Commentary: Forecast calls for high chance of lows
The industry's roller-coaster ride is only beginningSo how will the foibles that are roiling the economy affect the entertainment biz? While I don't have a crystal ball, I am willing to make a few predictions:
-- "The entertainment industry does great in a depression since everyone goes to the movies"
Uh ... no. While the second part might be true (more people may go to the movies), the first part is no longer the case. In the 1930s, film revenue was driven by theater attendance; these days, the majority of revenue for filmed entertainment is ad-driven, including all forms of television and much of VOD. It is true that theatrical films won't be hit as hard as television fare, but -- quick -- name a major studio that doesn't have a large television department.
As advertisers get hit, so will showbiz revenue, which is going to hurt everyone. Thus ...
-- Prices will go down
The law of supply and demand will never change, so just as the wave of hedge-fund financing during the past several years drove up prices, a combination of factors is going to drive prices down, namely (a) the receding wave of hedge-fund financing, (b) the reduction in ad revenue and (c) the general depression of prices that accompanies all recessions. So, agents, send a copy of this article to your clients when you need to explain why they are being offered half of what they previously were paid. But take heart, because in one year ...
-- Prices are going to go through the roof
We can expect high price inflation in about a year. This will not be because life is beautiful and all is well again. Au contraire, it will be because of the government's current Zimbabwean economic policy of printing money until it runs out of ink.
The current graph of the money supply looks like the path of Iron Man launching. You know you're in trouble when the government decides to "pay" for a $700 billion bailout by giving away an additional $100 billion in tax pork subsidies, when an additional $25 billion given away to the car companies is barely mentioned because it pales compared with the other handouts and when the line for further corporate welfare rings the Capitol.
Yes, the government has found the solution to all our problems without raising taxes: Just print money and issue debt till the cows come home. Unfortunately, the cows will come home within a year, and you can expect massive inflation to kick all prices through the roof. And riding on the back of inflation will come wild interest rates, perhaps near 20%. Crazy? Does anybody remember the '70s?
And from all this discombobulation will come ...
-- Entertainment bankruptcies
I admit to being old enough to have worked on such fiascoes in the '80s. It led to a cottage industry of lawyers that pushed entertainment companies into involuntary bankruptcy, followed by the appointment of independent trustees to sort out the dead bodies.
If history repeats, you can expect some high-profile bankruptcies to cause a bit of agita because the Bankruptcy Code is written so perversely in favor of the debtor that a bankruptcy upsets all reasonable expectations of anyone doing business with the debtor. Film rights are lost, payment obligations are canceled, and other contractual issues are left in limbo for years. Pity those that pay their debts but do business with those that don't. Everyone will be scrambling to learn the bankruptcy consequences of "executory contracts," "voidable preferences" and the "automatic stay" (and they won't like what they learn).
-- The demise of state tax credits
Meanwhile, the race to the bottom for state tax credits soon will be over. The sexiness and fun of subsidizing local film production, resulting in a net loss to the states, might come to an end as a shrinking tax base and budget deficits force a hard look at these tax giveaways. And any serious look will conclude that a state does not prosper by giving away more than it gets. Indeed, Congress might finally step in and stop the madness of states competing with one another, rather than the country competing against the world.
And the reduction of state tax credits, combined with inflation, will lead to ...
-- Runaway production
The combined effect in one year of inflation and a reduction in state tax credits will lead to runaway production to foreign shores, where costs will be cheaper. We can again be amused by the hand-wringing and insults from the guilds that always accompany this trend.
-- A shrinking financing base
So many lenders already have abandoned Hollywood recently -- including DB Zwirn, Societe Generale, Natexis and Deutsche Bank -- though their departure will leave better pickings for those still standing when the game of musical chairs is over.