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Warm weather usually means blockbuster movies, smash hit songs, and sold-out concert tours. But this summer Americans wracked by recession are thinking hard before opening their wallets for entertainment. In the second quarter, spending on "recreation services"—a category that includes movies, sports, and concert tickets, gambling, and other services—slipped 4.5 percent, according to the Bureau of Economic Analysis. That was the largest drop since the third quarter of 2008 and followed a first quarter in which recreational spending seemed to stabilize with a decline of just 0.1 percent.
The weak economy may be "resetting" Americans' discretionary spending, says Thomas O'Guinn, a professor of marketing at the University of Wisconsin School of Business. "People are finding places to trim." Previously they would splurge on entertainment, like expensive concert tickets, by justifying them as one-time treats. "Now they're taking these things they once saw as exceptional and taking them into normal budgeting," O'Guinn said.
The small-cap Russell 2000 Entertainment index consists of 10 such companies, including Warner Music Group (WMG), movie theater owners, World Wrestling Entertainment (WWE), and movie studio Lions Gate Entertaiment (LGF). Stocks in the index have plummeted 31 percent since the broader market's April 23 peak. Despite stingier consumers, Standard & Poor's (MHP) equity analyst Tuna Amobi notes that many large media and entertainment companies, with diverse revenue streams, are benefiting from a revival in advertising. The large-cap Standard & Poor's 500 Media Index—which includes Walt Disney (DIS), Viacom (VIA), and CBS (CBS)—has slipped 5.5 percent since April 23. Hit much harder have been smaller entertainment companies with narrower focuses.
Concert promoter Live Nation Entertainment (LYV) reported Aug. 5 that last quarter's concert revenue tumbled 7.1 percent from a year ago, while total attendance slipped 5.7 percent. "The economy's impact on fan-ticket purchasing behavior is worse than expected," Chief Executive Michael Rapino told analysts. Live Nation stock is down 45 percent since April. In response, the Beverly Hills (Calif.) company is cutting costs and reducing ticket prices. "We currently believe that 2011 will have a strong concert lineup and the industry should rebound," Rapino said. "This is achievable if we price the show right and do a more effective job of meeting the fans' needs."
World Wrestling Entertainment, which is in Stamford, Conn., reported Aug. 5 that average North American attendance last quarter dropped 29 percent from a year ago. The number of pay-per-view purchases was off by nearly a fifth. "Basically, we had a lousy quarter," Chairman and CEO Vincent K. McMahon told analysts, blaming in part the retirement and injuries of top wrestling stars. We were "really not giving the public the performance … that they wanted to see," he said, adding that some injured stars are now returning and WWE is promoting new talent. Warner Music Group, the home of such acts as R.E.M., Green Day, and Gnarls Barkley, said Aug. 5 that its quarterly revenue declined 16 percent from a year ago, blaming most of the drop on fewer high-profile new releases.
One part of the entertainment business that has remained healthy is movie box office revenue. According to data from the National Association of Theatre Owners, domestic box office gross in the first half of 2010 rose 2.3 percent from last year, helped by higher ticket prices for 3D movies. Movie theater chain Carmike Cinemas (CKEC), reported Aug. 2 that 3D movies accounted for 26 percent of admission revenue last quarter, up from 15 percent a year ago. Still, overall sales fell 4 percent at Carmike, North America's fourth-largest theater chain, while revenue at third-place rival Cinemark Holdings (CNK) rose 4.2 percent.
Shares of movie stocks have suffered recently from the realization that the 3D trend will not solve all the industry's problems, says Matthew Harrigan, an analyst with Wunderlich Securities in Denver. "People are realizing now that [3D] is not a panacea," he says, especially when it comes to "making a bad movie a good movie." Another problem 3D films can't solve is the continuing slide in DVD sales. For various reasons, including the migration of content online and the slow adoption of pricier Blu-ray discs, "we're not seeing people build DVD libraries," S&P's Amobi says. Retail shelf space for DVDs is shrinking, leading to fiercer competition. Some DVD titles continue to do well, Amobi says, but adds: "The consumer is still tentative."
A similar trend can be seen in video game sales, according to Sterne Agee analyst Arvind Bhatia. Consumers flock to popular titles, such as Take-Two Interactive Software's (TTWO) Red Dead Redemption game, but other games sit on shelves, he says. He predicts new products from Nintendo (NTDOY), Microsoft (MSFT), and Sony (SNE) could drive sales later in the year. Video game consumers respond "to new, fun things," Bhatia says. "They're not going to buy anything that comes out."
That means frugal consumers will still shell out for hot new games and such popular hits as Toy Story 3, but other offerings can expect droopy sales. Says Amobi: "People are a lot more selective in what they're buying."