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Slashing Film Budgets In A Killer Economy

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Los Angeles Times

Published: January 10, 2009

HOLLYWOOD - There is no Hollywood ending in sight in 2009 for the entertainment industry, which along with the rest of the nation is experiencing its worst economic slump in decades.

The fallout from declining local TV ad revenue, weakening DVD sales and diminishing sources of film financing will continue to pound Los Angeles' signature industry, which employs more than 200,000 people and pumps an estimated $20 billion to $30 billion into the local economy.

Many people expect that will trigger further layoffs at the studios, networks, independent production outfits and other media companies on top of the thousands of job losses that have occurred in recent months. Industry executives contend that the steep downturn will force Hollywood to change the way it does business.

"You can eliminate all the limos and velvet-rope events you want," said former studio executive Marty Kaplan, director of the Norman Lear Center and research professor at the University of Southern California Annenberg School for Communication. "But if you're still spending $100 million on pictures that have little chance of being hits, you're in a business that is inherently nuts."

Compounding the angst is the threat of another industry strike, this time by the powerful Screen Actors Guild, which would halt most movie and prime-time TV production. Estimates of how much last year's strike by screenwriters cost the local economy vary widely, from $380 million to $2.5 billion. One study concluded the strike led to the state losing 37,700 jobs tied to the entertainment industry.

"It's not business as usual," said Marc Shmuger, the chairman of Universal Pictures. "We are all facing economic uncertainty, and 2009 is going to be tough. We are deep into a recession. None of us have been here before."

Financing Troubles Studios

Studios are scaling back the number of movies they are making. The capital crunch will help ensure it. Paramount and MGM weren't able to close so-called slate film financing deals in 2008 and prospects for securing such arrangements in the near term appear bleak. Even one of the world's most famous filmmakers, Steven Spielberg, is struggling to raise hundreds of millions of dollars in debt financing to help bankroll his new studio.

Although most studios have long-term financing deals in place, their lenders are looking to renegotiate terms, including lower distribution fees that studios earn for releasing the movies. The studios might have to resort more to self-financing their productions.

That would force them to take on greater risk and make fewer films, says Richard Dorfman, managing director for the New York investment company Richard Alan Inc. "The credit crunch will have a pervasive effect on the movie business in 2009 and 2010," Dorfman said.

Budget slashing is happening at Culver City, Calif.-based Sony Pictures.

"We're cutting costs across the board, with restrictions on overtime, the filling of open positions and those that become vacant, use of temporary workers, and travel and entertainment expenses, as well as consolidating shared services," Sony spokesman Jim Kennedy said.

Other studios say they, too, are cutting back on traditional Hollywood perks such as lavish premieres, first-class and entourage travel, limo services and hair and makeup sessions.

Talent Deals Cost Studios

Confronted with rising costs and diminishing returns, studios are reining in costly talent deals that can leave them in the red while stars walk away with millions. For example, Warner negotiated a deal with "Yes Man" star Jim Carrey - the first comedic actor to break the $20 million benchmark - in which he deferred his usual upfront fee for an ownership stake in the movie.

This is occurring against a backdrop of declining DVD sales, which have propped up studio profits for years. Consumer spending on DVDs, already slowing, is believed to have dropped about 5 percent to 7 percent in 2008, according to Adams Media Research, which projects a similar decline for this year. The slowdown in DVD sales reflects the maturity of the business, which began to slow in 2005 but is exacerbated by a drop in overall consumer spending that began a few months ago, said Tom Adams, president of the research enterprise.

Sales of the high-definition Blu-ray discs have been brisk, but not brisk enough to offset declining DVD sales. Adams estimates overall spending in the home-entertainment sector, including Blue-ray discs, will have dropped 3 percent to 5 percent for 2008.

Meanwhile, broadcast networks - grappling with rising production costs, lackluster prime-time ratings and a loss of viewers to the Internet - face a difficult year as automakers and other big TV advertisers slash spending.

As for box-office revenue, the studios saw nearly as much money generated in 2008 as they did in record-setting 2007, although that was due to ticket price inflation. Attendance was off an estimated 5 percent from 2007's 1.4 billion admissions. Hollywood nonetheless saw a last-minute surge during the long Christmas weekend, thanks to hits including family films "Marley & Me" and "Bedtime Stories."

"If you have good movies, people tend to come even during down economic times," said John Fithian, president of the trade group National Association of Theatre Owners. Fithian, noting that in 2005, when the economy was booming, "We had the worst year we've had in decades because the movies were terrible."

Fithian acknowledged that if the recession dragged on, it could affect moviegoing at a time when consumers are getting more of their entertainment at home with their big-screen TVs, video games and Internet.

Such changes could prompt the studios to speed up their efforts to distribute entertainment via the Internet, cell phones and other new outlets.

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