The motion picture/TV production industry is rapidly changing, and the uncertainty level is rising according to a study released today by the Los Angeles County Economic Development Corporation (LAEDC). “While the public’s perception is one of glamour and wealth, the industry is facing a string of challenges that could have profound impacts on this signature industry,” said Jack Kyser, chief economist and senior vice president, LAEDC.
The industry employs 249,000 people in Los Angeles County, had revenues of more than $28 billion, and has a “halo” impact on other key industries in the region, most notably tourism and apparel design. “There will be job growth in the entertainment industry during 2005, but will it continue in the following years?,” that’s the big question, explained Kyser.
Among the issues highlighted in the LAEDC report (in addition to the perennial one of piracy) are:
- Run-away production: “Most people think of production running away to Canada, but run-away production to other states has become a very significant challenge to our film industry,” Kyser stated. The LAEDC study pointed out that other states are upping the ante. A recent example is the plan to build a $60 million film, TV and digital media production facility in Albuquerque New Mexico. “All these states recognize that these are clean, high-wage jobs and that there is significant tax revenue generation as well,” noted Kyser.
- Lack of production incentives in California: The LAEDC report pointed out that an incentive package for low-budget films was proposed in Sacramento in 2005, but ran into a “buzz saw” of opposition. There are plans to re-introduce the incentive package in 2006. “Overlooked in the uproar were both the jobs and tax revenues lost whenever a film is shot in another state,” Kyser observed. Research conducted by the LAEDC revealed that for a low budget ($2 million) film, 59 direct and indirect jobs would be created while $215,000 in state taxes would be generated. “Given the current level of production in other states, the proposed state incentive program would probably have paid for itself,” added Kyser.
- Loss of a key audience segment: A recent study by OTX reported that a prime audience segment, males 13-25 years of age, were going to the movies less often due to the cost of tickets, poor film quality, and a growing interest in video games. The film industry will have to work hard to re-capture this lucrative group of film-goers.
- Slow-down in DVD revenues: DVD sales are a relatively new but quite spectacular revenue source for the film industry, with 2004 sales of over $15 billion. The studios have been quite protective of this revenue because it is estimated that only one in ten features make back their costs from domestic release, and that only one in four makes money after all the revenue streams come in. Unfortunately, sales of DVDs have slowed in 2005, and studies of this sector see sales leveling off in 2006.
LAEDC Film Study Says
One of the more contentious issues in recent industry contract negotiations with the major industry unions was obtaining a bigger share of DVD revenues, but the studios were able to hold the line. However, this issue looms large in future negotiations.
- New ways of delivering content: Technology is rapidly changing the way in which content is delivered. The unions are starting to demand a share of this revenue, but the whole process could dramatically change the way the industry does business. On the exhibition side of the business, there is growing pressure to open films in theaters and release them on DVD at the same time. This would not only impact the theater owners, the LAEDC study noted, but it would have an impact on local real estate development as well, since so many retail projects have a multiplex as an anchor.
- Union militancy: A recent round of elections has resulted in more militant leaders at two key entertainment unions, the Screen Actors Guild (SAG) and the Writer’s Guild of America West (WGAW). All industry unions want a larger share of the DVD pie, ironic in light of this market’s leveling off. The LAEDC study pointed out that there are a string of contract negotiations in the not-so-distant future, including the SAG contract with advertising agencies at the end of October 2006; the WGA contract with the studios in November 2007; and the SAG and Director’s Guild contract with the studios in November 2008.
“This all speaks to the potential for strikes, real or de-facto, in the future,” explained Kyser. “The April 2001 –March 2002 ‘de-facto’ strike (when the studios stockpiled films in anticipation of a strike that did not happen) had an income loss estimated at $526 million for the County, while there was a ripple impact on the residential real estate market and the hospitality industry especially on the Westside of Los Angeles.”
“Is there any positive news?,” asked Kyser “At the end of the day, content will still be king, although it may come in many new guises. And the Los Angeles area is well positioned to create this evolving content.”
The LAEDC study noted that these trends have significant implications for all the workers “below the line” who have already experienced some economic hardship. The study concluded that the entertainment industry should do a better job of promoting its benefits and articulate the many challenges it faces.
The Los Angeles County Economic Development Corporation (LAEDC), the region’s premiere business leadership organization, is a private, non-profit organization established in 1981. Our mission is to attract, retain, and grow business and jobs in Los Angeles County. Since 1995 through May 2005 the LAEDC has helped retain or create more than 100,000 jobs, providing $3.5 billion in annual economic impact from salaries and $65 million in annual tax revenue benefit to Los Angeles County.