No Longer Slump-proof

With con­glom­er­ation, cord cut­ting and heavy debt, the en­ter­tain­ment sec­tor won’t be im­mune to a slump BY BRENT LANG AND RE­BECCA RUBIN

Variety - - Contents -

The en­ter­tain­ment biz isn’t im­mune to re­ces­sion woes

the stock mar­ket is tank­ing, debt lev­els are ris­ing, China is locked in a trade war with the United States and eco­nomics sage Alan Greenspan re­cently warned in­vestors to run for cover. No won­der peo­ple fear there’s a re­ces­sion com­ing.

“When you see all this mar­ket volatil­ity, it’s a sign that a lot of peo­ple who think very hard about these things and have a lot of money on the line are wor­ried that things are slow­ing down,” said Charles Bal- lard, pro­fes­sor of eco­nomics at Michi­gan State Univer­sity.

If in­vestors’ fears are jus­ti­fied, then the decade of eco­nomic growth the world has been en­joy­ing could soon come to an end, lead­ing to sig­nif­i­cant job losses, a cap­i­tal crunch and a whole lot of pain.

But what does that mean for the me­dia and en­ter­tain­ment sec­tor, a busi­ness that has his­tor­i­cally en­dured fi­nan­cial down­turns bet­ter than other in­dus­tries?

Though the movie busi­ness has been able to largely weather tough eco­nomic times, given that go­ing to lo­cal mul­ti­plexes is still a rel­a­tively cheap form of en­ter­tain­ment, me­dia com­pa­nies that make and dis­trib­ute con­tent have be­come so con­glom­er­ated that it’s dif­fi­cult for them to be to­tally im­mune to a fi­nan­cial down­turn.

Nearly ev­ery ma­jor movie stu­dio ex­ists as a small cog in a much larger en­ter­prise, re­sid­ing along­side tele­vi­sion stu­dios, cable

busi­nesses or phone com­pa­nies. These sec­tors are more likely to feel the im­pact of a ma­jor slump.

For one thing, ad­ver­tis­ing of­ten takes a hit dur­ing a re­ces­sion as com­pa­nies look for ways to cut costs. That’s bad news for both the broad­cast and cable busi­nesses, which de­pend on ad­ver­tis­ing to boost their bot­tom lines. In 2009, for in­stance, with the coun­try mired in a down­turn, com­pa­nies cut way back on their print and tele­vi­sion spots, push­ing to­tal U.S. ad sales down more than 15%. A sim­i­lar de­cline could be in store dur­ing the next slow­down, caus­ing prob­lems for me­dia gi­ants.

“The me­dia in­dus­try is not in­su­lated from broader eco­nomic trends,” said me­dia an­a­lyst Hal Vo­gel, head of Vo­gel Cap­i­tal Man­age­ment. “If com­pa­nies are run­ning on empty, they can’t pay mil­lions for a 30-sec­ond spot on the Su­per Bowl or the Os­cars.”

There are other causes for con­cern that sug­gest a down­turn could be even more dam­ag­ing to Hol­ly­wood. Cord cut­ting, the in­dus­try term for con­sumers’ aban­don­ment of cable in fa­vor of lower- cost stream­ing ser­vices, has been a ma­jor is­sue for the Dis­neys and Warn­er­me­dias of the world — com­pa­nies that have grown rich on re­trans­mis­sion fees. The num­ber of peo­ple who can­celed pay-tv sub­scrip­tions in 2018 grew 32.8%, to 33 mil­lion adults, ac­cord­ing to re­search firm emar­keter. That trend could ac­cel­er­ate as dis­pos­able in­come grows tighter and Dis­ney and Warn­er­me­dia launch stream­ing ser­vices that could siphon off bar­gain hunters tired of writ­ing big checks to Time Warner Cable and Com­cast.

The last fi­nan­cial dis­as­ter was pre­cip­i­tated by a hous­ing bub­ble and a shadow bank­ing sys­tem that en­abled a sub­prime mort­gage cri­sis to take root. The next one will al­most in­evitably have dif­fer­ent trig­gers. Econ­o­mists are wor­ried about the amount of debt that com­pa­nies have been tak­ing on, and me­dia and tele­com gi­ants such as Com­cast, Dis­ney, Net­flix and AT&T are no strangers to us­ing other peo­ple’s money to fuel their growth. Some of this bor­row­ing has reached dizzy­ing heights. Com­cast’s ac­qui­si­tion of Euro­pean pay-tv be­he­moth Sky has pushed its net debt to an es­ti­mated $108 bil­lion, while AT&T’S pur­chase of Directv and Time Warner has left it with a net debt of $177 bil­lion, ac­cord­ing to Cred­it­sights.

Dis­ney has made some strides to­ward re­duc­ing its debt, sell­ing re­gional sports net­works to pay for its ac­qui­si­tion of Fox, but it still will be more heav­ily lever­aged once the deal closes. And Net­flix keeps re­turn­ing to the debt mar­kets as it buys more con­tent and pro­duces more and more “Brights” and “Ro­mas.” In Sep­tem­ber, the com­pany re­ported that its long-term debt had climbed 71% to $8.34 bil­lion. A month later, the stream­ing giant was back at it, rais­ing an ad­di­tional $2 bil­lion in fi­nanc­ing through debt se­cu­ri­ties. That leaves these me­dia ti­tans in hock up to their eye­balls at a time when they may not be able to af­ford it.

“It may be that all these com­pa­nies that kept adding more and more debt will wake up to find that they’re no longer get­ting much bang for the buck,” Vo­gel noted.

That said, the me­dia and en­ter­tain­ment busi­ness fared much bet­ter dur­ing the Great Re­ces­sion of 2009 than other in­dus­tries did. Over the course of the down­turn, the U.S. econ­omy shrank by 4%, with some of the most se­vere losses com­ing in the durable goods and man­u­fac­tur­ing sec­tors, which fell 35%, and con­struc­tion, which dropped by more than 20%. In con­trast, the mo­tion pic­ture sec­tor was rel­a­tively un­scathed, grow­ing by 8.6%, while the broad­cast­ing and telecom­mu­ni­ca­tions busi­ness fell by less than 2%.

The sec­tor that has his­tor­i­cally sur­vived best is the film busi­ness.

“The movie in­dus­try has been re­silient in tough eco­nomic times, and that’s be­cause where else in Amer­ica can you get two hours of great en­ter­tain­ment for $9?” said Adam Aron, CEO of AMC, the largest the­ater chain in the world.

The data sug­gests that Aron is right. Since the Great De­pres­sion, peo­ple have sought refuge from their trou­bles by vis­it­ing the cin­ema — a com­par­a­tively af­ford­able en­ter­tain­ment op­tion when money is scarce. Box of­fice rev­enues in­creased dur­ing five of the last eight re­ces­sions and even set do­mes­tic records in 2001 and 2009 as the econ­omy sput­tered.

“Gen­er­ally we are an in­dus­try that’s re­ces­sion proof,” said Jeff Gold­stein, head of do­mes­tic dis­tri­bu­tion at Warner Bros. “If there are good movies, [peo­ple] will want to see them.”

But moviego­ing may not be the cheaper en­ter­tain­ment op­tion that it used to be. Ticket prices have been ris­ing steadily in re­cent years, fueled by the ex­hi­bi­tion in­dus­try’s push into pro­vid­ing re­cliner seats, al­co­holic bev­er­ages, 3D, Imax and other trap­pings of a premium ex­pe­ri­ence that en­able ex­hibitors to charge more for ad­mis­sion. Prices hit a record high of $9.38 dur­ing the sec­ond quar­ter of 2018, roughly the cost of a monthly sub­scrip­tion to Net­flix or other stream­ing ser­vices. In cities such as New York and Los An­ge­les, go­ing to the movies can cost $20 or more.

“I’m scared that movies in many places are very ex­pen­sive,” said Chris Aron­son, head of dis­tri­bu­tion at 20th Cen­tury Fox. “Price was never a bar­rier for moviego­ing be­fore, but now it is.”

There is a pal­pa­ble fear among those work­ing in en­ter­tain­ment about the po­ten­tial neg­a­tive ef­fects of a se­ri­ous eco­nomic down­turn. War­ren Buf­fett, the leg­endary in­vest­ment or­a­cle, has a col­or­ful way of de­scrib­ing the con­se­quences of a re­ces­sion. It has a ten­dency, he noted, to sep­a­rate the best-run and most vi­sion­ary com­pa­nies from the ones that took heed­less risks.

“You only find out who is swim­ming naked when the tide goes out,” he quipped. If an eco­nomic cri­sis comes, we may dis­cover which me­dia gi­ants were wear­ing bathing suits.

Gen­er­ally, we are an in­dus­try that’s re­ces­sion proof. If there are good movies, peo­ple will want to see them.” Jeff Gold­stein, head of do­mes­tic dis­tri­bu­tion, Warner Bros.

Cause for Con­cern? Net­flix’s debt climbs as it buys more con­tent and pro­duces pricey films such as “Bright.”

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