Reel Effect of Asia Crisis: Loss of Korea Film Market

Hollywood is losing its Seoul, and nowhere is that clearer than in the hallways of the seaside Loews Santa Monica Beach Hotel this week.

As foreign movie, video and TV program buyers streamed through the hotel’s marble-floored lobby Thursday for the opening of the annual American Film Market to shop for the entertainment industry’s latest offerings, there was a virtual absence of buyers from economically ailing South Korea.

Until last year, South Korea was one of Hollywood’s hottest growth prospects, having become one of the world’s seven largest markets for U.S. entertainment in the 1990s.

In Asia, Hollywood’s fastest-growing overseas market, South Korea ranked second only to Japan.

But with an economic collapse accompanied by a 50% drop in the value of South Korea’s currency, the won, in recent months, South Korea’s Hollywood fever has cooled considerably.

Last year, 111 Korean buyers and 37 companies traveled to the market in Santa Monica. At the start of the gathering Thursday, 11 buyers and six companies had registered from South Korea.

“We think they will buy almost nothing this year, compared to a red-hot situation before,” said veteran independent film financier Lewis Horwitz.

While South Korea has been the hardest hit among the Asian entertainment markets, it is far from alone. And the reversal of fortunes comes at a time when Hollywood is increasingly dependent on foreign revenue for its economic health and growth.

Entertainment companies that had come to depend on the voracious appetites of Asia’s growing middle class to finance their escalating film budgets and hefty recording contracts have seen video and music sales and box office revenue take a hit across the region.

Even Japan, the largest entertainment market in the region, has slowed considerably since its real estate and stock market bubble collapsed in the early 1990s.

Only China, Taiwan and Hong Kong are expected to show strong growth this year, according to Dudley Mendenhall, a managing director and entertainment specialist for Bank of America.

Asia’s currency woes mean even sure-fire Hollywood blockbusters will fall short of pre-crisis expectations, because the local box office receipts in countries such as Indonesia, Thailand, Malaysia and South Korea translate into significantly fewer dollars under today’s exchange rates.

Although “Titanic” is filling theaters throughout Asia, its box office revenue to date is $21 million less than what it would have been under last year’s exchange rates, according to Julian Lavin, an executive vice president at 20th Century Fox, which is distributing the film overseas. Still, that’s only a small percentage of the more than $1 billion that “Titanic” is expected to gross worldwide.

To some extent, the impact on large Hollywood studios has been blunted by past failures to better develop the Asian market. Major firms such as Walt Disney Co. have been trying, with mixed results, to boost revenue from Asia, which still accounts for a relatively small part of the U.S. entertainment industry’s overall business.

But the loss of South Korea will be felt in Hollywood, and not just because of the weakening consumer market.

Just a few short years ago, South Korea’s chaebol--giant, economically powerful industrial conglomerates with dozens of subsidiaries--armed with low-cost financing were knocking hard on studios’ doors, anxious to show up Japanese competitors like Sony Corp. and Matsushita Electric Industrial and get access to U.S. entertainment fare to serve Asia’s expanding middle class.

Those dreams of Hollywood grandeur were shaken last fall, when a mountain of private debt brought South Korea to the edge of bankruptcy, and collapsed last month, when incoming President Kim Dae Jung ordered the chaebol to trim back their operations, particularly those risky or unprofitable businesses.

Korea’s chaebol are all reevaluating their entertainment operations, at home as well as abroad. What with a credit crunch and the currency devaluation, Samsung, Daewoo, Cheil, Hyundai and SKC are pulling back, scrambling to renegotiate film distribution contracts, cancel investment plans and, in a few cases, sell off or close their operations.

The sudden withdrawal of Korea’s chaebol, the industry’s major source of funding, coupled with the devaluation of the won, has hit the Korean film industry like a “bombshell,” said South Korean producer Yoo In Taek, president of Cine2000, a Seoul film company.

The devaluation means Korean companies are effectively paying twice what they agreed to pay a year ago for movies being delivered now.

Three new Cine2000 films scheduled for production this year have been put on hold. No new film distribution contracts are being signed.

“Everybody has stopped their activities and have no plans for this year,” Yoo said. “It’s very quiet.”

In the short term, the hardest hit in Hollywood will be the smaller, independent makers and sellers of movies, videos and TV shows.

While major studios are cushioned by their own distribution apparatus in South Korea, independent companies rely heavily on selling their movies and shows to foreign distributors, with Korean companies playing an increasingly important role.

Entertainment bankers had considered Korean sales as good as cash, allowing companies to borrow against those sales to finance film production. That’s not the case now.

Last year, members of the American Film Marketing Assn., made up of scores of independent companies, reaped $99 million in sales from Korea, about twice the level of the early 1990s. Now, that activity is slowing to a trickle.

The long-term question is whether South Korea’s giant industrial conglomerates will launch a full-scale retreat from their rapidly growing investment activity in Hollywood, which includes a $60-million stake by industrial giant Samsung Corp. in “L.A. Confidential” film producer New Regency Productions and a $300-million investment by Cheil Foods and Chemicals in DreamWorks SKG, the studio founded by moguls Steven Spielberg, Jeffrey Katzenberg and David Geffen.

One industry source with close ties to the South Korean entertainment industry said there is internal dissent among top Cheil executives about the wisdom of its DreamWorks investment amid the current economic downturn.

But Susanna Kim, a vice president of the multimedia division of Cheil America Inc., said she could not comment on widespread speculation in South Korea that Cheil might be considering selling its DreamWorks stake because of financial pressures.

“DreamWorks has been a very good partner, and we hope that will continue in the future,” she said.

Ron Nelson, the DreamWorks executive overseeing financial matters, declined to comment.

Other South Korean companies are not wasting any time in pulling back.

SK Communications, the media arm of SKC, is attempting to cancel or renegotiate $30 million worth of film deals in the United States, including a deal with former Sony Pictures Chairman Peter Guber’s company, Mandalay Entertainment, according to one industry source.

Kim Se Woong, an SKC spokesman in Seoul, confirmed that his company is considering selling or merging its entertainment business, which was bleeding money even before last fall.

He said his company lost about $3.1 million (at today’s exchange rates) last year, which he blamed in part on the poor showings of the Madonna film “Evita” and “Seven Years in Tibet,” starring Brad Pitt.

Daewoo Cinema, which has led the pack in domestic film production and home video distribution, faces serious problems this year because its film distribution contract with New Line Cinema must be paid in increasingly costly dollars, according to Daewoo Cinema Executive Managing Director Hong Se Hee.

“We are almost out of business,” Hong said.

Larry Goebel, president of Image Organization, a Los Angeles producer and distributor of action and thriller films, said the company has been meeting this week with Daewoo, which has a three-year distribution deal with Image.

“We’re trying to sit down and figure out a way that makes sense for both companies to grant them relief from license agreements that they committed to well before the crash,” Goebel said.

Patrick Choi, president of Hollywood-based InterLight Pictures, counts himself among the lucky.

Daewoo Cinema, which financed his last two films, has agreed to honor its funding commitment to his next film, an action-thriller. But a deal to extend that contract has been put on hold.

On the flip side, a handful of U.S. companies investing in Korean entertainment projects are actually benefiting from the currency drops.

Phil Botana, president of acquisitions for Brimstone Entertainment in Los Angeles, said Brimstone is making “Younggary,” described as the “Korean Godzilla.”

The $10 million being spent on such things as computer graphics, special effects and other production expenses will buy $20 million worth of work, Botana said.

Bates reported from Los Angeles and Iritani from Seoul. Chi Jung Nam of The Times’ Seoul Bureau contributed to this report.