With the country plummeting into a recession, Hollywood is convinced folks will continue to stream into movies, watch TV, buy DVDs and support most sectors of the entertainment industry.
Nonetheless, when it comes to lost jobs, reduced bonuses and overall angst, showbiz probably will be hit more dramatically than in any other post-World War II downturn.
The reason: The congloms that control the entertainment industry, while bigger and supposedly more resilient than their predecessors, also are more vulnerable to economic down-trends and their CEOs are more militantly cost conscious.
As such, showbiz is bracing for a major slump amid a growing sense that no one will be immune to this meltdown, which took a drastic turn for the worse a month ago with the Sept. 15 failure of Lehman Bros. and hasn’t let up since.
Companies, many of whom had already begun trimming costs during the writers strike and earlier stages of the decline, are taking a hard look at their operations. Among the retrenchments: Paramount said it would trim its slate 20% to 20 pics a year, and 25 employees, to meet targets set by parent Viacom. Disney has put its makeover of Fantasyland at Walt Disney World’s Magic Kingdom in Florida on hold, and J.P. Morgan has suspended efforts to raise DreamWorks coin for now. Playboy Enterprises shuttered its DVD division last week to focus on online distribution. And Myriad Pictures topper Kirk D’Amico says he has decided to hold off a slate deal with a distrib “until things calm down.”
Whenever that might be.
Last week, the Dow took another nosedive — the second biggest drop since 1987. Media analysts are busy slashing earnings forecasts around the most vulnerable parts of the biz: advertising, DVD sales, parks and resorts and consumer products. Subscription-based revenue, like pay-TV, cable network affiliate fees and magazine subscriptions, as well as theatrical box office, is seen as more resilient.
If entertainment is a safe bet during the recession, Wall Street doesn’t seem to agree. Most major entertainment companies have seen their stock drop even more than the overall Dow Jones index since the markets started to collapse late last month. As of Thursday, Viacom stock had fallen 27%; Disney and News Corp. were down 29%; Time Warner saw its value plummet 34%; Lionsgate took a 30% hit; DreamWorks Animation was off 13%; vidgame giant Electronic Arts declined 31%; and CBS had taken an astonishing 43% hit.
Heightened financial pressures could further inflame internal tensions, as one division competes against another for resources and consumer coin. Sumner Redstone, chair of Viacom and CBS, stung daughter Shari, who had to defend the performance of National Amusements, the family’s theater chain she heads, after he sold chunks of his company to pay down debt. Viacom and CBS are the only major media companies thus far to officially warn of a shortfall in third quarter earnings.
NBC Universal, as part of the GE family, is more directly yoked to the finance meltdown than its rivals. By week’s end, NBC U topper Jeff Zucker asked for a $500 million cut in spending for next year, around 3% of the overall budget.
“Market conditions are obviously on our mind every day,” a studio topper says. “That’s why we’re trying to be as efficient as possible. The volatility of the market reminds us every day that we need to be as prudent as possible.”
Editors at News Corp.’s HarperCollins division, for example, were recently told to cut back on literary fiction and beef up nonfiction in a bid to meet corporate targets. This edict further aggravated those already chafing at the number of tie-ins for Fox movies and TV shows they are expected to churn out as good corporate players.
Soft advertising, skittish sponsors and tight credit market are adding to the jitters around town.
“There’s no credit out there at all,” says a vet producer with his own financing, who believes MGM is the most vulnerable to the credit crunch, given its high debt. He also predicts that certain cash poor indies will go out of business, but studios will be fine.
“There is a massive reshaping of the landscape,” says another producer with his own financing, who predicts that indies will swing from making too many movies to making too few. “It’s not in anyone’s interest to go forward without North American (distribution) now,” he adds. “It’s important to have a domestic partner invested.”
Theme parks are also considered vulnerable now that economic woes have spread around the globe. So far, tourists taking advantage of the weakened dollar have bolstered attendance the past year, as has the addition of new attractions. The question is how long it will last. Parks are making contingency plans: Both Disney and Universal upped the price of their one-day passes in August, and U will remain open on Thanksgiving and Christmas for the first time to collect some extra coin from families during the holiday months.
Although the Fantasyland makeover is on hold, the $1 billion overhaul of California Adventure in Anaheim is still under way, and Universal is weeks away from rebuilding the portion of its lot that recently went up in smoke.
Financial jitters have already scuttled shows on Broadway. Over the summer, two incoming Rialto productions, revivals of the play “For Colored Girls …” and tuner “Godspell,” were cancelled at the last minute when wary investors backed out. “Nice Work if You Can Get It,” a brewing Gershwin tuner starring Harry Connick Jr., was postponed indefinitely because the team of producers involved couldn’t hammer out a deal that was satisfactory to all parties.
And in recent weeks, both “Legally Blonde” and six-year-old “Hairspray” have posted closing notices, with producers citing the uncertainty of the economy as a major factor in their decisions.
Although box office has been largely unaffected so far, legiters are concerned, of course, that belt-tightening consumers will decide to stay away from Broadway and its always-rising top ticket prices. And if Gotham tourism begins to dry up, Rialto shows — particularly the splashy, longrunning tuners reliant on out-of-towners for a significant chunk of their biz — could be increasingly jeopardized.
The tough economy might actually help the ailing homevid biz, which has been struggling to maintain previous sales levels for the aging DVD format. Execs expect rentals to rise, but the impact on the Blu-ray format is less clear. This holiday shopping period was supposed to be the one where the pricier next-gen format finally broke through, but it’s not clear how many consumers will pop for a player and pricier discs in the current economy.
For this reason, many in the biz were heartened by record first week “Iron Man” Blu-ray sales this month; the pic quickly became the year’s top seller on DVD. But some big hits, most recently “Sex and the City,” have bowed below industry expectations, in another sign that consumers have become choosier about their disc purchases, which are down 3.5% through the third quarter, according to Video Business.
Universal home entertainment topper Craig Kornblau admits the difficult economy “has got to give everybody pause,” but suggests it may play to homevid’s advantage.
“I’d much rather be in the DVD business and the Blu-ray business than the restaurant business,” he says.
The picture’s a little brighter for booming sectors like videogames and online entertainment, which are still expected to grow, albeit at reduced levels than they might have under a robust economy.
“It’s very hard in this environment to be protected,” says one network digital topper. “Everybody is going to be affected in some way.”
On the other hand, online entertainment is less vulnerable than other, costlier, forms of entertainment. The low price to consumers will undoubtedly increase the audience for such programming, the exec says. “The question is, will ad dollars be there?” And unlike their DVD counterparts, these execs don’t have high revenue targets to meet.
So far there’s not a hint that the videogame biz has been hurt by the economic downturn. In the first nine months of the year, in fact, overall industry spending is up a boffo 26%, reflecting the surge of interest in new properties and technologies like the Nintendo Wii, “Guitar Hero” and “Grand Theft Auto IV.”
“We’ve never found evidence of a correlation between the industry performance and the economy,” states Anita Frazier, an analyst for industry tracker NPD Group.
But with the economy entering uncharted territory, no one claims to know for sure that the rules will continue to apply. Revenue may be surging by double digits, but for a still-young industry riding the wave of three new consoles launching in the past three years, there’s no way to know whether growth could be stronger in a healthier economy.
There are also worries about whether dynamics within the videogame biz will be affected. While those who already play games may consider $60 for “Gears of War 2” to be a good value, consumers new to the business may be hesitant about the $300-plus it costs to buy a console and a single game just to start playing.
Economic concerns could also push gamers to delay purchasing new games and wait to buy titles used at a discounted price. It’s also possible that Sony, whose PlayStation 3 is the most powerful but also the most expensive system, may have an even tougher time gaining ground on lower-priced competitors Nintendo and Microsoft.
The theatrical biz likes to trumpet low ticket prices and the box office track record in previous recessions. But the aud is clearly in the mood for comedies right now, as evidenced by the strong second frame for “Beverly Hills Chihuahua” and weak bow of star-laden “Body of Lies,” which Warners attributed to its off-putting subject matter. This may not bode well for darker movies on their way to theaters in coming months.
One studio head says he would make more comedies if he could release them tomorrow, but won’t change his slate due to the lag time between production and release. He believes his company is well positioned for the deepening downturn, but admits Hollywood has entered uncharted territory.
“No one’s ever seen a market like this,” he says.
There’s a bright side to showbiz economic woes: As the crisis passes, media companies should be able to spring back to business as usual, unlike, say, the financial or automotive sectors that are undergoing transformational upheaval.
“We believe the media sector should regain its premium to the S&P 500,” says Michael Morris, an analyst with UBS securities, “as there have been no systematic changes brought on by the current economic crisis that should impact the group’s long-term operating fundamentals.”
Ben Fritz, Anne Thompson, Jill Goldsmith, Gordon Cox, Tatiana Siegel and Marc Graser contributed to this report.