Street weighs in on strike

Prod'n companies, b'cast nets most at risk, ratings service sez

Moody’s Investor Service said Tuesday that a Hollywood strike by writers or actors would have to extend into 2002 before hurting credit ratings of media and entertainment companies.

The ratings service called such a prolonged work stoppage “unlikely” and labeled as “narrow” the issues separating parties in writers and actors guilds’ negotiations.

The Writers Guild of America’s contract with producers was set to expire at 12:01 a.m. today. The Screen Actors Guild and AFTRA have contracts set to expire June 30.

“Most at risk to the damage of a prolonged strike would be production companies, broadcast networks, television stations owners, movie theater owners and, eventually, the video rental chains,” Moody’s stated in its strike report.

The ratings service noted that news reports place the two sides in the WGA negotiations as separated by residuals amounting to about $100 million over the next few years, which it characterized as “an amount insignificant to credit quality.”

“Should the production companies cede a considerable amount to the writers’ demands, the screen actors and other guilds and unions might gain greater leverage in their own negotiations, creating a ‘ripple’ effect,” Moody’s veep Neil Begley observed.

‘Scant margins’

Such a flurry of settlements would likely raise costs, leading to possible credit implications years later, Begley said.

“It is certain that any increased cost burden could pressure already scant operating profit margins at the production level, and in order to minimize losses, may result in production cutbacks that could affect the quality of product,” he added.

“Should the amount of quality product deteriorate noticeably, there could be a longer-reaching effect on the entire distribution channel, as each entertainment option competes for the limited amount of leisure time among consumers.”

Separately Tuesday, Prudential Financial’s equity research department issued a report identifying AOL Time Warner, Disney and Viacom as media groups that would be most hurt by a long strike.

The investment firm said it based that projection in part on the expectation that film revenue would plunge from a major production interruption.

“The impact on USA Networks would be very small,” the Prudential report added. “But Pixar and Imax could also suffer in a prolonged strike.”

Threats to their corporate bottom line notwithstanding, studios may be tempted to incur a short work stoppage, the firm suggested.

Short strike predicted

“Our analysis reveals it would probably cost the studios less to settle on the economic differences between themselves and actors/writers, rather than suffer the potential financial downside of a long strike,” Prudential said. “However, when push comes to shove, the studios are better positioned to withstand a strike that would last less than six months. For these reasons, we believe we could see a strike but believe it will be short-lived.”

On the other hand, the Moody’s report said production companies could actually see short-term financial benefits from a strike, as they spend less on new production and exploit increased opportunities for library revenue.

“However, should a long gap develop between new product already on hand and new product made after a strike, revenues could be hurt for several years,” Moody’s said.

“Broadcast networks and premium pay cable networks would begin to feel the effects of a strike before the end of this year as soon as firstrun primetime product began to run dry,” the ratings service estimated.

Struggle to win back auds

“Later, the networks might struggle to win back former viewers that had migrated during the strike to other entertainment sources such as to basic cable networks or the Internet,” Moody’s said. “The fortunes of television station owners and operators during a strike should closely parallel those of the networks assuming ratings could decline and without the benefit of strong lead-in programming.”

Exhibs, which are already cash-strapped of late due to a recent industrywide building binge, would begin to run out of new movies to run in their theaters beginning in the first quarter of next year, according to Moody’s. But video chains would take longer to see any strike fallout, it said.

“In fact, an initial increase in rentals would likely result from the scant lineup of both new movies and popular broadcast network programming,” the report projected. “Also, traffic should continue to be strong for library materials and for the remastered and re-released DVDs the studios are likely to promote just as DVD player sales hit full stride.”