Richard Florida
by Richard Florida
Sun Mar 29th 2009 at 10:41am UTC

The End of Hollywood?

Hollywood is not a place, it’s a business model. The Hollywood model of flexible production, project-based work, and free agents stands as one of the archetypal economic models of the late 20th century – second perhaps only to the Silicon Valley model. Now, according to my good friend, Steve Pearlstein, it’s facing deep and fundamental challenges.

Now, however, there is a sense that it may all be coming to an end, that the threat this time is real and that the old business models can’t survive. With the rise of legal and illegal downloading, the Internet has already decimated the music business, and it is just beginning to overturn the economic foundations of the movies, television and electronic gaming as well. Financing is drying up, once-sacred expenses are being cut, whole layers of management eliminated and work shifted elsewhere …

Things are looking considerably more precarious for the television business, where there’s been a dizzying drop in network and station advertising revenue, driven as much by the DVR as the souring economy. Syndication revenue has shriveled, and networks have been forced to move away from prime-time drama and comedy series in favor of reality series and talk shows that employ many fewer actors, directors, screenwriters and technicians. The industry’s hopes are now focused on networks like HBO, AMC and Showtime, whose subscribers are still willing to pay for quality programming. But many of those networks’ biggest hits have been produced elsewhere.

The mood in Hollywood, however, is decidedly anxious.   DVD sales, which for years have driven industry profits, have recently fallen by almost half as consumers turn to cable or the Internet to get movies they want, when they want them, for less than what it costs to buy the movie in a store. And piracy is cutting deeply into sales in fast-growing markets overseas.

At the same time, the Wall Street investment houses and hedge funds that have lavished cheap financing on the industry for the past decade are now in retreat. Some have closed their L.A. offices and are reportedly peddling their ownership interests in upcoming movies at discounts of 30 to 70 percent. Viacom gave up in its effort to raise $450 million from outside investors for its slate of movies, and credit ratings have been reduced on debt used to finance past pictures. Even famed director Steven Spielberg is reportedly having trouble raising the $700 million that his DreamWorks Studios needs for its next round of movies.

No surprise, then, that the number of movies produced is expected to decline again this year, or that many of those will be made outside of Southern California as producers respond to incentives from dozens of states and localities offering tax rebates equal to as much as 40 percent of production costs. To lure back what it considers “runaway” production, a strapped state legislature was forced this year to enact a modest tax break of its own.

Meanwhile, studios are under intense pressure to cut costs from corporate parents that over the years have been foiled in their efforts to rein in the industry’s extravagant ways and earn a decent rate of return on their oversized investments. Movie openings have been canceled, weekend jets grounded and marketing budgets slashed, and even top stars are being told they won’t be paid in full until the studios recoup production costs. Nearly every studio has announced layoffs, and a number are closing down subsidiaries and selling off facilities.

The world will always need entertainment, and Southern California is the odds-on favorite to produce it. It has the history, the people, the infrastructure and the creative energy. But as Detroit automakers and New York’s financiers have learned, these natural advantages can disappear when an arrogant and insular industry comes to view its dominance as inevitable and its outsized compensation as an entitlement.

5 Responses to “The End of Hollywood?”

  1. Christopher Hyde Says:

    Interesting. I just finished reading David Bordwell’s take on a session from Hong kong’s Filmart, where he posits:

    “Who needs Western markets if the PRC market continues to swell and if other territories in the area hold up their end of financing, distribution, and the occasional regional hit? As far as mass-market cinema is concerned, we may be moving toward a bipolar world, with North America at one pole and Asia at the other.”

  2. Don Holbrook Says:

    The end of Hollywood is predictive of a new convergence trend in the entertainment industry that is taking hold. It is the convergence of several mediums in order to make movie making profitable once again. The trends are the focus of major studios on making use of their movie inventories and our need as humanity to escape from our reality and the mindless onslaught of reality based television programming in our homes. All of these are clues to what is just over the horizon.

    The studios are converging with their film stocks to create a multi-level and sustainable experience for consumers. It starts in the traditional format of a major film or more likely series of films in a certain genre. Examples are obvious, Harry Potter, Indiana Jones, Star Wars, Star Trek, the Matrix, etc., and then marry them to a reality based concept, based on the old Westworld movie.

    The theme park industry is in need of a face lift and so are destination location attractions and hotel resorts. Now take the rage of online gaming and the addictive nature of those online quests and the pursuit of competition in those games and you have a new industry… “Immersive Interactive Entertainment Destinations.”

    Now if you are a major fan of a certain movie series you can go become part of that experience at a major thematic hotel destination that is part hotel/spa, part theme park, part water park, part tourism attraction, and part gaming experience. You can create your quest tasks while playing the game or you can get addicted to the continuation of the quest while staying at the immersive resort. There is no limits to their ability to entertain us and our own history of concepts is full of fictional opportunities for such examples (Aliens, Atlantis, Camelot, etc.)

    I must warn you Americans don’t necessarily own the rights to this emerging trend. It will be subject to global economic competition, but none the less, Westworld is coming and closer than you may think. All this driven by the need to create a more predictable and sustainable shelf life for profits in the entertainment industries. Convergence has already been borne so the concept is already in the making.

  3. Ian Says:

    I’d be interested in seeing a companion piece on the new models for film production and how profitable they are. Perhaps grosses and margins are lower but I think you’d see evidence of some interesting new business models growing out of this case of creative destruction.

  4. Elana Says:

    There is also opportunity in the non-traditional forms, new media forms. This is a point of change in the industry and those who adapt may thrive.

    For example, the traditional way of advertising is costly and might not reach the core audience where web platforms like twitter and Facebook have the core audience built in. As these on-line communities grow, it becomes easier and cheaper for a marketer to directly reach their audience.

    Now is the time in Hollywood to think out of the box.

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