Los Angeles Times

How much will it hurt?

Hollywood watches a changing landscape and economic clouds on the horizon.

- By Ryan Faughnder

Hollywood was supposed to be headed for a redux of the Roaring ’20s after COVID-19 restrictio­ns eased, theaters and theme parks reopened and live sports returned to television.

But as the entertainm­ent industry comes to grips with the challenges of the streaming business, companies are now also having to worry about what it would mean if the economy went into a serious recession.

Analysts worry that the Federal Reserve could tip the economy into decline by raising interest rates to control inflation, which hit a four-decade high of 9.1% in June. Recessions mean job losses. Economic uncertaint­y normally means less money to spend on discretion­ary things like trips to Disneyland. On the other hand, consumers facing hard times often seek refuge in movies and television.

“If you zoom out a bit and look at past economic cycles at least in the U.S., most forms of entertainm­ent have been fairly resilient to downturns,” said Netflix executive Spencer Wang, in a video interview discussing earnings last month. “There’s a level of escapism, I think, that entertainm­ent provides.”

Recent economic data are providing mixed signals as economists debate whether it’s more important to pump the brakes on inflation, which affects virtually all consumers, or to avoid a recession that throws millions of people out of work.

Real gross domestic product for the second quarter decreased 0.9%, according to the Bureau of Eco

nomic Analysis, though that number could change. This comes after the economy declined 1.6% during the first three months of the year, meaning the U.S. has now had two straight quarters with no economic growth. By one definition, that means the country is already in a recession.

But Federal Reserve Chair Jerome H. Powell, who is trying to pull off a “Mission: Impossible”-style “soft landing” for the economy, cited a robust job market to argue that the country is, in fact, not in a downturn. Further complicati­ng the picture, while consumer sentiment has taken a hit in recent months, Americans are still spending. Nonetheles­s, chief executives in multiple industries have been talking on earnings calls about an increasing­ly challengin­g macroecono­mic environmen­t.

Parts of the entertainm­ent industry are already experienci­ng job losses for reasons that have little to do with the country’s general economic picture. Netflix has laid off 450 employees to contend with a slowdown in revenue after the company surged during the pandemic.

Consolidat­ion is also a factor. David Zaslav, CEO of the newly merged Warner Bros. Discovery, is looking for $3 billion in cost savings from the combinatio­n of WarnerMedi­a and Discovery Inc. assets.

So it’s worth considerin­g the potential effects of a broader slump, which would have a number of specific implicatio­ns for the entertainm­ent business. Among the most immediate effects of a sluggish economy is a tightening of the advertisin­g market, analysts say. Is that happening?

The upfront advertisin­g market for the 2022-23 TV season is projected to be up slightly over the previous year, hitting $19.63 billion, based on projection­s from research firm Insider Intelligen­ce. Media companies have been reporting strong demand in the market, where commercial­s are sold well in advance of the fall TV season. Walt Disney Co., for example, reported a record $9 billion in advertisin­g commitment­s.

But the true test will come once the season begins, as advertiser­s can cancel their upfront buys closer to airtime. Softness in the economy is showing up in advertisin­g’s scatter market, where companies buy ads on short notice typically at much higher prices than what upfront buyers pay.

While NBCUnivers­al reported the highest-grossing upfront in its history at $7 billion, thanks in large part to revenue flowing into its Peacock streaming service, the Comcast-owned media company’s Chief Executive Jeff Shell told analysts the scatter market weakened in the second quarter.

Streaming device maker Roku also cited recent short-term cutbacks in ad spending in response to the economy slowing down in the San Jose-based company’s latest earnings report. Roku’s stock fell 23% last Friday after the company reported worse than expected earnings and withdrew its full-year revenue estimate.

“We are seeing advertiser­s worried about a possible recession and so we’re seeing them reduce their spend in places that are easy for them to turn off and turn back on,” said Roku CEO Anthony Wood. “So for example, the scatter market, which is an important source of ad revenue for Roku, is an easy market for advertiser­s to turn off and turn back on.”

A slowdown in advertisin­g would be bad for traditiona­l TV outlets that are already facing long-term problems in the form of cord cutting and competitio­n from big-spending streaming services.

Warner Bros. Discovery and Paramount Global report earnings this week, which should provide additional insight into the market’s health.

However, Brian Wieser, an analyst at GroupM, said the amount of fretting over the advertisin­g market is overblown. Wieser, in an interview last week, said he expects TV advertisin­g in the second quarter to wind up “flat-ish” year-over year, while the overall ad market grows by high single digits, propelled by double-digit increases in digital spending.

“The overall market is consistent with what we expect it to be,” Wieser said. “It’s not that there aren’t risks, challenges and problems, but I think that the tone of negativity is a little overdone.” (Wieser discussed more thoughts on the ad market in GroupM’s “This Week Next Week” podcast.)

The other big area where you would expect to see problems is in theme parks.

Recessions force families to cut big-ticket items from their budgets, and annual vacations to Orlando, Fla., and Anaheim certainly qualify. But there’s no sign that this is happening quite yet. NBCUnivers­al last week said its parks business generated profits of $632 million, the best second-quarter result on record for the division.

“Obviously the parks business historical­ly has been subject to macro trends, and there’s no reason to think that that won’t be the case in the future,” Shell said. “We’re just not seeing it yet.”

Walt Disney Co. reports earnings Aug. 10, so there will be more to learn then about whether kids’ overwhelmi­ng desire to hug Mickey and Goofy post-shutdown outweighs economic uncertaint­ies. Morgan Stanley analyst Benjamin Swinburne, in a June note to clients, wrote that pent-up demand for Disneyland and Walt Disney World, plus the company’s pricing strategies, “may allow the business to grow even in a modest recession.”

What’s unclear is what kind of blow a recession would deal to the streaming business. Netflix is already reining in spending to contend with slowing subscripti­on growth, though it’s still spending $17 billion a year on content. Belt tightening could make households choosier about which of their half-dozen monthly streaming video subscripti­ons are worth keeping.

Co-CEO Ted Sarandos, in an argument for Netflix’s value to consumers, plugged the Russo brothers’ film “The Gray Man” as a killer bang for viewers’ bucks, compared with seeing a similar movie at a theater.

“This is an enormous bigbudget action film that normally people would have to go out and spend an enormous amount of money to go see,” Sarandos said in the earnings call. “And they’re premiering it on Netflix.”

Box office is also relatively recession-resistant. Despite the financial crisis, movie theater admissions in the U.S. and Canada totaled a strong 1.4 billion tickets sold in 2009, according to the National Assn. of Theatre Owners. The years immediatel­y following the dot-com crash at the turn of the century were among the biggest in terms of admissions.

But who knows? Economic forecastin­g is notoriousl­y difficult. Still, recession or not, the overarchin­g trends, such as the decline of cable TV, the disruption of the movie business and the transition to streaming, aren’t going anywhere.

 ?? Photo illustrati­on by Nicole Vas Los Angeles Times; Getty Images and Unsplash photos ??
Photo illustrati­on by Nicole Vas Los Angeles Times; Getty Images and Unsplash photos

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