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How an Economic Downturn Could Ravage Hollywood

Trade-war fears, stock market volatility and, most recently, bond market signals that point to a pending recession are rattling investors, igniting concerns that another devastating downturn may be just around the corner. As those worries reverberate all the way from Wall Street to Hollywood, the entertainment industry is in for an unsettling reminder of the level of damage a recession can inflict, just as the major players are summoning resources to fight for a piece of the new digital age of media consumption.

The dreariness that the Great Recession brought on from late 2007 through mid-2009 crushed the American psyche, wiping out 8.7 million jobs. The media sector was far from the hardest hit, but at the crisis’ midpoint in 2008, more than 28,000 people were affected, including those who worked in film and television, according to Challenger, Gray & Christmas, a U.S. firm that specializes in layoffs and job placement.

Sources say they’re not expecting the “perfect storm” of misery they saw in 2007 and 2008, when the double whammy of a writers’ strike and a recession hit Hollywood hard. At the time, the networks and studios were already rationing whatever content they had made right before the strike, and the pullback in production and deals couldn’t have come at a rougher moment.

These days, production is robust. Based on projects that have already been greenlighted, that momentum is likely to continue for a number of years.

Back then, recession-era TV networks found themselves scrapping for ad dollars from sponsors who were quickly becoming less confident in the abilities of consumers to spend. Were a new downturn to come to pass, “you would tend to see a general worsening of trends,” says Brian Wieser, global president of business intelligence at GroupM, the large media-buying unit of WPP.

The television business today is grappling with keeping advertising flowing as marketers see new value in digital media and streaming video. In recent months, however, new investment from digital retailers and e-commerce companies like Wayfair and Chewy.com have powered the market.

“The single most important category driving advertising growth is the digital companies,” says Wieser. “The allocation of their budgets to marketing and media are more likely to go in line with their revenue growth. If you expect to see deceleration in their revenue growth, you would expect to see a reduction in their spending.” And that, he says, would be cause for concern for both traditional and digital media outlets.

Of course, the impact of a recession is hardly ever just financial. The fear and anxiety that such an economic earthquake provokes can infect everything from the source of people’s livelihoods to, say, the going rate of Botox injections.

During the 2009 awards season, lavish events like Vanity Fair’s post-Oscar celebration were scaled back in the interest of sensitivity, or canceled entirely. Talent agency CEOs toasted nominated clients in their own well-appointed homes instead of pricey hotel ballrooms and bought-out restaurants. Even area plastic surgeons and other pamperers told media outlets at the time that business was not on par with previous years’ red-carpet-heavy cycle.

In the ensuing decade-long bull market, which took equities — and nine-figure overall deals — to new heights, memories of austerity measures may have faded. Hollywood will be forced once again to grapple with what constitutes a necessity, balancing behind-the-scenes economic realities with the business of spectacle.

“It really comes down to how discretionary is your product or service,” says Lakshman Achuthan, co-founder of the Economic Cycle Research Institute.

That perhaps applies to both spending within the industry — on content acquisition, marketing and expansive productions — and the perceived value of the industry to the average American consumer.

Entertainment, while discretionary in nature, is often resilient in the face of financial bleakness. U.S. box office revenue reached new all-time highs in 2009 as more people used movie theaters as psychological fallout shelters from the economic downturn.

This time may be different. A decade ago, Amazon Video and Hulu were barely vying for attention, and Netflix wasn’t the ubiquitous streaming presence it is now, ferreting into 60 million households across the nation and making the persuasive case for viewers to stay home instead of going to the multiplex.

Even the cable sector, a recurring revenue subscription business that is fairly immune to market corrections, might be shaken a little harder this time around, due to the digital competition.

“The video segment, which in the past has proven rather recession-resistant, would likely prove more cyclical this time around, as there are now a host of lower-cost vMVPD options out there to cannibalize traditional MVPDs,” wrote MoffettNathanson analyst Craig Moffett in an April research note. (Virtual MVPDs refer to streamers such as Sling TV and Hulu’s live-TV service.) “The broadband business is likely more durable than video, but here, too, one might expect to see more cyclicality than we’ve seen in the past.”

It’s not a great time for belt-tightening. The increasingly consolidated entertainment landscape is marked by the anticipated entrée of streaming platforms from Disney, WarnerMedia, NBCUniversal and Apple in the next year or two. That kind of arms race requires capital. Disney’s last fiscal year saw the media company lose about $1 billion due to investments in Hulu — now controlled entirely by Disney — and BAMtech, the acquired streaming technology that underlies its new direct-to-consumer services.

And debt burdens hover over the major entertainment conglomerates, to varying degrees. WarnerMedia parent AT&T far outpaces its peers in that area, holding $157.9 billion in long-term debt as of the end of June.

CFRA analyst Tuna Amobi isn’t particularly worried about the media sector’s balance sheets, however, since much of its debt was negotiated at historically low interest rates. Where it could become problematic, he says, is in the event of a severe economic fallout, when cash flow would be vital to service those debts and help a company deleverage.

Netflix, weighed down by $12.6 billion in long-term debt, has long been scrutinized for its negative free cash flow. The tech company, expected to shell out more than $15 billion on content alone this year, anticipates having a free cash flow deficit of $3.5 billion in 2019.

“If someone’s overextended on debt, and they can’t handle a debt service payment, they’ve got to get some money” flowing somehow, whether by raising another round of funding or by issuing stock, says Achuthan. “During a recession, cash is king.”

Still, there’s no reason to ring the alarm bells just yet, even if the country is in the midst of a slowdown. The bond market nervousness that’s all over the headlines — prompted by a brief inversion of the yield curve, meaning that 2-year Treasury bonds momentarily yielded more than the 10-year bonds — should be taken with a grain of salt.

“The yield curve is a very imperfect leading indicator of a recession, globally,” says Achuthan, calling it just a “piece of the puzzle.” “But what it does tell you is that there’s a slowdown. It’s completely consistent with the slowdown that we’ve called.”

At this point, there is no real precedent for how an economic downturn might weigh on Hollywood in the digital age. But industry insiders note that the entertainment business has generally been able to withstand hard knocks, as it did in the Great Depression of the 1930s.

“That doesn’t mean there aren’t impacts, but ultimately the message is: In hard times, people always need escape,” says one exec. “They always need a laugh. They need something that will take their mind off hardships.”

Brent Lang and Brian Steinberg contributed to this report.

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