Business

Hollywood's woes likely to persist

LOS ANGELES — The industry that was supposed to be immune to economic downturns looks like it's going to have some problems as the economy begins to recover.

Broad swaths of the entertainment business declined in 2010. DVD sales were off 13 percent. Music CD purchases plummeted 19 percent. Video game sales as well as concert and theater attendance also fell.

Even the turnout for America's favorite pastimes — baseball and NASCAR — was down. And swift changes in technology will make it difficult for Hollywood to capture pre-recession levels of revenue.

So much for the value of escapism.

But perhaps most ominously, last summer the pay-television industry suffered an unprecedented net loss — for the first time — of customers, a warning sign that consumers may no longer regard cable TV as a must-have utility on par with electricity and phone service.

Cable and satellite subscriptions, DVD sales and video rentals long have been the profit pillars that supported Hollywood. Although media executives continue to boast "content is king," recently released year-end data suggests entertainment companies are vulnerable to the same disruptive forces that imperiled the music industry.

"The studios and the content companies have become increasingly aware of the problem, but they seem collectively paralyzed about what to do about it," said Craig Moffett, an analyst with Sanford C. Bernstein & Co.

2010 now looks to be a watershed year in the confluence of two powerful trends.

The first of those forces, technology, is enabling people to get entertainment in cheaper and easier ways.

And the second, the anemic economy, is widening the gulf between the haves and the have-nots, making it tougher for some consumers to justify paying for cable or tossing a new DVD into the shopping cart.

"Right now it is a tale of two cities," Moffett said. "On the high end, people can't go up-market fast enough," he said, referring to affluent consumers who are buying the latest in mobile phones, portable tablets, or Internet-connected TV sets. "Then you have this other half of the country that is being largely ignored in this discussion."

The "other half" encompasses the lower 40 percent of American earners, who, after paying for food, housing and transportation, are left with just $100 a month to pay for health care, clothing, phone service — and entertainment, Moffett said.

One of them, Rebekah Atkinson, a graduate of Biola University in La Mirada, Calif., found herself making necessary sacrifices after losing her job two years ago. She disconnected her mobile phone and sliced her food budget to make ends meet. The 30-year-old La Jolla, Calif., resident ultimately found a job that paid 60 percent of her previous paycheck. A year later, her husband lost his job, precipitating another round of household cuts.

"The cable bills were starting to come up higher and higher. Before we knew it, we were paying $200 a month on the cable package," Atkinson said. "That's a car payment for some people. It had to go."

The most profound shift among consumers has been toward renting movies and away from buying them, which has enormous financial consequences for Hollywood.

Thanks to the proliferation of Redbox kiosks, which offer $1-a-night movie rentals, cost-conscious consumers have an inexpensive alternative to buying the DVD for $19.99 — representing a significant blow in revenue to the studios. Blu-ray high-definition discs were expected to pick up the slack, but consumers have been slow to embrace the more-expensive format.

High-speed broadband access, now available to two-thirds of all homes, is also helping to cap the onetime home video gusher.

Services such as Netflix Inc. are able to pump a carousel of movies instantly into the home via the Internet for only $8 a month. The popularity of the company's streaming service has skyrocketed: 66 percent of Netflix's 17 million subscribers use it, eliminating the need to receive DVDs in the mail through Netflix' trademark red envelopes or to run out to the corner video store.

Studio revenue from home video rentals amounted to less than $1.7 billion in each of the past two years, compared with $2.97 billion in 2001 — more than a billion-dollar drop in less than a decade, according to market researcher Screen Digest.

"Studios get a double negative whammy from rental's strength," said Tom Adams, principal media analyst for Screen Digest. "Transactions are growing, but consumer spending is not, because they're getting them cheaper."

Meanwhile, movie theater attendance last year was off nearly 5 percent compared with 2009, as exhibitors charged more for movies in 3-D.

Shift in preferences

It's not difficult to see why movie viewers are staying home.

"There's no popcorn, no baby sitter, no expensive soda. You just sit on the couch," said Michael Nathanson, media analyst with Nomura Securities International Inc.

But the sour economy and high unemployment, with 14 million people out of work, account for only part of the problem. Some analysts think the explosion of Internet-connected TVs and portable devices is leading to permanent shifts in consumer behavior — at least among a certain segment.

Affluent buyers appear more than willing to shell out hundreds of dollars for sexy new gadgets that alter the way they access entertainment. Apple Inc. sold 7.5 million iPads within the first six months of their introduction — even before the holiday stampede. The tablet, which retails for $500 or more and can be used as a portable flat-screen TV, is on track to become the fastest-growing consumer product in history, according to Bernstein Research.

Tablets provide a measure of comfort for media companies because the appeal of these devices hinges on the ability to conveniently check sports scores, read news stories, play games and watch TV shows and movies. Executives see the trend as evidence that consumers' appetite for entertainment is not diminishing, but how they receive it is changing.

But consumers have proved that although they are willing to shell out for gadgets, they view content as cheap filler and are less willing to pay to own it. Because video is seemingly ubiquitous, consumers no longer feel they need to own a DVD or digital downloaded file to watch a movie or TV show.

Is it Hollywood's fault?

Some analysts believe that Hollywood, with its history of antipathy toward new technologies, only exacerbated its troubles.

Hulu, owned by News Corp., NBC Universal and Walt Disney Co., encouraged people to watch TV shows for free online. The service, which was intended to combat piracy, appears to have fueled a shift to online video viewing.

"From 2009 to 2010, we saw a 53 percent increase in online video consumption by broadband users — which is a pretty substantial increase," said Colin Dixon, a senior partner in research at the Diffusion Group.

But there hasn't been a corresponding increase in revenue from online viewing.

Now, media companies are trying to develop business models to take advantage of the popularity of Internet video but also protect their established, and lucrative, businesses.

Companies are experimenting with new approaches that seek to make universal access to content a selling point. Media giant Time Warner is experimenting with a system called TV Everywhere that enables HBO subscribers to watch HBO's shows online, and Comcast Corp., the company taking over NBC Universal, has a similar plan called Xfinity. Both are in the early phase, and it's not known whether they will succeed.

Nomura's Nathanson said that history has shown that consumers will pay for entertainment. But he cautioned that media executives should adjust their pricing to reflect the fact that not everyone can afford $35 Blu-ray discs, $60 video games and $100-a-month cable bills.

Profitability of new online model unclear

In the past, technological changes have been met with fear, bordering on hysteria, by Hollywood — as when the late Motion Picture Association of America head Jack Valenti famously predicted in the early 1980s that the video cassette recorder represented to the film industry what "the Boston strangler is to the woman home alone."

Yet each time, such advances have created new, more lucrative businesses for Hollywood, as was the case with VHS and its successor, DVD.

For now, it's unclear whether the Internet and the flotilla of connected devices will lift — or sink — the industry.

"The jury is still out on whether there is a digital model that can replicate the profitability of the old linear model," Bernstein's Moffett said. "Nobody has cracked the code for online profitability."

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