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Stock Market Plunge Puts Hollywood on Edge

Despite huge upfront sales and strong earnings, the media industry is fully aware that advertisers have cancellation options

Media companies are on edge after watching their value plunge in the global stock selloff Thursday.

Despite recent earnings showing robust ad sales, they are perceived as vulnerable because of tremulous economic conditions and uncertain ad spending.

Case in point: CBS, which is more dependent on advertising than other more diversified media companies, took the hardest hit. Its stock dropped 9.3%.

Compare that with a new media darling like Apple, which during the debt negotiations was touted as having more cash than the U.S. government. It declined 15.2 points, or just 3.87 percent.

"A healthy economy is critical to supporting the advertising industry, which supports television production and distribution," Bruce Rosenblum, president of Warner Bros. Television Group, told TheWrap earlier this week just after the debt deal passed.

He added: "We had a healthy upfront. But the next real test will be cancellation options. If the economy deteriorates further, that's a meaningful risk to our business."

By some indications, the television industry ought to feel sanguine. This year’s upfronts offered spectacular ad sales. The five major networks netted $9.2 billion in commercial time during the big selling season.

And media companies have been making money. Just Wednesday, Time Warner and Comcast announced that they had exceeded analyst expectations in earnings. And before the market opened on Thursday, Discovery Communications reported an 11 percent jump in revenues and a $1 billion stock buyback.

Also read: Media Companies Suffer in Stock Market Crash

But despite the huge upfront, and the strong earnings, advertisers have cancellation options, as Rosenblum noted.

In the worst single-day selloff since December 2008, the Dow closed down 512.53 — a 4.31 percent drop. The Nasdaq was down 136.68, or 5.08 percent. The Standard & Poors 500 dropped 60.24, or 4.79 percent.

Also read: Market Troubles Dominate News Channels, Rope In Networks

Analysts contacted by TheWrap after market close on Thursday said that companies that depend on advertising revenues are especially vulnerable right now, including CBS and Viacom, which plunged 6.1 perent.

In Hollywood, reactions ranged from gallows humor to concern and determined optimism. The sharpness of the decline was hard to shrug off completely.

"We have to pay attention to this stuff because our business is independently financing movies," Dylan Russell, vice president of production, Stone Village Pictures, told TheWrap. "We’re dealing not only with the studios but also the private investors, the foreign sales companies so a ripple anywhere always reaches its way to our shore. We just have to keep tabs on what’s going on."

Film finance expert Jeff Steele told TheWrap that Thursday’s selloff could hurt deals that are in the middle of being closed.

“If someone is on the verge of closing a deal with an investor that is tied to institutional markets, Wall Street and that sort of thing, why that could obviously rock their deals,” he said.

But he said he expects deals to close unless the markets continue to plunge. He explained that international buyers “are having a currency field day, getting a 20 percent freebie or so.”

And he predicted that the selloff would provide opportunities for savvy investors looking for a bargain.

“Even though many stocks will tumble, I think a lot of institutions will have the opportunity to pick up something that might have been sucked down inadvertently,” he said.

A manager for top-tier filmmakers speculated that a weakening economy coupled with various market factors could pave the way for a cash-rich tech giant to swoop into the media business “either on their own, or by acquisition of one of the majors.”

Among the companies he named: Apple, Google and Facebook. Each has already made certain inroads in the traditional media business as a distribution platform.  

Entertainment lawyer Lindsay Conner, a partner in the entertainment and media practice at Manatt, Phelps & Phillips, said the threat of a renewed recession is indeed cause for concern.

“What would be troubling in the long run is if the fall in the market heralded another recession in which banks tighten the availability of credit for entertainment companies or in which consumers made personal decisions to rein in their own consumption of entertainment to save money,” he said. “Either of those things would have a significant impact on our business.”

Another producer acknowledged that “our sector is not immune to this stuff," but said, "it’s not going to nosedive.”

He suggested that in the short term, jittery investors could seek comfort in a darkened theater. “Are people going to show up this weekend?” he asked. “My hunch is that if the stock market affects them, they’re going to want to be entertained.”

The manager suggested that Hollywood already has its hands full, grappling with the declining DVD market and conversion to the digital download market.

“That doesn’t mean that the troubles on Wall Street and Washington aren’t affecting the big studios’ parents on a macro level — each one in a different way,” the manager said.

But they also have their own individual challenges. Sony Pictures, for example, “always seems to be directly impacted by what’s happening with their other businesses in Tokyo,” while Fox has the hacking scandal as a distraction.

After all the cutbacks in recent years, some Hollywood denizens have become desensitized to economic turmoil. 

“It can’t affect us,” one television development executive quipped about the latest stock plummet. “The studios are already squeezing our budgets.”