Cinema-going and gambling have traditionally been seen as recession-proof. But you shouldn’t fall for the hype, says Eoin Gleeson – Hollywood and Las Vegas will suffer with everyone else.
With four months to go until the Oscars, the Hollywood machine is lumbering into action. Studios are throwing lavish parties. Academy judges are collared by bosses eager to point out the merits of this year’s blockbuster. And film critics are schmoozed as they flit from one party to the next. But this year there will be far fewer movies vying for the Best Picture Oscar. Bosses may be reminding everyone that “Hollywood thrives, while the economy dives”, but the studios are finding that this recession is very different to the ones they’re used to. Running low on cash, many are having to drop out of the Oscar running before the race has even begun. And slashing this year’s blockbuster alone may not be enough. The US entertainment industry, from Hollywood to Las Vegas (see below), has done such a good job of selling the idea that it thrives in recession that it has convinced itself. But after rampant expansions in recent years, both the gambling and film industries in the US now face hard times.
For years, studio executives have trotted out the old story of how people flocked to Marx Brothers comedies and glossy musicals to escape the reality of the Great Depression. Even with a quarter of the country out of work, they say, people still scraped together the cash to see the latest picture. And with box office takings rising during five of the last seven recessions, Hollywood has maintained the illusion. At least $12bn in institutional money, backed by once-sober European banks, such as Deutsche, RBS and Société Générale, has been shovelled into the industry in the last couple of years, says Colin Brown in CNBC magazine.
But that story is as dated as a Depression-era musical. For a start, in the 1930s cinema was the sole purveyor of mass entertainment. Even when box-office takings rose during the 2001 recession, the industry still didn’t have to contend with free movies on the internet, iPods or video games such as Grand Theft Auto IV, which generate first-week sales of $500m. Asked by Forrester Research what they would be least willing to surrender as they cut back during the recession, the top answer among the under-34s was their “high-speed internet access”. Cinema visits were among the first things to be axed.
And it’s showing at the box office. Cinemas enjoyed a bumper hit with the Batman movie this summer, but in the last quarter, domestic revenue fell by double digits for three major studios – 20th Century Fox, Paramount Pictures (owned by Viacom (NYSE:VIA)) and Walt Disney (NYSE:DIS), according to Bernstein Research. The real pain was felt where they make most of their profits: DVD sales. Disc sales fell 9% and sales of new releases fell 22% last quarter, notes Dawn Chmielewski in the LA Times.
With hedge funds hitting the wall and banks shrinking, film financing is also drying up. MGM has been struggling to put together a $1bn fund to bankroll the next James Bond movie and an adaptation of Tolkien’s The Hobbit, while Deutsche pulled its support for a $450m fund for Paramount Pictures. And so studios are now desperately competing with broken banks to raise new funding from sheikhs and oligarchs, says Brown. But it’s too little, too late. Hollywood, which has been in thrall to its own myth for too long, will be found out during this recession.
Fear and loathing in Las Vegas
It’s not just the film industry. For 19 of the past 20 years, Nevada has been the fastest-growing state in the US, with most of the growth in Clark County, home to Las Vegas. In August, the state had another distinction, notes Kevin Anderson in The Guardian – the highest level of foreclosures in the US. Sold on the line that Las Vegas was recession proof, the big gambling houses added thousands of hotel rooms to their developments. There were about 133,000 hotel and motel rooms in the city last year. With 90% occupancy rates typical, plans were made to add 40,000 more rooms by 2010. Now the hotels are empty and nobody has trouble getting a taxi to the casinos from the airport.
The thing is that gambling earned its reputation as a refuge from recession in a very different time. During previous recessions, if you wanted to try and turn your last few dollars into a windfall, you had two options – bet on the horses or visit Vegas. This meant demand for gambling remained steady. But now gambling in the US is a mainstream industry – legal in 48 states, with millions of Americans within driving distance of a slot machine. So even if the gamblers come to Vegas at all now, they don’t stay long and they spend a lot less. Gaming revenues on the Strip fell 7.4% in August. The biggest operators, MGM Mirage (NYSE:MGM) and Harrah’s Entertainment, have slashed jobs this year.
Many casinos are defaulting on construction loans, while more than $10bn of hotel and casino projects with 10,000 rooms have been delayed on Las Vegas Boulevard, according to Bloomberg’s Daniel Taub.
The “main nerve” of the American dream runs through this desert metropolis, Hunter S. Thompson concluded in his 1971 novel, Fear and Loathing in Las Vegas. But as homeowners across the States scramble to hold onto every dollar, that nerve now seems to have withered.