Michael Austin

Over risotto at Ca' Brea, former Sony (SNE) Pictures Chairman Peter Guber is lamenting the state of his industry. A movie he's trying to get made is in limbo, held up by a bank that wants him to put up more money before making a deal. "No one wants to lend money these days for an asset that will take months to create," Guber says, before rushing off to plead with his banker.
Over risotto at Ca' Brea, former Sony (SNE) Pictures Chairman Peter Guber is lamenting the state of his industry. A movie he's trying to get made is in limbo, held up by a bank that wants him to put up more money before making a deal. "No one wants to lend money these days for an asset that will take months to create," Guber says, before rushing off to plead with his banker.

Like the rest of Hollywood, Guber is discovering that Los Angeles' Dream Factory is not immune when the rest of the country slips into recession. Cinemas around the U.S. are selling fewer tickets. DVD sales, a major profit engine, are tanking. And within weeks, the Screen Actors Guild may authorize a strike that could throw Hollywood into its second work stoppage in a year.

It's hard to spot the worry lines when half the town is botoxed. But the angst is there. Yes, television production is booming. But a lot of that activity is the networks and studios playing catch-up after losing 14 weeks to the writers' strike that shut down Hollywood earlier this year. And while some wonder whether SAG would actually strike at a moment of such economic vulnerability, the studios are quietly pulling back. They are slower to green-light pricey films, and the networks are ordering shows without expensive pilots.

Even before the economy went off the rails, studios were making fewer movies. Box office tracker Media by Numbers says they will release about 450 films this year, 67 fewer than in 2007. Next year there will be even fewer. Paramount (VIA) has said it will make 20 films each year, not 25. Time Warner (TWX) shut its New Line Cinema unit. Meanwhile, even leviathans are having trouble funding movies. Steven Spielberg's DreamWorks SKG has been talking to banks for weeks about how to structure a $750 million line of credit.

COMPETING LOCATIONS
To make matters worse for the Los Angeles economy, cash-strapped states are using hefty tax incentives to lure away films and TV shows. In late November, Illinois passed a 30% tax credit to woo productions (Michigan already has a 40% credit), and earlier this year New York upped its credit to 35%. Los Angeles has since lost two TV shows to New York: HBO's (TWX) In Treatment and ABC's (DIS) Ugly Betty. "L.A. needs to do more, or this will keep happening," says Ugly Betty creator Silvio Horta. "Sooner or later, Hollywood will just be a state of mind, not an actual location for productions."

Back in California, an alarmed Governor Arnold Schwarzenegger is urging the state legislature to pass its own sweeteners. His plea comes as some studios are starting to lay off people. NBC Universal is whacking its budget by $500 million, and staff there are bracing for pink slips. Lions Gate Entertainment (LGF), which produces AMC's (AC) Mad Men, laid off 41. And just before Thanksgiving, The Weinstein Co. let go 24 people, or 11% of its staff.

The economic situation in Hollywood is hardly as dire as it is in, say, the Midwest. But then, Tinseltown has long prided itself as being recession-proof. "This is nuts," says an actor-turned-waiter named Justin. "It's like we're in the auto industry."

THUMBNAILS

LOS ANGELES

Movie studio executives on Friday presented the best-case scenario for a winter holiday surge in the purchase of high-definition Blu-ray players as their best hope to keep the U.S. home video market's decline from accelerating past 3 percent or 4 percent this year.

The executives hosted by The Digital Entertainment Group, a consortium of movie studios and electronics manufacturers, forecast that 10.5 million households would be able to play Blu-ray videos by the end of the year -- with about 2.5 million standalone players and 8 million PlayStation 3 game consoles.

That estimate is much lower than the 14.4 million households that Adams Media Research said in June would be playing Blu-rays by the end of the year. But if it is to come true, about 1 million more standalone players and 2.3 million more PS3s must be sold through the holidays.

Prices have dropped in recent months, and Blu-ray players can be found online for less than $200, encouraging hope for adoption of the format.

"The only dark cloud is the economy," David Bishop, president of Sony Pictures Home Entertainment, told a panel. He said the consumer products side of Sony Corp. is "showing no slowdown in the adoption of the PlayStation 3."

There are 5.7 million PS3s installed in the United States now, and Sony and expects to sell 4 million to 5 million more by March.

"We remain pretty confident that we'll meet our targets for the fiscal year," said Julie Han, spokeswoman for Sony Computer Entertainment America.

These so-called "early adopters" of video technology are especially important because they tend to buy more movies than consumers who join a trend later.

"These are the heavy buyers, the heavy collectors," said Craig Kornblau, president of Universal Studios Home Entertainment.

Executives agreed it is still the early days of Blu-ray because it was only February when the high-definition format beat out Toshiba Corp.-backed HD DVD. Last week, the consortium kicked off a $25 million TV ad campaign to push Blu-ray, acknowledging in part that half the people it polled in a recent survey didn't know the format war was over.

Gains in Blu-ray revenues, including rentals and sales, are expected to counter some of the expected 6 percent decline in regular DVD revenue in the U.S. in calendar 2008.

Through the first three-quarters of the year, video rental revenue in the U.S. was down 1.2 percent at $5.6 billion and sales were down 3.5 percent at $8.6 billion, according to the industry tracker, Video Business.

Economic headwinds remain a concern.

In a survey the consortium conducted in late August and early September of 2,200 owners of high-definition TV sets in the U.S., U.K. and Japan, just 12 percent said they were likely to buy Blu-ray players in the next six months.

Another 30 percent were open to purchasing them, it said. How potential Blu-ray consumers will respond to lower prices isn't clear.

"This was done before prices started to come down and before the economy started to hit," Chris Lang, senior vice president of research firm SmithGeiger LLC, told the panel.

Those who don't yet have high-definition sets are not expected to be large contributors this season, said Bob Chapek, president of Walt Disney Studios Home Entertainment Worldwide. Purchasing a $1,000 high-definition TV and even a moderately priced Blu-ray player may not appeal to some buyers in the slowing economy, he said.

"It's only logical to expect there'd be some economic impact," he said. But he added, "We've been pleasantly surprised so far."

The consortium said a growing proportion -- now about 10 percent -- of home video sales comes from Blu-ray. In October, as the U.S. financial crisis came into focus, sales of Blu-ray discs more than quadrupled to 2.2 million units, it said.

A number of upcoming titles are riding on the format, including Warner Bros.' "The Dark Knight" due out in December.

Previous top-selling titles, such as "Iron Man," "The Incredible Hulk" and "Hellboy II: The Golden Army" have had a strong appeal among PS3 owners, and that raises hopes for a December turnaround.

"Every week as the next title comes out, we're all holding our breath," Kornblau said.