Economy takes its toll on Hollywood

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Conventional wisdom dictates that Hollywood could always shrug off economic downturns because worried consumers spend more on entertainment when times are tough.

Not this time. Everywhere one looks, the entertainment business is in a world of hurt. The downturn is slamming the balance sheets and stocks of major media companies. Banks and hedge funds are cutting or eliminating movie financing, putting projects at studios and independents in peril. TV networks, reeling from an advertising decline, are slashing costs and trimming staffs.     

"Every single source of capital has suffered a seismic shock that we haven't seen in our lifetimes," said Nigel Sinclair, co-principal of film producer Spitfire Pictures. "That's going to lead to a broad squeeze throughout the studio system."

The industry's woes are reflected in recent financial announcements.

NBC Universal is cutting $500 million from its budget in 2009 and likely trimming staff.

Viacom's third-quarter earnings dropped 37% as its cable networks saw an ad revenue dip in the U.S., and chairman Sumner Redstone and his holding firm National Amusements are under pressure from nervous creditors amid a global credit crunch and declining stock prices.

Disney's recently announced quarterly earnings dropped 13% from last year, citing a sudden and significant decline in TV ad and theme parks trends.

"Studios are taking a much harder look at the bottom line," said analyst Larry Gerbrandt of Media Valuation Partners in Beverly Hills. "When they contract, they contract across the board, and that includes production."

For movies, the days of easy money are officially over.

Late last month, Societe Generale, a key movie financing player, abruptly exited the business, following the example of Deutsche Bank. Hedge funds like the Merrill Lynch-backed Melrose I fund that backs 24 films in Paramount's slate are either under water or seeking to extricate themselves from the film business.

After first merging several Paramount Vantage departments into the studio proper, the specialty label laid off 60 of its employees. The departure of DreamWorks from the Paramount fold last month shed another $50 million in overhead, and the annual feature slate was concurrently trimmed to 20 per year.

The new DreamWorks is to a large extent immune from the current credit freeze since it bypassed Wall Street to sew up $550 million from Indian company Reliance Big Entertainment. DreamWorks has delayed its pitch for the remainder of its hoped-for $650 million or so through JPMorgan until the new year as a result of poor market conditions.

Independent filmmakers, whose survival is tenuous in the best of times, have the most to lose in the tough environment. Filmmakers who seek funding for new movies in the coming months are in for a nasty shock, some producers and bankers say.

"Production will drop significantly," said D. Jeffrey Andrick, managing director of Citibank unit Continental Entertainment Capital. "Some of the players who are here now, won't be. And those who are here will be making fewer movies."

Investors or distributors who do come to terms are often forcing filmmakers to bear much more of the cost themselves. And even when backers commit, "the question is whether people who are pre-buying now will still be there in a year," said Cassian Elwes, senior vp and co-head of independent film at WMA.



Complicating matters is uncertainty about the availability of "soft money" -- tax credits from local governments that producers use to cover as much as 30% of their costs.

Many states are calling special sessions to cut their budgets, forcing studios to redo their risk analyses and production budget forecasts.

New York offers among the most generous tax incentives, prompting production companies to line up for soft money through 2010, one studio executive said. But now the exec is worried that the state might not honor its commitments, putting several of the studio's TV shows in limbo.

"No one could have predicted six months ago that we'd be in a financial crisis that could potentially make a state insolvent," the exec said. "Those are the kinds of models I have to run now for senior management."

Many digital-cinema insiders are concerned that the credit crisis will impact the industry's transition. In the U.S., both Digital Cinema Implementation Partners -- representing roughly 14,000 screens -- and Access Integrated Technologies' Phase 2 plan -- for up to 10,000 screens --need to secure financing in order to move forward.

For TV companies, the recession comes on the heels of the WGA strike, which led to a lot of belt-tightening last winter. Many restrictions implemented during the strike -- such as limiting print subscriptions and travel, restricting or freezing new hires -- were never lifted after the work stoppage ended in the spring, making recession-related spending cuts a little less painful on the TV side.

ABC Studios was the most aggressive during the strike. It terminated nearly 30 overall deals, the most of any studio. Now it is the only studio so far to impose budget cuts on its shows, a 2% production cost trim on all series. That is on top of the much-gossiped-about spending cuts on wardrobe on the

studio-produced hit "Desperate Housewives."

Sister network ABC has trimmed the orders on three series -- "Castle," "The Unusuals" and "Samantha Who?" -- and opted not to go with "Single With Parents," one of the series previously picked up for midseason.

At News Corp.'s TV divisions, recently implemented measures include a hiring freeze, eliminating overtime and restricting the use of temps and consultants, reducing T&E expenses across the board.

In a memo from Sony Pictures Entertainment chairman Michael Lynton and co-chairman Amy Pascal, the company outlines its cost-cutting measures, which include less plane travel and hotel downgrades, the restriction of corporate jet travel to top talent only, fewer print subscriptions, no internal meetings outside the company offices and cutting airport parking costs.

Talk of layoffs in Hollywood has subsided as such measures are never popular. By talking up their cost-saving measures, management teams are apparently hoping to avoid major across-the-board layoffs.

Still, with budgets for 2009 being finalized, pink slips could still be in the offing by the holidays and likely on the rise over the next year.

"Without a doubt," Sanford Bernstein analyst Michael Nathanson replied when asked whether layoffs are likely between now and early in the new year. "There will undoubtedly be layoffs," echoed Hal Vogel, president of Vogel Capital Management. "How many, I don't know."

Media industry layoffs this year already are twice as high as last year, reaching 23,417 as of the end of October, according to data from global outplacement consultancy Challenger, Gray & Christmas. That also means that 2008 has already seen the highest number of media job cuts since the 43,420 recorded in 2001.

For all the gloom, there are bright spots in the entertainment business. Unlike most businesses, Hollywood has a locked-in market for its products, ensuring steady supply-and-demand for its movies and TV shows. As some bankers and investors exit the scene, producers are tapping new sources, including India and China, for funding.

"If it's the right film, people will want to make it and finance it," Elwes said. "It's the marginal films that will have a hard time."

Video game sales remain strong, rising 8% in the third quarter, suggesting studios that tie their movies to games -- think "Quantum of Solace" -- will profit handsomely.

The Internet is another wild card. One banker suggests that filmmakers, denied funding, will take their ideas directly to the Web, where production is far cheaper -- helping jump-start the still largely unmonetized market for online video.

Producer Michael Ohoven ("Capote") says the hard times could end up creating a better entertainment business as companies merge, weak players disappear and Hollywood makes fewer, better movies and TV shows.

"There's no need to cry and whine," he said. "Things could be a lot worse. We could be in the auto business."

Georg Szalai contributed from New York; Nellie Andreeva, Jay A. Fernandez and Carolyn Giardina contributed from Los Angeles
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