Faced with dire portents of continued recession, the major entertainment companies are signaling further belt-tightening for 2011. Some leaders of Hollywood’s creative community wonder, however, whether they’re being caught up in a complex corporate chess game.
“The squeeze on talent deals is tightening and development seems to be disappearing,” observes the chief of one talent agency, who pleads anonymity. “Consumers are more and more cautious. The lure of 3D is not panning out,” says DreamWorks Animation’s Jeffrey Katzenberg. Says one corporate CEO: “The film industry overall is not reinventing itself creatively as it has done in the past.”
Since Hollywood has tended to be recession-proof, bearish comments such as these cause a stir, especially since corporate profits are strong, box office is vibrant and television is experiencing an upturn in advertising revenues. These numbers reflect the overall economy: Operating earnings of the companies in the Standard & Poor’s 500 increased 38.4% in the second quarter even as job growth has flatlined.
To complicate things, some economists are now offering fresh evidence that, as a new Milken Institute study puts it, the indicators call for “modest and sustainable growth” in the resilient economy.
Given these cross-trends, there’s a growing suspicion that the downturn is being fueled as much by an excess of corporate caution rather than consumer caution. Across the economy, big U.S. corporations outside the financial sector itself are sitting on a huge hoard totaling $2 trillion, according to FactSet — a stash signaling a determination to tread water rather than to grow.
What explains this corporate wariness?
In the entertainment industry, while the TV economy (especially the off-network side) has shown a robust recovery, film mavens have seemed slow to recover from a series of shockwaves, such as the decline of DVD revenues. “We’ve all been spoiled,” says one CEO. “For three decades one new revenue stream after another has kicked in, (but) suddenly we’ve run out quick fixes.”
The upshot: a continued reduction in film production and tougher dealmaking. Only a small handful of superstars now command $20 million paydays compared with a dozen a few years back. Consequently, while automobile and consumer products companies (like Procter & Gamble) have increased their ad spending lately, entertainment companies have cut ad budgets by 7.5% in the first half of 2010 alone, according to Kantar Media, which tracks ad spending across TV, print, radio, outdoor and online.
Industry CEOs admit they’re sending out mixed signals. Next summer, Hollywood will send forth a skimpy supply of product but a record slate of tentpoles — new iterations of “Pirates of the Caribbean,” “Transformers,” and even a new “Hangover.” But Warner Bros.’ “Harry Potter” gold mine will finally exhaust itself and efforts to trigger new franchises, have proven unpredictable. New properties such as “Watchmen” and “Jonah Hex” fizzled. Significantly, Hollywood’s fusillade of blockbusters this summer tallied $4.22 billion in box office domestically, but actual attendance hit its lowest point since 2007.
Given these uncertainties, some leaders of the creative community are asking this question: Can organizations that are dependent on creativity and innovation flourish within vast corporate structures?
Writing in the Wall Street Journal, management guru Alan Murray reminds us that “corporate decisions on allocating resources are made by people with a vested interest in the status quo.” The fast changes in the economy are making corporate bureaucracy “obsolete,” he writes.
The Economist points out that the businesses displaying the greatest success and flexibility are what it calls “unincorporations” — ones that are organized not as public companies but as newly designed forms of partnerships. In these entities, “mangers behave like owners rather than like hired hands” and thus can plan ahead rather than responding to the tyranny of quarter-by-quarter management.
“The hard fact is that the movie business seems paralyzed by the wave of change confronting its leaders,” argues the CEO of a top-tier company. One example: While homevideo divisions may be losing DVD customers, they confront the demands of Google, which hopes YouTube can grab a bigger piece of the video on demand pie. Consumers display an appetite to watch new product in new ways, but companies must figure out how to embrace new platforms without forfeiting old revenue streams.
The creative community worries whether an industry obsessed with cost-cutting can also exploit opportunities for growth. On the other hand, dealmakers are quick to find the exceptions when they appear. NBC, for example, launched its own stimulus program during the 2010 development season following a period of intense retrenchment as the Peacock’s new TV topper Jeff Gaspin suggested that past cutbacks might have gone too deep.
TV agents also revel in the opportunities open to non-traditional TV talent, catering to those multihyphenates who work across film, TV, the Internet and even the “Jersey Shore” pseudo-reality skeins.
The bottom line: Industry leaders acknowledge they are caught in a conflict between their own instincts to invest in new platforms and new product, on the one hand, and the pressure from investors who welcome the belt-tightening and the fatter profit reports on the other.
They also are rattled (and divided) by the multiplicity of distribution options — Apple’s 99¢ TV rentals or discount DVDs from Redbox, etc. If Apple undercuts network and cable distributors, who pays for the development deals and marketing that allows networks to launch new shows like “Glee” and “Modern Family”?
Business paradigms are shifting at a dizzying pace, and the media maven who seems to accommodate all this with the greatest facility is Rupert Murdoch. The crusty mogul is battling the Googles and Amazon.coms publicly, declaring war on the New York Times and launching his new national digital newspaper, all the while coping with rivers of red ink pouring from the ventures that aren’t panning out.
War, to Murdoch, seems oddly energizing. For other toppers in the entertainment industry, it triggers caution.
Once again, the mixed signals are a source of concern to those who toil in the business of innovation.