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Tense times in Hollywood's dream factory

The entertainment biz is holding up nicely amid the financial meltdown, but it won't be immune.

By Richard Siklos, editor at large
Last Updated: October 17, 2008: 5:22 PM ET

LOS ANGELES (Fortune) -- Even in the land of make-believe, where the meltdown on Wall Street feels a million miles away, these are tense days. While no one can say for sure how the financial crisis will affect Hollywood, a prevailing view is that the film business is relatively protected for at least a year or two, but that the TV industry which was already impacted by last winter's writers' strike could be in for a rocky ride.

Surreal at the best of times - ok, all the time - sunny Tinseltown has avoided the sense of catastrophe that has enshrouded Wall Street and spooked Silicon Valley. But now its biggest players are trying to come to grips with exactly what the financial and economic meltdown is going to mean for them. One big-deal agent told me the other day that only projects involving major stars and producers are going forward right now. "Everybody's putting their tail between their legs," the agent said. "It's hard to get deals done." More worryingly, one senior TV executive posited to me: "I can almost guarantee that you're going to see major cuts across our businesses."

Well-timed funding boom

Broadly, there are in fact two early takes on how tough times are going to affect the entertainment industry. The first take is that the movie industry in particular is going to be just fine for the next couple of years. This is more by happenstance then design, although there is evidence that entertainment products are less impacted by economic downturns than other sources of consumer spending. (The conventional thinking that the box office actually goes up because people are taking fewer vacations and or holding off on big-ticket items).

Additionally, this time Hollywood has timing on its side. For one thing, Tinseltown has just gone through a boom in new outside sources of funding led by hedge funds and Wall Street sources. By the estimate of one finance executive who worked on several of these financings, between $10 and $15 billion was raised over the past few years to fund slates of studio films, as well as television projects.

What this means is that whatever films are already in the works don't have to worry about how they are going to be financed, and relatively few big Hollywood players are going to have an imminent need for cash. The only deal that has been held up by the crisis is the $700-million debt financing for the Dreamworks studio's new venture with India's Reliance group, but no one has expressed fears that the financing is in doubt. (There are of course question marks on the horizon, such as $3.7 billion of MGM's debt coming due in 2012, and relentless chatter about the capital needs of smaller shops like the Weinstein Company.)

"Hollywood is pretty well financed in terms of enough money being there right now," says a finance chief at one of the studios. "What it looks like two years from now, I don't know."

Hollywood under pressure

Meanwhile, the impact of last winter's writer's strike - as well as uncertainty over whether there might yet be a strike from the Screen Actors Guild - led to a slowdown in the production of new films and TV shows that some have called a "de facto strike." But according to a recent report in Variety, after a period of being put on hold some 40 or more films are going to go into production between spring and summer of next year.

Layer on top of this the fact that many of the Hollywood majors, including Warner Bros. (owned by Fortune parent Time Warner), Fox and the Disney (DIS, Fortune 500) studio, have reduced the number of films they are releasing, while smaller studio divisions like Warner Independent, New Line and Paramount Vantage have been restructured or shuttered. In the first announcement of cost-cutting that was directly linked to the financial crisis, Paramount announced that it is slimming its release slate by 20% to 20 films a year to hit financial targets set by its parent, Viacom (VIA).

Which brings us to the second take, that the downturn is still going to hurt everyone, and more fallout in LaLa Land is inevitable. Television costs will be under immense pressure as advertising continues to weaken, and, if the fall TV season so far is any indication, viewers are not stampeding to watch all the new shows. (To be fair, part of this is still hangover from the strike plus the fact that the election and meltdown have been competing rather well for audiences' attentions.)

Also worrying: To the extent that Hollywood's growth is driven by the adoption of new technologies - a lot - a bleak outlook for selling new gizmos this holiday season could lead to further sluggishness in home video and ancillary revenues, a big cash engine for the studios from both film and TV.

Meanwhile, for all the Hollywood executives who are sadly watching their shareholdings in their media conglomerate parent companies diminish, we can only offer by way of a suggestion a recent statement made by the studios' trade association in the context of preventing another strike: "If ever there was a time when Americans wanted the diversions of movies and television, it is now." To top of page

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