Europe Divided: How Hollywood Hurts When Struggling South Drags Down Booming North (Analysis)

9:00 AM PST 01/04/2013 by Scott Roxborough
Tomi Um

The economic implosion in Spain, Italy and Greece is negating entertainment inroads in Russia, the Netherlands and Scandinavia as a "perfect storm" of problems has the U.S. feeling pain.

This story first appeared in the Jan. 11, 2013, issue of The Hollywood Reporter magazine.

For Hollywood film and television studios, Europe is becoming the land of the haves and have-nots. 

The crisis triggered in 2009 over mounting government debt in Greece since has led to an economic slump and skyrocketing unemployment throughout much of the continent. For the entertainment industry, the impact chiefly has been felt in debt-ridden southern countries — Spain, Italy and Greece — while in the north, such countries as Germany and the U.K. are on target to break all-time box-office records as movie attendance in the Netherlands and across Scandinavia and Russia remains robust. It’s a pattern repeated on the small screen. Ad spending — the money that drives TV rights deals — is sliding in the south, while the TV markets of Germany, France and the U.K. continue to chug along. 

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The struggles have big implications for Hollywood, which increasingly depends on foreign markets. For instance, European TV output deals with such broadcasters as Italy’s RAI, Germany’s RTL and France’s TF1 have been a dependable source of cash for decades. The northern nations, which have escaped the worst of the economic pains, continue to deliver but can’t compensate for the southern slump.

Total ad revenue for the so-called eurozone (the 17 countries that use the euro) will finish the year 15 percent below 2011, according to ad giant GroupM. The drop means producers and studios won’t be able to hit the numbers they made just a few years ago.

The impact of the euro crisis on the film sector was clear at the American Film Market in November, when major distributors from Italy and Greece signed zero deals and Spanish buys were scarce. Greek film distributors actually sent out a letter to all major sales agents asking for a 40 percent discount on movies bought but not yet released in the territory. 

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“The film business is a rapid barometer of the economic climate, and the euro crisis is having a major impact,” says David Garrett, head of Mister Smith Entertainment, which handles DreamWorks titles in the region. In Spain, where more than 50 percent of under-25-year-olds are unemployed, there exists what Garrett calls a “perfect storm” of problems: “The coffers at the TV channels are pretty much empty, and home entertainment is ravaged by piracy.”

The Spanish government made a bad situation worse when it increased taxes on theater tickets from 8 percent to 21 percent to help close budget shortfalls. Spanish box office plunged 12 percent in the first half of 2012. Thanks to the breakout success of Spanish director Juan Antonio Bayona’s The Impossible, which grossed more than $53 million in his home country for distributor Warner Bros., Spanish theater owners hope to close out the year down just 5 percent.

But factor out the extra 13 percent hike in ticket prices — money that goes into empty government coffers — and things look dire indeed.

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To protest the tax hike, a Spanish theater owner staged a one-day “carrot rebellion,” avoiding the tax by handing out free tickets in exchange for the purchase of a $16 carrot. As a staple food item, carrots carry a much lower 4 percent rate of sales tax. “We have to do something so that theaters don’t close,” theater director Quim Marce tells THR.

The situation is reversed in Greece, where ticket prices have fallen below $9 (from a pre-crisis high of near $12) as the economy tanked. So while The Dark Knight Rises sold about 5 percent more tickets than 2008’s The Dark Knight in Greece, it made 20 percent less money for Warner Bros.

Lionello Cerri, president of Italy’s cinema exhibitors association, warns of a “vicious circle” in southern Europe. “Revenue drops, so productions are slowed, fewer new films are in cinemas, so fewer people go, revenue drops further, and so on,” he says. “I don’t know how to get out of it.”

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The bad news is especially troublesome for the independent film sector, which relies on preselling foreign rights to finance production budgets. Once-rich territories of southern Europe and crisis-hit Ireland used to jointly deliver a dependable 5 percent to 8 percent of a film’s budget. In this climate, the studios and indies are lucky to get half that — if they can sell their films at all. European buyers increasingly are betting on sure things such as The Hunger Games or star-driven vehicles. Riskier titles get left on the shelf.

“Gone are the times that every film has some kind of value in the marketplace,” says Robert Beaumont, president of indie sales group Lightning Entertainment. “Now films are either worth a lot or nothing. There is no in-between.”

Yet at the same time, the news is great in certain segments of Europe. Most northern territories have been spared the worst of the crisis. (The German unemployment rate actually has gone down recently.)

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In Britain, the boom has been largely homegrown, with Sam MendesSkyfall — which has soared to past $160 million in local gross — becoming the most successful film of all time in the U.K. British box office crossed the £1 billion ($1.6 billion) threshold in record time in 2012, and with Peter Jackson’s The Hobbit: An Unexpected Journey rolling out during the holidays, David Puttnam, president of the U.K. Film Distribution Association, is predicting U.K. cinema will set an all-time record.

Meanwhile, in Germany, the monster success of The Intouchables — the French comedy grossed $79 million there — has put the country’s box office on track to crack the €1 billion ($1.3 billion) mark for the first time.  France remains somewhere in the middle, with admissions and box office more or less flat this year. With nothing to compare to the mega success of The Intouchables (released in France in late 2011), box office in the first 10 months was off 2.4 percent to $1.32 billion.

And in Scandinavia, strong local titles — such as Susanne Bier’s Love Is All You Need ($7.2 million in Denmark alone) and the adventure drama Kon-Tiki ($14 million in Norway) are complemented by a surging VOD market that has attracted the likes of Netflix and HBO GO, both of which launched Nordic operations in the past year.

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Further east, things are even brighter. Russian box office is booming — forecasts by Moscow’s Exhibitor’s Bulletin expect 2012’s take to land between $1.26 billion and $1.3 billion, up 10 percent to 13 percent compared with  2011. A weaker TV market and rampant piracy in the region, however, mean Russian growth, by itself, won’t compensate for Western Europe’s decline.

Hollywood executives hope that Europe has hit bottom this year and that 2013 will see a turnaround in the sickly Mediterranean markets. The signs, however, aren’t good. In December, the European Central Bank slashed its forecast for the eurozone, predicting that instead of growing 0.5 percent in the next year, the economy in the currency block will shrink by another 0.3 percent.

“We all try to be optimistic that things will improve, but for the time being, this is the new normal,” says Beaumont. “There’s still business to be done in Europe, but you have to be realistic and not just think and hope things will go back to how they used to be.”

Stuart Kemp in London, Eric J. Lyman in Rome and Pamela Rolfe in Madrid contributed to this report.

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