Devastating Downturn for Hollywood Is Unlikely

Empty buildings. Thousands out of work, with layoffs extending from corner offices to the security gates. Companies scrambling to discuss merging operations to save money, or even to survive. A mayor warning that a hometown industry would “cease to exist” if the president himself didn’t take action.

This could describe the troubles any number of cyclical industries in America experienced over the last 30 years, from autos to oil, defense to steel, real estate to financial services. In 1971, it was Hollywood.

If it happened once, could it happen again? And with Hollywood taking on an increasingly important role in the Southern California economy, would the impact ripple through the area in the same way that the steep downturn in defense work did in the early 1990s?

That Southern California’s entertainment industry was ever in such a precarious position seems surprising today. Hollywood has almost always defied cyclical economic downturns, thriving even during hard times like the Great Depression as people sought refuge in movie houses.

But in the early 1970s, studios--to save money--were producing a good chunk of movies in foreign countries instead of Los Angeles, prompting Mayor Sam Yorty to sound the alarm. Worse, millions had lost interest in what Hollywood was doing. Just 17 million people a week were going to the movies, from a peak of more than 80 million in 1946. (Last year, the number rose to about 25 million, the highest since 1959.)

“We practically had to subpoena people to get them to go to the theaters,” said Motion Picture Assn. of America President Jack Valenti.

For the most part, structural changes in the entertainment industry, mainly through the demand for Hollywood’s movies and TV shows in foreign countries and from an exploding number of TV channels worldwide, make it less likely. Hollywood may manufacture fantasy, but its economic foothold in Southern California isn’t smoke and mirrors.

Unlike Southern California’s government-subsidized defense business, Hollywood doesn’t have a Berlin Wall that could come down, fundamentally altering the necessity of its projects. Unlike cities such as Houston and Detroit, which fell into severe slumps in the early 1980s with downturns in energy and autos, the fortunes of Los Angeles aren’t joined at the hip with entertainment.

Despite Hollywood’s rapid growth in size and importance in the 1990s, the region’s economy remains diverse. The entertainment business continued to grow in Southern California in the early 1990s despite the riots and the Northridge earthquake, which doomsayers predicted would chase businesses and people away from Los Angeles in droves.

What’s more, a $7 movie admission, a $12.99 compact disc or a $3 video rental aren’t the kind of big-ticket item--like a new car or house--that consumers eliminate during a recession. Entertainment also isn’t at the mercy of another industry, as autos might be to steel or lumber to construction.

And the definition of the entertainment business these days is far broader than what it was in the early 1970s, encompassing such areas as retail stores, merchandise, video games and entertainment centers.

Jack Kyser, chief economist with the Economic Development Corp. of Los Angeles, notes that when entertainment does experience a downturn in the future, the impact on Southern California will probably be blunted by the fragmented nature of the business.

Studios are always working to feed several markets simultaneously. A company that cuts back on making big, expensive feature films because of high costs may at the same time increase production of TV shows, boosting licensed merchandise operations or making more smaller films for a specialty movie distribution unit.

“In the days of aerospace, any time there was a downturn in defense or NASA spending, the local economy caught a cold from layoffs knowing sooner or later there would be an up cycle. In entertainment, it’s different. The industry is so fragmented. If there were a downturn, instead of one great burp it would be a bunch of hiccups.”

Still, what happened in 1971 offers a cautionary lesson that shouldn’t be forgotten. Any number of red flags threaten to chip away at Southern California’s entertainment industry despite its emergence as perhaps the single most important engine in the Los Angeles-area economy.

“There are major demons lurking everywhere at all times, all of which get incrementally worse,” said Tom Pollock, former Universal Pictures head and current chairman of the American Film Institute. “There’s no giant tsunami coming to upset Hollywood’s apple cart. What there are are many, many small quakes.”

Problems in the Business

One warning sign is the economic paradox of movie making. Even though production has been extraordinarily healthy, the economics of the basic film business driving the industry are lousy. In part that is due to skyrocketing costs, from the salaries of actors and directors to high-tech special effects.

A new record was just set with the hit “Titanic” and its staggering $200-million budget. Still, that film is on its way to making money.

At the same time, Hollywood is churning out so many films that most fall by the wayside if they don’t perform in the first week they open. That has led to much talk about studios cutting back significantly on making films because the market is too crowded. Studios have to produce new movies and programs to bolster their film and TV libraries. But if any kind of significant cutback happens, it could seriously ripple down to Hollywood’s rank and file.

Competition for the Industry

Ever-rising cost pressures make it easier for Southern California’s competitors, eager to entice an environmentally clean industry that produces high-paying jobs, to lure production away with promises of lower costs and tax breaks. The nature of Hollywood productions is that they are mobile, flexible operations that can easily move to the most desirable location. Much of “Titanic” was filmed at a new facility that 20th Century Fox built near Rosarito Beach in Baja California.

“This is a high-glitz industry, and everybody wants it,” said economist Kyser.

The panic about film productions running away to other states and countries has been more muted in the last five years, in part because of aggressive moves by California and local officials to keep filming here. In addition, the mere fact that a film or TV show goes on location doesn’t necessarily have a major economic impact on Southern California, because crew members, stars, directors and others often live here and presumably spend the bulk of their paychecks locally.

But some areas, notably Canada, have established the kind of infrastructure that does pose a threat. The lure of lower costs, a growing pool of skilled labor and government tax incentives helped Vancouver in the 1980s establish a thriving television business. The city is home to the hit Fox show “The X-Files” (although that show may move to Los Angeles next season to accommodate the wishes of star David Duchovny) as well as a substantial percentage of Hollywood’s TV movies of the week.

Earlier this month, CBS turned over the reins of its Saturday morning children’s programming to Nelvana, a successful Canadian animator that produces “The Magic School Bus” and “Little Bear” shows. Nelvana has a competitive advantage over U.S. producers in part because it, like many other Canadian entertainment companies, receives government incentives for work done there.

Officials with the International Alliance of Theatrical Stage Employees union say that the hit NBC show “ER,” one of the most expensive TV shows to make, was nearly shot in Atlanta for cost reasons instead of Burbank. But a favorable deal with unions was negotiated to keep it in Southern California.

Although Southern California still dominates entertainment production, some states have gotten slices of the business. For cost reasons, 20th Century Fox built a $100-million animation studio in Phoenix, where its recent film “Anastasia” was made. States such as Florida and North Carolina boast studio complexes. A major new studio facility is being discussed for New Jersey across the Hudson River from Manhattan, which is a distant second to Los Angeles in production spending.

Some industry segments, such as special effects, have experienced a shakeout recently, partly because expectations of growth were too high and because some firms were too thinly financed. At the same time, the availability of more powerful, cheaper computer equipment has made that business a highly entrepreneurial one, making it easier for small companies to establish a beachhead in the business.

Still another problem that could cause some productions to flee, said economist Kyser, is potential shortages of skilled labor in Southern California as the work force struggles to keep up with the production boom and technology changes. Some entertainment retraining programs are emerging, such as one the state announced this month for workers at Technicolor.

Lucrative Foreign Market

Helping to offset those ever-rising costs has been the lucrative foreign market that Hollywood now increasingly depends upon to make or break movies and TV shows. That business could be hurt by the recent economic problems spreading throughout Asia. Currency devaluations and economic problems in that region would naturally hurt all U.S. companies exporting there. But Asia is considered Hollywood’s biggest growth opportunity over the long term.

Piracy of Hollywood’s entertainment also is rampant in some of Asia’s fast-growing markets. Last month, Valenti, traveling in Malaysia, walked into a video store in a mall and was offered pirated videos of “Flubber.” The film had just been released in U.S. theaters.

Valenti said he was told by a store employee that if he waited a week, he could also buy “Titanic” although at that point the film had yet to be shown in U.S. theaters. Both the film and music industry consider piracy a critical problem, especially in China where factories churn out pirated videos and CDs that are sold throughout Asia.

Home video, which had a booster rocket-like effect on the industry in the 1980s by generating billions of dollars of new revenue, has matured. Whether the growth of digital television and digital video discs will have the same kind of impact on Hollywood that video had is still unclear.

All this isn’t to say Southern California’s entertainment industry is a house of cards. There seems to be a fundamental resilience to the industry, with its creative and physical infrastructure running deep.

Studios are unlikely to pack up and leave in any significant way like an automotive plant could move to cut costs, because they could never duplicate their talent pool elsewhere. Indeed, new, emerging entertainment players, among them DreamWorks SKG and Polygram Films, have expanded in Los Angeles.

“There is a lot that can be said for the regional vitality of the industry,” said economist David Friedman, a consultant and fellow in the MIT Japan Program. “The industry has remarkable staying power in the Los Angeles area. It won’t flee, but marginal, additional expansion could take place elsewhere.”

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Moving Pictures

‘X-Files’: One of the biggest competitors to Los Angeles for filming sites is Vancouver, Canada, where “X-Files” is currently shot. The series may move to L.A. next year, however.

‘ER’: Burbank nearly lost out to Atlanta as home of the NBC hit.

‘Titanic’: The blockbuster movie’s $200-million cost included construction of a replica of the doomed oceanliner off Rosarito Beach, Mexico.