How Will Recession Affect the Entertainment Biz?

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Paramount / Everett

Iron Man, starring Robert Downey Jr., recently set a Blu-Ray sales record

When the movie Iron Man hit video stores Sept. 30 — the same week Congress was squabbling over the $700 billion bailout bill — it sold 500,000 copies on Blu-Ray in seven days, a record for the nascent high-definition home entertainment format. In bad times, we still need our good times, maybe more than ever. At least that's what the companies that sell TV, movies, video games and other recreational commodities are counting on as the economic crisis deepens. "People are feeling like they're depriving themselves of fun they would be having by buying a new car or taking a trip," says Tom Adams, president of Adams Media Research. "So they feel fully justified in continuing to spend on more cost-conscious kinds of entertainment."

There's no question that the worsening economy is prompting some belt-tightening in the entertainment industry. NBC Universal is cutting $500 million from next year's budget and Viacom's Paramount Pictures is shrinking its slate from 25 movies a year to 20. But how bad the industry is hurt and which sectors are hit hardest will depend in part on an important calculation that consumers make — how much is an hour of fun worth?

"A family's got an entire entertainment and leisure budget," says Michael Pachter, an analyst who tracks video games at the securities firm Wedbush Morgan. "You're going to see a shift from high-cost forms of entertainment to low." Parents may cancel a Christmas ski trip that would cost about $40 per hour, the logic goes, and instead spring for Nintendo's Wii Fit so the family can do some virtual skiing through the long, cold winter at a cost of $1 per hour.

If more consumers start doing that kind of math, sectors like video games, DVDs and cable TV will be buffered from the shockwaves hitting other parts of the economy. So far this year video games are on a 20% or more growth trajectory, thanks in part to the introduction of three popular new platforms. The $50 billion industry hasn't been around long enough for other recessions to provide a guide as to how it will fare. (People got through the Great Depression just fine without Grand Theft Auto). But, as a bang-for-your-buck form of entertainment, gaming seems likely to maintain its upward trend. "It's cavalier for me to say games won't be impacted at all, but games won't be impacted at all," says Pachter. "Maybe it will dent growth a little."

The home entertainment industry is also counting on the new Blu-Ray technology to help carry it through the downturn. With Blu-Ray players now available for less than $200, Adams expects consumers to adopt the high-def format as readily as they did VHS during the 1981 recession. "Household adoption of new technologies seems to shrug off recessions," Adams says — and as the Iron Man sales show, worrying economic news doesn't seem to be slowing consumers down.

Cable TV also has free, night-on-the-couch appeal for the cash-strapped, plus another advantage. The research firm SNL Kagan says cable TV advertising will have grown an impressive 10.7% by the end of 2008, as channels like ESPN and Lifetime continue siphoning viewers away from broadcast TV. Next year cable ad revenues will grow only 4.7%, Kagan predicts, because of the recession. But when squeezed companies slash their advertising budgets, cable has the cushion of a second revenue stream — about 50% of its cash comes from affiliate fees paid by cable operators.

Industries that rely on sales of costly tickets for one-night entertainments, like sporting events, live music and theater, may not be so lucky. Broadway producers anticipating a rough 2009 are pulling the plug on big shows like Legally Blonde and Hairspray, and new shows are having trouble finding backers. In the concert world, "everybody's nervous," says Gary Bongiovanni, editor-in-chief of the trade magazine Pollstar. "It defies logic to think people worried about losing their houses are going to buy three-figure concert tickets." Music agents and managers are cautioning their clients to think small in 2009, at least when it comes to prices, Bongiovanni says. Some venues, like the DTE Energy Center outside Detroit, are dropping ticket prices as low as $10 to lure crowds. It's not as cheap as staying home and playing Rock Band, but it's still a pretty good deal.

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