Hollywood feeling pinch amid economic worries

- By RYAN NAKASHIMA

Photo By

Save This :

Top Photos

More Photos »

< >

This month, NBC Universal, a subsidiary of General Electric Co., announced it will cut its spending next year about $500 million, or 3 percent, to stay ahead of the downturn. At Paramount Pictures, a Viacom Inc. unit, the wide release of two movies has been pushed until January to delay spending on marketing, and the studio plans to make six fewer movies a year going forward.

Earlier this year, Warner Bros. cut production by 19 films a year, after eliminating its Picturehouse and Warner Independent labels and absorbing New Line Cinema -- a clear move to cut costs and focus in-house spending on the movies known as "tent poles" for their all-inclusive appeal.

But the vast empires of media conglomerates actually help insulate Hollywood from the credit crunch. Cable networks, TV stations and theme parks generate billions in free cash flows to help fund new movies -- boom, bust or fail.

Big-ticket movies are typically financed with in-house cash or company credit lines. Some projects are financed 50 percent by private equity, but those are usually riskier and smaller productions. Studios often become distributors on such tie-ups anyway, and secure themselves with agreements that recoup their distribution and advertising costs up front.

Already in 2008, only about a quarter of Warner Bros.' 33 movies were co-financed, said Wunderlich Securities analyst Martin Pyykkonen. With Time Warner Inc. businesses "still spewing off plenty of free cash to invest" and private equity players still in the market, financing blockbusters won't be a problem, he said.

"I'm just saying there are ways to get these done that may not be obvious," he said.

That is, no matter what happens in the larger credit market and even outside financing, you can bank on the next "Harry Potter" movies being made.

Even if equity investors do follow the example from July of Deutsche Bank in walking away from film financing, studios may be just as happy. Paramount said then, as Deutsche Bank abandoned it, that it preferred other financing options. And the studios use outside equity in varying proportions.

The lingering worry is that the famously resilient consumer will not buy as many videos through the holidays.

"They'll still be buying content, whether it's music or DVDs, but my guess is ... they'll be a little more selective," said Russ Crupnick, a digital media analyst for NPD Group. "That's where the economy is going to be hit."

Hodges, the Florida librarian, is not alone borrowing videos at the public library and re-watching his own collection. Video rental revenue in the U.S. in the first nine months of the year was off 1.2 percent at $5.6 billion, according to the industry tracker, Video Business. Video sales were down 3.5 percent at $8.6 billion, it said. Box office receipts through Oct. 5 were flat at $7.25 billion, though attendance slipped.