History shows that whenever the economy went through a recession or, for that matter, the Great Depression, showbiz came through remarkably resilient.
The twists and turns of the nation’s financial health seemed to have little in common with the public’s thirst for entertainment.
But this time around, with nearly every indicator showing a serious recession is near (if not here already), there’s ample reason to believe the business won’t emerge unscathed.
This is an era when 85-year-old Bear Stearns, an apparently rock-solid institution, went from Disney’s banker to near-non-existence in a matter of days. (For the record, other banks are likely to step in and handle Disney’s sterling credit).
Clear Channel saw a $20 billion privatization unravel with the demise of easy credit and free-flowing cash. Private equity firms Thomas H. Lee and Bain Capital have joined Clear Channel in suing lenders including Citigroup, Deutsche Bank and Credit Suisse for their reluctance to fund the deal. On March 27, a judge ordered the banks to get on with it.
That acrimonious mess points to the changing dynamics of the entertainment business, where the industry finds itself subject to macroeconomic trends as never before. The industry has become increasingly enmeshed with Wall Street and private equity. And the grim economy as well as stock-market stagnation not seen since at least the 1970s, means Hollywood will be giving a lot of ground in the coming years.
Far from recession-proof, certain sectors are actually quite vulnerable.
On the hit list:
Movie theaters. In the past, the conventional wisdom was that bleak news can only be good if you’re selling escapism. But ticket prices, at $10 or more per person, have risen to the level that a family pinching pennies may think twice — and that’s not including the rising fuel costs just to get the cinema.
At ShoWest, exhibitors and studio officials dismissed such notions, given that costs of a family outing to theme parks, for instance, are far greater ($141.20 for a family of four vs. only $27.52 for that quartet to go to a movie). But theme-park attendance is a once-a-year, day-long event, as opposed to the frequent moviegoing habits that exhibitors depend on. This summer also will be a test of repeat business, i.e. those who go to blockbusters more than once.
The credit crunch also raises questions about exhibitors’ efforts to upgrade the moviegoing experience. The much-ballyhooed conversion of thousands of movie screens to digital projection could slow as theater owners find it more difficult to come up with construction funds.
There are a number of digital 3-D tentpoles in the pipeline, including James Cameron’s “Avatar,” slated to open in December 2009. Of the country’s 37,000 screens, only 4,600 are digital.
If the credit markets don’t rebound, theater owners could have a hard time securing funds for the upgrades. For instance, a consortium formed by the nation’s three largest circuits — Regal Entertainment, Cinemark Holdings and AMC Entertainment — is in the midst of trying to lock down a $1.1 billion line of credit for the conversion.
The group, Digital Cinema Entertainment Partners, reps 14,000 U.S. screens. Under the plan, the digital rollout of Regal, Cinemark and AMC’s screens would take about three years. Smaller circuits also are relying on credit to make the conversion.
Network development. The networks’ austerity — some say payback — coming out of the writers strike, with producer deals jettisoned left and right, has dovetailed with the recessionary climate. Networks can therefore book strike-prompted savings on a renewable basis, which is why execs such as News Corp.’s Peter Chernin accurately predicted the strike would be a money-saver, at least in the near term.
Network chiefs have publicly said the approach to pilot season was undergoing massive changes, though the degree of actual cost savings is an elusive matter. NBC Universal loudly trumpeted its shift to a 52-week season, in part to relieve financial pressure on the traditional model, but it has so far yielded more headlines than results.
On the upside for the overall TV biz, this is an election and Olympic year, so most TV potentates are relieved to see projections of a rise in ad spending, sending an already resilient $9 billion upfront market even higher. However, “that could set people up for a rough 2009 when things fall back to Earth a bit,” says Chris Marangi, a cable analyst with Gabelli Funds, a major investor in media properties.
Studio spending. When Time Warner scaled back New Line, the linchpin of a plan to save $50 million a year in costs, it sent a message: Studios are serious when it comes to tightening the belt. Hollywood has gone through periods of austerity, but studio execs have often lacked bold action. A downturn in media conglom fortunes, especially if moribund stocks continue to trade near 52-week lows, could force cuts elsewhere, including such things as production deals.
Studios are reining in the number of releases. Disney has successfully gone from more than 30 a decade ago to 10 to 12 pics a year. New Time Warner chief exec Jeff Bewkes noted the trend when he announced the New Line move. The indie sector is even more turbulent, with new players boosting budgets and the risk level, given the requirement to spend aggressively on P&A.
Despite the majors cutting back, the overall number of releases held steady at around 600 in 2007. That means specialty players are the ones crowding into the multiplex. As in the video-fueled 1980s, a shakeout is all but inevitable.
Finance vet Ben Waisbren says a bit of Darwinian culling of the herd can be a healthy thing. As prexy and chief exec of the Citicorp-backed Continental Entertainment Capital, he has arranged financing for France’s Wild Bunch and films including “The Spirit,” Lionsgate’s upcoming Frank Miller adaptation.
“This is the part of the cycle when there is a cleansing of the market, so that the liquidity can come back and the cycle can begin again,” Waisbren says. “The solution to all this is a far better alignment of interests between passive investors and the party in control of current information and execution, the studio.”
Facts and figures aside, what is also striking about the current climate is that it carries with it a cultural sea change. Hollywood is more than a generation into its experiment of multinational congloms owning previously family-run shops, and that genie isn’t going back in the bottle. But a few years ago, there was at least a sense that the onrushing phalanx of MBAs wasn’t going to topple the people who knew how to channel creativity onto the screen. Now, they’re the same people, at least in mission.
“We’re financial mercenaries always looking for our next potential partners,” says one studio exec.
“The studios are in the full-time money-raising business,” says an investor. “They have three jobs: to raise money, to market films and to distribute films. And if they have to make them, they will.”
Slate financing. The hedge funds that sparked the latest influx of cash are still game. The difference is that the deals won’t be as lucrative for the studios, as investors are getting more circumspect about terms.
Granted, it’s not an immediate problem in some cases. Some studios have years left in their slate deals, like Sony’s Beverly Blvd LLC, with 60 pictures or so. Lionsgate closed on several financial deals last summer, including a four-year, $400 million slate deal with Societe general financement du Quebec in August. “Their timing was impeccable,” notes one Wall Streeter.
But the worsening economy is increasing scrutiny of slate terms, and it is an open question, as SMH Capital analyst David Miller wrote in a recent note, “whether studios are going to be able to extend the party.”
Paramount is almost finished with its Melrose II, amid reports of discontent on the part of investors over Melrose I. Disney has not said whether it will try to launch another Kingdom fund, especially since the cherry-picking it enjoyed (keeping “Pirates” and Pixar off the table) probably won’t happen this time around.
Moreover, the distribution fees studios take off the top are falling. Investors want caps and caveats on everything from budgets to backend participation. While bad deals will get fleshed out and the market will be healthier for it, independent companies could feel the pinch.
“You won’t get deals like Marvel did with Merrill Lynch,” says one media analyst. The senior bank debt portion of that seven-year, $525 million facility was insured by Ambac Assurance Corp., which helped raise the debt rating to AAA. In the current environment, “Ambac will stick to their knitting of backing municipal bonds,” the analyst says.
“There’s less liquidity in the market,” says one analyst. “Banks are lending less money. Things are getting tougher.”
Studios already are turning to Dubai and Abu Dhabi for co-financing relationships. As one Wall Streeter puts it, “You’ll be going to Dubai instead of Greenwich.”
It’s also worth noting how many significant entities have been carried aloft by the tide of new money in the past three to four years — The Weinstein Co., MGM and the retooled Summit, to name a few. These will be interesting times as they work toward new leases on life.
Special effects houses. Some execs are concerned about the viability of the shops that produce visual effects.
If these shops are unable to get credit, to expand staff or buy hardware, then they won’t be able to take on studio jobs. Right now, studios benefit from the glut of visual-effects providers in the marketplace. Costs could surely rise if there is consolidation.
Studios have been burned in the past by special-effects shops that used cash flow to pay off debts incurred on previous shows or films. The result? They ran out of money before delivering on their current projects. The shop goes belly up, the studio is in for millions and has nothing to show for it.
Pamela McClintock and David Cohen contributed to this report.
