Hollywood Braces for a Credit Crunch After Market’s Second Plunge

After another massive sell-off, the indie film community is jittery, but TV media buyers have yet to panic

How do you feel about the 630+ Dow drop on Monday? Depends which part of the business you're in.

After the second major plunge in less than a week, the indie film community is jittery, but TV media buyers have yet to panic about the latest stock gyrations. At least for the short term.

Also read: Media Stocks Tumble as Dow Falls 635 Points in Broad Sell-Off

Long term? There’s a nagging worry throughout media circles that America — and the global economy — is headed for another downturn that could test the long-held view that the entertainment business is recession-proof.

The tougher the economic climate gets, the tougher it will be to get investor backing for movies, and to command premium ad rates. TV rates are plugged in for months, but if the economy really tanks, all bets are off; advertisers could exercise cancellation options.

And if Hollywood thought consumers weren’t buying enough DVDs before — well, they’ve got a potentially tough holiday shopping period ahead.  

Deals could be the earliest casualty.

“It would be very unfortunate for our industry if we were to go back into another period of tightened credit,” Lindsay Conner, an entertainment partner at the law firm Manatt, Phelps & Phillips told TheWrap.

He cautioned that “it’s hard to tell from two days of carnage on Wall Street” what’s going to the happen to the media business. But he did take comfort in the fact that so far he hadn’t heard of anyone bailing out of a deal already in the works.

“Deals are still on the table,” he said. “No one’s bailing out of them domestically or internationally simply because of a crunch on Wall Street.”

But Hal Vogel, of Vogel Capital Management and the author of “Entertainment Industry Economics: A Guide for Financial Analysis,” takes a much darker view of the economy's well-being, and what that portends for Hollywood. He told TheWrap that the industry should prepare for a year or two of difficult times.

Maybe longer.

“It’s not good,” he said. “You know what happened with the indies last time – ’07, ’08? They got pretty much smashed. Blown away. The point here is, it’s dependant on capital, and the capital is going to be tougher to get and it’ll be more expensive.”

He said that when the market plummets, investors get conservative.

“If you think that moviemaking was a risky proposition before, it now looks even riskier,” he said.

On top of that, Vogel said, “when you get to the other end of the food chain, consumers are not going to have the funds to buy as much, whether it’s at the box office or streaming or DVDs.”

An independent producer shared Vogel’s gloomy outlook, predicting that the stock market’s troubles are going to continue, making institutional and individual investors less likely to finance movies.

He predicted that money invested in “affinity-driven projects, like your kid is going to direct something,” will “dry up or at least drop significantly” while larger, private-equity financed companies will rethink how they finance.

On the other hand, Doug Jones, associate director of programming for Film Independent and the Los Angeles Film Festival, told TheWrap: "It will definitely make it harder for everyone — independents all the way up to the larger studios. But if someone truly wants to get their vision up on a screen, they're going to do their damnedest to find a way to do that. It may take them longer, it may be more arduous, but eventually they're going to get their movies made.

"Filmmakers are still going to do all the tried-and-true methods of maxing out their credit cards and borrowing money from their parents or something interactive like Kickstarter campaigns," Jones said.

On the television side, there is no sign of panic from ad buyers.

As they did Friday — after the last big dip in the Dow — media agency executives reiterated Monday that decisions on advertising spending are long-term. They said advertisers don’t make snap judgments based on short-term stock market fluctuations — even serious ones like Monday’s.

Also read: Media Buyers Not Overly Concerned About Thursday's Stock Plunge

But the timing makes it possible for advertisers and media agencies to at least consider an immediate cutback in ad spending on broadcast television, since advertisers have several weeks to exercise cancellation options on advertising dollars committed to as part of their upfront ad spending negotiations for the 2011-2 television season.

Cancellation options can be exercised just prior to the start of each quarter — and the next quarter begins in September.

"We had a healthy upfront," Bruce Rosenblum, president of Warner Bros. Television Group, told TheWrap early last week after the debt deal passed. "But the next real test will be cancellation options. If the economy deteriorates further, that's a meaningful risk to our business."

However, media buyers point out that a drop in the stock market is unlikely to cause many advertisers to take a chance and drop their ad spending now. In 2008, the last time the stock market had similar drops, there was a lag of about six months before advertisers started to significantly cut back on ad spending.

And categories like retail and movies are extremely competitive in the fourth quarter, as is the wireless telephone category, media buyers said.

Brian Oliver, the president of Cross Creek Pictures, conceded that “any time there’s a financial crisis it’s not good,” but pointed out that his company operates from a private equity fund, “so we’re outside the market.”

While he said he did not expect the latest stock gyrations to affect his company, “there are people who finance films that this will probably inhibit.”

Conner said the last few weeks have indeed been bumpy but the entertainment business overall remains strong. Indeed major media companies such as Time Warner, Viacom and Comcast have reported double digit profit gains in the past week.

“It’s not a wonderful time to be holding industry stocks and calculating your net worth, but the entertainment industry in America remains strong,” Conner said.

“If it’s not dragged down by a double-dip recession, I think we’ll look back on these as a few very bad days.”

John Consoli contributed to this report