Downturn may not aid studios this time

Chmielewski and James are Times staff writers.

Worried by the worsening economy, Kristen Olson decided she'd better start saving money. She tallied her expenses and was walloped by sticker shock: She and her roommates were spending $900 a year for cable TV.

"I'm not watching $900 worth of cable," said the 25-year-old advertising account coordinator, who lives in North Hollywood. She's trying to persuade her roommates to drop the service.

"You can watch so many shows online for free; most of them are on Hulu now," Olson added, referring to the year-old video site that makes available at the click of a mouse more than 1,000 shows, including her favorites, "Ugly Betty" and "House."

Such changes in consumer behavior signal trouble for media companies. For decades, entertainment executives have boasted that Hollywood is "recession-proof." No matter how dire the economy, the argument goes, consumers will always be willing to spend on entertainment to escape.

Studio executives note that during the Great Depression, when more than a quarter of the country was out of work, people still scraped together dimes to see the latest motion picture. In subsequent economic slumps, consumers spent freely on new technology, expanded their home video libraries and, most recently, invested $1,000 or more on high-definition, big-screen TVs.

This time, however, past may not be prologue. Unlike the rudimentary entertainment economy of 75 years ago, when the downtown Bijou was about the only diversion, consumers now have a near-limitless array of entertainment options to occupy their leisure time.

"While Hollywood films have traditionally fared well during economic downturns, this time around may be quite different," said Bobby Tulsiani, an analyst at Forrester Research, which recently examined consumer spending on media.

Blame the Internet. With faster processors, improved technology to compress video and more than 60 million homes in the U.S. with high-speed connections, the computer seamlessly delivers full-length episodes of television shows and movies. As a result, the computer now vies with the TV and cinema as the go-to screen for entertainment.

One telling sign was the first "Saturday Night Live" parody with Tina Fey impersonating Republican vice presidential nominee Sarah Palin, which drew nearly as many viewers online as watched it on NBC. Only one-third saw the Sept. 13 skit that Saturday night live, according to San Mateo research firm Integrated Media Measurement Inc. The rest caught it online or on their digital video recorder.

Olson is representative of a younger generation that values the Internet above other media. The recent Forrester Research survey found that adults ages 25 to 34 were the most willing to sacrifice a night at the multiplex or premium cable if money gets tight. What were they least willing to surrender? High-speed Internet access.

The endless stream of free content, through legitimate services as well as pirate sites, appears to be shifting viewing habits more quickly than industry executives had anticipated -- or intended. That creates a dilemma for media companies because the Internet generates substantially lower revenue than established business models -- 30-second TV commercials and home video sales -- which have long supported the costly economics of TV shows and movies. That's not Hollywood's only problem.

When Midori Connolly's family business in San Diego, which supplies audiovisual equipment for conferences, began to feel the economic slowdown this summer, she and her husband trimmed expenses.

The monthly subscription to DVDs-via-mail service Netflix was the first to go. Now they rent movies for $1 a day from a kiosk at the supermarket. Next they saved the $10 to download George Strait's new "Troubadour" album on iTunes. Instead, they bought two tracks for 99 cents each. And they didn't rush out to spend $17 for the DVD of "Sex and the City." They checked out a free copy from the library.

"We started finding alternatives that we didn't have to spend money on," said the 31-year-old mother of two. "I don't feel that we've lost any quality."

Media companies are bracing for the fallout from decisions by families like the Connollys. With the economy cooling, Netflix has lowered its revenue and subscriber forecasts for the fourth quarter. Viacom Inc., which owns Paramount Pictures and MTV, and CBS Corp. said profits would be lower than expected, citing weaker ad sales. NBC Universal plans to slash $500 million in spending -- 3% of its budget -- because it anticipates "unprecedented economic challenges" in the year ahead.

The wild card is the length and depth of the downturn. No one knows how bad things will get.

Although cinema attendance increased during five of the last seven recessions, a closer examination of movie box office receipts during the Great Depression seems at odds with Hollywood's conventional wisdom. Attendance soared in 1929 and 1930, after the advent of "talkies," but the novelty appears to have worn off amid hard times. By 1932, ticket sales had plunged and did not recover until 1940, just before World War II.

"It's not that the cinema business is completely immune to recessions," said John Fithian, chief executive of the National Assn. of Theater Owners. "But the industry appears to be recession-resistant. If there are decent movies, people are going to come out."

This year movie attendance is down nearly 4% from 2007, and the reverberations are beginning to ripple across the studios. Third-quarter domestic ticket revenue was down by double digits for three major studios -- 20th Century Fox, Paramount Pictures and Walt Disney Studios, according to Bernstein Research.

Though the box office makes up a small portion of media companies' bottom line, movies are important because they propel other segments of the business, such as DVD sales. Studios rely on DVDs to turn a profit on many of their movies because ticket sales often are not enough to offset production and marketing costs. Disc sales are down 9% for the third quarter, and purchases of new releases fell a more dramatic 22%, according to Nielsen VideoScan.

Studio executives attribute the slump to fewer blockbuster DVDs released in the third quarter.

Industry observers say home entertainment sales traditionally hold up in a down economy, as consumers seek more-affordable entertainment options. Videocassette tape rentals took off during the 1981-82 recession, and DVDs underwent explosive growth during the 2001 slowdown, said Tom Adams, president of Adams Media Research. That gives studio executives optimism that the latest technology, Blu-ray, will take off despite lower consumer spending.

Holiday sales should shed light on the prospects for Blu-ray. Other segments of media, such as basic cable TV subscriptions and movie rentals, are expected to remain healthy. Most people, particularly those older than 35, view home entertainment as affordable and even indispensable. A night on the town for a couple who hire a baby sitter, dine at an upscale restaurant and pay for parking and a movie can easily cost as much as the monthly cable bill.

Cable companies realize that they are not immune from household budget cuts.

"Subscriptions get pared down," said Forrester Research analyst James McQuivey. "This means cutting extra movie channels, reducing premium channel packages and taking mobile TV [on cellphones] out completely."

Video game sales slumped in September, down 6% from a year ago, when Microsoft Corp. released its blockbuster Halo 3, which drove $228 million in sales. Game sales would be up 22% for the month if the mega-hit were removed from the equation.

Anita Frazier, video game analyst for NPD Group, said console games, which sell for $60 apiece, are perceived as a good value because they afford hours of play.

"At-home forms of entertainment tend to succeed in difficult times because people are 'nesting' more at home," Frazier said.

The Los Angeles economy, which employs more than 225,000 in entertainment, could feel some pain. Jerry Nickelsburg, a senior economist with the UCLA Anderson Forecast, said a recession could hamper the ability of studios to finance films, TV networks to sell ad time and companies to cash in on the sale of T-shirts and other merchandise.

"The entertainment industry is going to be somewhat insulated because of the long lead times for producing films and because movies remain an inexpensive form of entertainment," Nickelsburg said. "It's cheaper than the theater, ballgames or white-water rafting."

All bets are off, though, if the recession leads to widespread layoffs.

Nikki Maxwell, a 39-year-old mother of three from North Hills, said her family was still suffering the aftermath of the writers strike.

Her husband, a video game writer, was displaced by striking writers who flooded the market. He subsequently landed a job with a start-up, but the couple fear the new company might falter. Maxwell lost her grant-writing job to state budget cuts.

They cut discretionary spending. They stopped buying CDs, DVDs, video games and books and gave up Netflix. They canceled HBO and Showtime, along with trips to indoor playgrounds and the movies.

"We lost the certainty we had," Maxwell said. "My husband says the biggest loss that he has is the sense that we can do anything. We had no doubt that we could be successful. Here we are -- we're statistics."

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dawn.chmielewski@latimes.com

meg.james@latimes.com

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