A BLEAK PICTURE FOR BIG STUDIOS

By Claudia Eller and Richard Verrier

Jan. 2, 2009 12 AM PT

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 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 already occurred in recent months. Industry executives contend that the steep downturn will force Hollywood to fundamentally 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 USC 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 and throw tens of thousands of actors, technicians and others out of work. 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.”

The signs of distress are already evident. In December, Universal laid off 70 executives as part of parent company NBC Universal’s move to cut 500 jobs across its business units. The same day, Viacom Inc. shed 850 jobs at its various media companies, including MTV Networks and Paramount Pictures.

Most recently, video game giant Electronic Arts Inc., based in Redwood City, Calif., said it was cutting 1,000 jobs amid declining sales, and New York-based Cablevision Systems Corp. announced it would close its Voom high-definition channels and cut jobs in the unit. Time Warner Inc.’s Warner Bros. and Walt Disney Co.’s ABC are considering similar moves in the first quarter.

Studios are also scaling back the number of movies they are making.

Indeed, the capital crunch will help ensure it. Paramount and MGM weren’t able to close “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 may 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 firm Richard Alan Inc. “The credit crunch will have a pervasive effect on the movie business in 2009 and 2010,” Dorfman said.

Some studios say they are hoping to save money without having to sacrifice jobs.

“We have been implementing aggressive cost-containment initiatives specifically designed to mitigate layoffs,” said Julie Henderson, a spokeswoman for News Corp., parent of 20th Century Fox. Fox expects to save $400 million this fiscal year by reducing marketing and production costs, slashing travel and entertainment budgets and not filling open positions, the studio official said.

Similar moves are underway at Culver City-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.

Executives there have been told to cut travel costs, stay at cheaper hotels and use a shuttle van instead of car service between the studio and LAX. 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. Expect to see fewer executives at upcoming festivals in Cannes in the South of France and at Sundance in Park City, Utah, as well as industry events.

For the first time, Universal won’t send executives to the movie theater industry’s biggest trade show, ShoWest, scheduled for March in Las Vegas. Sony canceled executive meetings in Latin America in December and Europe in June.

Instead of throwing its traditional lavish Christmas party (complete with skating rink) on its back lot, Paramount Pictures held a more subdued tree-lighting ceremony and served refreshments.

Warner Bros. abandoned its longtime ritual of sending holiday turkeys out to a host of actors, executives and agents. Instead, the studio sent virtual Christmas cards via e-mail.

Jon Feltheimer, chief executive of Lions Gate Entertainment Corp., a studio that specializes in low- and mid-range-budget films, said the economic downturn would force Hollywood to cut back on more than mere parties and perks.

“It’s a great wake-up call to ask ourselves if we’re operating as smartly and strategically as we can,” said Feltheimer, whose Santa Monica-based movie and TV studio recently eliminated 41 positions, or 8% of its head count. “Times like this force us to reexamine our operating plans, look at where we’re spending money and where we’re getting returns.”

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% to 7% 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 now exacerbated by a drop in overall consumer spending that began a few months ago, said Tom Adams, president of the research firm.

Moreover, 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 Blu-ray discs, will still have dropped 3% to 5% for 2008.

Meanwhile, broadcast networks -- already grappling with rising production costs, lackluster prime-time ratings and a loss of viewers to the Internet -- face a very 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% from 2007’s 1.4 billion admissions. Hollywood nonetheless saw a last-minute surge over the long Christmas weekend, thanks to such hits as family films “Marley & Me” and “Bedtime Stories,” the latter starring Adam Sandler.

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

Nonetheless, 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 the Internet. A recent study by market research firm Parks Associates found that nearly 66% of U.S. consumers altered their spending habits in the fourth quarter of 2008 as a result of the bad economy.

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

“The recession will accelerate the transformation of the entertainment industry from traditional media to tomorrow’s reality of new media,” said Jerry Nickelsburg, a senior economist at UCLA.

The downturn has hurt the local entertainment economy in other ways. Commercial production, which accounts for about 12% of on-location film shoots in L.A., was expected to have dropped 20% in the last quarter of 2008 as the major car companies and other advertisers cut back.

“It’s the first signal that the nation’s economic problems are really starting to hit the entertainment industry directly,” said Paul Audley, president of FilmL.A. Inc., the nonprofit group that handles film permits.

Feature film activity also was down in the quarter, thanks to the front-loading of production that occurred earlier in 2008, when studios rushed to finish movies by June 30 in anticipation of a possible walkout by actors.

Production is expected to pick up early this year, barring an actors strike. Although most studio executives don’t think SAG members will authorize a strike, they’ve crafted contingency plans such as scrapping so-called pay-or-play deals, in which stars are guaranteed their paydays even if their movies are canceled.

“The possibility of a SAG strike really creates uncertainty,” said Patrick Whitesell, a top talent agent at Endeavor, which, like all agencies, has been paring expenses.

A walkout by actors would probably take a greater economic toll than the 100-day writers strike, which mainly disrupted the television industry.

“The job outlook is not rosy, and if you do have an actual SAG strike, it would be a disaster and put a huge dent in the Los Angeles economy,” said Jack Kyser, chief economist of the Los Angeles County Economic Development Corp.

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(BEGIN TEXT OF INFOBOX)

Downsizing

Recently announced job cuts at major studios and entertainment companies:

NBC/Universal (NBC, Universal Pictures): 500 jobs

Viacom (MTV Networks, Paramount Pictures): 850 jobs

Electronic Arts: 1,000 jobs

Lions Gate: 41 jobs

Cablevision Systems: unspecified layoffs from closing its Voom HD channels in the U.S.

Time Warner’s Warner Bros. and Disney’s ABC also are considering job cuts in the first quarter.

Source: Times research