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.