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To borrow a phrase from poet Carl Sandburg, a sustained economic slowdown appears to be creeping into the U.S. on little cat feet.
Everyone from Jeff Bezos to Gwyneth Paltrow is talking about the likelihood of a deepening recession, with the Amazon founder advising Twitter followers on Oct. 19 to batten down the hatches and the Goop CEO confessing late- night worries about the economic outlook a few days earlier. Technically, the U.S. economy entered recession territory midyear, following the second straight quarter of decline in gross domestic product. But the economy has rallied in the past following such declines, leading some to argue we aren’t yet in a recession; the glass-half-full crowd points to low unemployment even amid rising inflation as an indicator we aren’t in such bad financial straits.
A key signal will arrive Oct. 27 when the Department of Commerce releases its preliminary report on third-quarter GDP activity.
The financial slowdown comes at a perilous time for Hollywood, already grappling with the high price of producing content for streaming services and a theatrical market that has yet to recover from the pandemic. The question on many observers’ minds: How bad will the recession get for the entertainment industry?
As consumers have less money to spend on discretionary items, Hollywood will surely have to adjust, especially given the recent direct-to-consumer building boom. There are indications that cord cutting could accelerate and consumers will ditch some streaming service subscriptions as they feel the pinch in their wallets.
“With rising interest rates, media companies are going to need to make hard choices about what they prioritize, where they invest — and where they find cost savings,” says CJ Bangah, principal for tech, media and telecom customer transformation consulting at PwC U.S.
In many cases, that work has already started. Warner Bros. Discovery has promised to find $3 billion in savings as it labors under a mountain of debt, this week telegraphing it would write down between $3.2 billion and $4.3 billion in pretax restructuring charges related to the mega-company’s merger, while Netflix cut back on programming spending and instituted layoffs after its shares plunged following a weak earnings report last April.
“We were already going through a severe contraction even before inflation and a recession hit,” says Tom Nunan, a producer of Oscar winner “Crash” and a lecturer at UCLA School of Theatre, Film and Television. “Big, bloated companies may use this as an excuse to do more cut- ting, but the process was already happening.”
Advertising, as always, is a key economic bellwether. But the yo-yo market of the past few years has upset the usual forecast models. Standard Media Index, a tracker of ad spending, has clocked declines in year-over- year U.S. ad spending since June. Interpublic Group CEO Philippe Krakowsky told Wall Street analysts last week that advertisers have been getting nervous about the quarter ahead and urging ad buyers to proceed cautiously with their campaigns.
“The majority of our clients are now asking us to engage in this kind of contingency planning, prioritization of activity, and a focus on actions that will drive performance,” Krakowsky said. Even so, recent forecasts call for growth. GroupM, the WPP-owned media-buying giant, in June projected ad spending in the U.S. to grow by 9.3% in 2022, and it has not moved off that projection, according to Kate Scott-Dawkins, the company’s global director of business intelligence.
“Our base case in the U.S. is still unclear as to whether we get a recession or how deep it is,” Scott-Dawkins says.
GroupM has already seen pockets of slowing, including among big auto marketers. The sector “is not entirely back to normal” after the pandemic, says Scott-Dawkins.
During the upfront sales market earlier this year, many media companies tried to gather up as much ad spending as possible, choosing to offer concessions in ad rates in hopes of enticing buyers. There is some question about how much ad coin Madison Avenue has left after the upfronts to back a broad array of ad-supported streaming ventures.
“Streaming is a relatively inexpensive entertainment option,” says Kevin Westcott, head of Deloitte’s U.S. technology, media and telecommunications practice. “Consumers may spend less on going out of the house — going to dinner, going to movies. The number of minutes viewed on streaming will probably go up, and that increases the value of the ads on those services.”
The theatrical movie business has long proved to be unusually resilient when it comes to economic downturns. In fact, over the last eight recessions, the box office has increased six times and admissions have gone up five times.
“Even in hard times, people don’t stop doing things,” says Patrick Corcoran, vice president and chief communications officer at the National Association of Theatre Owners. “They just look for cheaper options. And often that’s going to the movies instead of concerts or other things.”
But theaters are facing other issues. The pandemic depressed ticket sales and prevented studios from making the same number of movies pre-COVID, leaving exhibitors without enough compelling films to screen. Ticket sales are down nearly 35% from 2019 — the last pre-pandemic year — and much of the entertainment industry’s attention has shifted from making global blockbusters toward creating content for the streaming services that these companies believe represent their future.
Eric Johnson, faculty director of UCLA Anderson School of Management’s Center for Media, Entertainment and Sports, believes the cutthroat streaming wars will become even more fiercely competitive.
“If you’re not one of the three or so top-tier must-haves, the cost to acquire new customers or trying to manage churn could become exceptional,” he says.
Todd Spangler and Diane Garrett contributed to this report.
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