Weak dollar is altering nearly every aspect of the business


Be afraid. Be very afraid.

That's the mantra of economists as the U.S. dollar has plunged against world currencies, dropping more than 50% against the euro alone in the past six years.

But in Hollywood, be thankful. Be very thankful.

The dollar's decline has artificially inflated foreign boxoffice receipts, curtailed "runaway production," sustained theme park admissions and provided independent sales agents an amphetamine shot at markets like this month's Festival de Cannes.

"The weak dollar definitely boosts the sales and profitability of the industry," says Harold Vogel, head of Vogel Capital Management. "On balance, it is very good for Hollywood."

Just how good?

The MPA boasts that the foreign boxoffice soared $760 million from 2006 to 2007 as worldwide boxoffice reached an all-time high of

$26.72 billion, a 5% year-over-year increase. But admissions in 2007 were the lowest since 2003 -- a troubling reality that the weak dollar helped hide.

"If we have successful product and the revenue is bigger than the cost, the weak dollar helps because we get more," Warner Bros. Pictures president Alan Horn says. "It has had a positive effect on revenue."

At the same time, the weak dollar, combined with aggressive new tax breaks, has proven a boon to domestic film production, with the strong euro and Canadian dollar making it prohibitive to shoot in once-favored foreign locales.

A 2005 report by the Center for Entertainment Industry Data concluded that spending on domestic shoots had dropped 14%, even though spending on shooting overall had grown 30%. Three years later, it's the other way around.

"We have seen a reduction in Canadian production," says John Burke, a film finance attorney at Akin Gump. Competitive subsidies in the U.S. are a major factor. "But loss of the additional benefit we used to see from the favorable Canadian dollar exchange rate has added to the problem," he says.

Nu Image/Millennium Films, which used to film regularly in Canada, has not shot there in two years. Indeed, it is preparing to open a new studio in Shreveport, La.

"The dollar factors into it more and more because production anywhere else in the world has become more expensive," Nu Image CFO Trevor Short says.

As the U.S. benefits, foreign film industries are being hit hard.

"In the last year, I have done maybe 15 deals for significant U.S. productions, all because of the dollar and state tax credits, and maybe one foreign deal," says Schuyler Moore, an entertainment attorney with the Stroock firm. "Two years ago, that would have been completely flipped."

Movies that still choose to shoot abroad are paying the price -- like Fox and Hyde Park Entertainment's "Street Fighter: The Legend of Chun-Li," which has been shooting in Thailand. Between the time the budget was completed and the start of production, the dollar dropped from 35 to 31 baht.

"We lost several hundred thousand dollars," Hyde Park chairman and CEO Ashok Amritraj says.

On the other hand, the weak dollar has made Amritraj's films a bargain for foreign investors, and he has done multimillion-dollar deals with such companies as India's Toonz and Reliance Big Entertainment, a conglomerate that has raised a billion-dollar film fund and this week announced a slate of development deals with production companies run by George Clooney, Nicolas Cage and Tom Hanks, among others (HR 5/19).

India and China are among the growing number of countries now looking to invest in the U.S. entertainment industry. After years in which revenue spiraled downward thanks to the growth of foreign-language (or "indigenous") filmmaking, independent movies suddenly seem reasonably priced.   

Studios with theme park divisions also have seen a jump in revenue despite the U.S. quasirecession and increased gasoline prices.

"The dollar is the biggest swing factor for the parks and resorts, and that happens in two ways," one corporate executive notes. "One, it boosts the income from overseas parks and resorts" -- a key factor for a company like Disney, which has properties in Hong Kong, France and Japan. "Secondly, the company benefits from an increase in the number of foreign visitors coming to the U.S. parks and from Americans who tend to travel abroad less."

In May, Disney posted strong quarterly numbers, aided by revenue from parks and resorts that for the first three months of 2008 was up 11% compared with 2007.

For all the advantages the weaker dollar brings, the overall picture "is not so straightforward," says Michael Lynton, chairman and CEO of Sony Pictures Entertainment. "A lot of our marketing expenses are in yen or euros, so they go up, too. And almost half of our employees are outside the U.S., in everything from theatrical distribution to home entertainment to TV distribution. So our fixed costs, as far as salaries are concerned, go up dramatically."

In the case of Sony or Warner Bros. -- which has more than 5,000 employees scattered in 30-plus countries, according to Horn -- that amounts to a lot of fixed costs.

Plus, on the indie side of the business, the weak dollar hasn't quite generated the hoped-for sales.

"In theory, you should be able to 'presell' for more," says Moore, speaking of the way producers sell off rights to their films before they are made. "But the reality is, foreign distributors don't offer that up, and U.S. sellers have a mind-set where they don't really think about it. They think, 'If I'm selling to Germany for 10% of the budget, with a $50 million movie I'll ask for $5 million.' They don't think, 'I really should be getting 15%.' That has not happened yet, though it will."

Producers who shoot in the U.S. to save money also are finding hidden costs like extra residual payments.

"The three main guilds -- the writers, directors and actors -- are much stronger here than anywhere else in the world," Myriad Pictures president and CEO Kirk D'Amico says. "They can be as much as 10% of your sale. That goes right to the bottom line of a film's possibility."

Plus, with a declining currency come rising interest rates.

"That impacts the business badly," Moore says. "High interest hurts the producers, anyone that needs financing, anyone borrowing. And everyone is borrowing, even the studios."

Ryan Kavanaugh, managing director of Relativity Media, a hedge fund-based financier of studio slates, says U.S. investor confidence has dampened.

"There's a mentality of, 'I am going to hold onto my dollars, because as the dollar comes back up, which it has to do, I'll get more bang for my buck.' That is not necessarily a rational way of thinking, but it is swaying 5%-10% of the market," Kavanaugh says.

Despite all this, the weak dollar is giving show business a much-needed boost. But that begs the question: If the trajectory reverses course, will the studios go into a tailspin?

It's something Lynton admits is a concern. But, he says, other factors worry him more than foreign boxoffice.

"It is going to be more about things that do not have variable costs," he says. "Things like television revenues, coming from the pay channel deals, don't have much variable cost associated with them; with the money that BSkyB or CanalPlus pays us, we get the benefit of a significant currency translation without greater marketing expenses."

When that benefit goes, whole swathes of the entertainment field will be impacted -- from international television to home entertainment.

Nobody is looking forward to that moment, but most executives expect it to come, and maybe soon.

"We are in a global business," Horn says. "Currency fluctuation is a fact of life."