Up until a few weeks ago, the buzzword in Hollywood was “international.” Overseas seemed to be the key to growth aspirations, with B.O. booming, studios cranking up local-language production, networks buying overseas TV formats, and key funding streaming in from India’s Reliance (to DreamWorks), the Abu Dhabi Media Co. (Warner Bros.) and Dubai’s Tatweer (Universal).
But in the last few weeks, people in the U.S. have begun to realize that no one is immune to the financial meltdown.
Emerging growth territories such as Russia, China, India and the Middle East are finding themselves just as vulnerable as well-established markets in Western Europe.
- As an ominous sign for Russia’s red-hot media growth, Russia’s culture minister pulled the plug Oct. 20 on Natalya Bondarchuk’s feature “Gogol, Up Close” after she ran overbudget and couldn’t secure extra financing.
- Chinese independent film and TV production sectors have both been badly hit as producers face a hard time raising money. The comedy “Xiao man jiang hu” by director Xie Hong, lost its investors; Zhang Jizhong’s yuan 100 million ($17.2 million) TV series “Journey to the West” has postponed shooting; and the $3.5 million TV series “The Mysterious Buddha,” from China Film & Television Production Co., has been canceled.
- At last month’s Mipcom confab, execs repeated the mantra that entertainment, and particularly television, thrive in a recession. But in fact TV advertising in Western Europe is expected to fall 5%-9% in ’09 and isn’t expected to recover in 2010. With programs far cheaper to acquire than produce, local production may suffer.
The U.K.’s biggest private network, ITV, expects a decline in ad revenues that translates to roughly £100 million ($160 million) in lost earnings. Earlier this fall, the broadcaster announced that 1,000 jobs, approximately 20% of the workforce, would be cut as ITV pushes through a belt-tightening plan designed to save up to $64 million a year. And rival Channel 4 is cutting staff by 15%.
It may not be all bad news. Traditional blue-chip investments such as real estate and the stock market have become so precarious that film financing, often seen as offering comparatively low-yield returns to investors, could actually become attractive again.
“At least when you invest in a film, you know how much you’re going to lose,” quips one hedge fund manager.
Clearly, no one is in a mood to celebrate just yet.
As AFM and the Berlin Festival approach, buyers are insisting that sales agents dramatically reduce their minimum guarantees. Sellers can expect a harder time from buyers — including Russians, who in recent years had been primo customers.
Alexander Semenov, publisher of Russian Film Business Today, says the crisis is likely to throw a wrench in production.
“Films in preproduction are likely to find it harder to access bank financing, and some productions — television series in particular — have been put on hold because of this,” Semenov says.
Even folks in the Mideast — who have the underlying security of vast oil wealth, a soaring real estate sector and an increasing reputation as a regional financial hub — could be feeling vulnerable, due to plummeting oil prices.
At the start of the fiscal crisis, the area seemed immune: Even as bankers from Lehman Bros. were scrambling to save the financial institution from bankruptcy, the Abu Dhabi Media Co. launched its $1 billion production banner Imagenation. Only days after the Dow Jones suffered its biggest single daily loss, Abu Dhabi launched its multibillion-dollar media zone, which is named twofour54.
But the downturn in the stock markets hit Dubai, as well as other Mideast bourses in Saudi Arabia and Kuwait, particularly hard, to the point that the central bank of the United Arab Emirates — essentially funded by Abu Dhabi’s government — had to step in Oct. 14 and guarantee all bank deposits in the UAE.
While Dubai’s expansion — the emirate reportedly has 22% of the world’s cranes working on real estate projects — looks to be the most vulnerable in the region, due to its highly leveraged, debt-based economy, the emirate should be able to cope with a little help from its friends.
The UAE, and the Gulf as a whole, feel they are better protected from the economic malaise than other emerging or established markets.
“With all its oil wealth, Gulf countries have large enough reserves to manage the bumps ahead,” says Ali Shihabi, chief exec of Dubai-based investment bank Rasmala. “It’s unlike any other emerging market. While the impact on the media industry in the region will not be unnoticeable, it will not be significant.”
Or as another Dubai-based analyst puts it: “We’re in a vehicle driving extremely fast and we don’t know what the roadmap is. We don’t know how good the driver is but we have some really good airbags.”
Others are having a much bumpier ride.
Even though most developed Asian territories are confident the current downturn will not hit them as hard as the 1997 Asian financial crisis — which caused property and currency devaluation and high unemployment — its impact is already being felt.
Having already suffered a half-year slowdown in approvals by the censorship boards that was blamed on the Olympics, China producers cannot raise money.
The problem here seems to be China’s unusual dependence on sources of coin from industries outside media. Many investors who made fortunes in textiles, IT and manufacturing are suffering the “wealth effect” from tumbling asset prices and stock markets in China, which are down by more than 64% in 2008 alone.
Uncertainty also is affecting the established territories of Western Europe.
Webheads at ITV say there are no plans to cut program budgets, but skeptics think this policy is likely to be reviewed as a recession kicks in, because programs represent any network’s biggest single cost.
“Don’t be surprised if there is a shift out of U.K. drama into acquisitions,” predicts one seasoned industry watcher. “Out of a program budget of around £850 million ($1.36 billion) ITV spends only $80 million on acquisitions. We’re not going to go back to the days when shows like ‘Dallas’ and ‘Dynasty’ were schedule-drivers, but acquisitions are a much more efficient way of getting audiences than investing in original U.K. drama.”
At rival broadcaster Channel 4, station chairman Luke Johnson says the network is “challenged.”
“Media companies are under significant pressure. It is tough out there, and next year is going to be extremely difficult,” Johnson says.
Channel 4, which recently abandoned plans to launch a portfolio of radio stations, blaming the downturn, is cutting program budgets by 4% as it seeks savings of $160 million over two years.
“Any free-to-air broadcaster that relies on advertising is vulnerable,” says Paul Richards, media analyst at Numis Securities.
In Germany, deja vu has settled over the media sector following a series of profit warnings, scandals, executive exits and share-price plunges.
While there’s little sign of an imminent tsunami of high-profile bankruptcies, investor confidence is at its lowest since the burst of the dot-com bubble and the implosion of the Neuer Markt at the beginning of the decade.
One of Germany’s biggest TV players, ProSiebenSat.1, has seen its share price fall 62% in the past two months to its current $3.47. In September, it plunged sharply after the company lowered its earnings forecast for the year by about $130 million, predicting that its German free TV business would take a serious hit in the second half of 2008.
The group has reportedly cut costs, much of it in programming, by $90 million this year and is said to be planning to chop a further $40 million through December.
The Rupert Murdoch-controlled feevee operator Premiere, meanwhile, was rocked by a recent scandal that wiped out its share price and left its future in doubt.
Since January, when Murdoch started building his stake in the feevee platform (currently at
25%), shares have slid 83% to their current price of $3.38. They took a particularly steep nosedive earlier this month after Premiere issued a profit warning and admitted it had nearly 1 million fewer subscribers than it had previously touted — 2.4 million instead of the 3.5 million reported in June. Premiere is now expecting operating losses of between $56 million and $98 million this year.
In Italy, Alessandro Bai-Badino, a Deutsche Bank expert on Mediaset, says the private broadcaster, controlled by premier Silvio Berlusconi, was already bracing for a time of little growth, if any.
“We still think that ad revenues for the year as a whole will be up by 0.5%. But we predicted that before the current financial crisis,” he says.
Only last week, Mediaset’s advertising chief, Giuliano Adreani, made some positive noise about total revenues being up on last year.
“But that looks pretty poor compared with last year’s 12% growth. RAI’s figures for 2008 are going to look pretty bad compared to last year, as well,” says Bai-Badino, of Mediaset’s pubcaster rival.
In Spain, banks are freezing concessions on credit until the effects become clear of the government’s bank assets guarantee scheme, which kicks in this month.
One distributor complained it can no longer discount TV sales contracts it had inked on films with national TV stations in order to raise further credit with banks. And TV stations are paying less upfront when they purchase films — it used to be 50% of a deal.
Not all the world’s media and entertainment woes can be blamed on the current financial downturn, of course. Execs in the music industry, for example, have been struggling to cope with the switch to digital downloading for the last few years.
“I’ve got bigger fish to fry than the credit crunch,” says one music exec. “I’ve got the Internet to worry about.”
(Reporting by Patrick Frater in Hong Kong, John Hopewell in Madrid, Leo Barraclough and Steve Clarke in London, Nick Holdsworth in Moscow, Nick Vivarelli in Rome, Ed Meza in Berlin, Michael Day in Milan and Ali Jaafar in the Mideast.)