Economic turmoil takes its toll on Hollywood

By Michael Stroud

LOS ANGELES (Hollywood Reporter) - 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 family-controlled holding firm National Amusements are under pressure from nervous creditors amid a global credit crunch and declining stock prices.

Walt Disney Co 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 and principal Steven Spielberg from the Paramount fold last month shed another $50 million in overhead, and the annual feature slate was concurrently trimmed to 20 per year.

Spielberg's 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 the William Morris Agency.