Writers Strike Could Devastate Small Businesses

Thousands of outfits subcontract exclusively from entertainment studios and production companies, says small biz consultant Mark Deo

by Karen E. Klein

As Hollywood writers face off against movie and television executives in the recently called Writers Guild of America strike, an often overlooked group may bear the brunt of the work stoppage. Thousands of small companies based in Southern California and New York subcontract exclusively from entertainment studios and production companies, says Mark Deo, executive director of consulting firm the Small Business Advisory Network. He spoke recently to Smart Answers columnist Karen E. Klein about how a protracted union walkout could devastate hundreds of small firms. Edited excerpts of their conversation follow.

How are small businesses going to be affected by this strike?

Thousands of small businesses are going to lose revenues. I wouldn't be surprised if several hundred would have to close operations. Let's hope not, but if this goes six months, many companies with 10 or 15 employees who get all their business from one or two shows won't be around anymore.

What's the potential economic impact overall from this strike?

The Los Angeles County Economic Development Corp. is saying that this is going to cost $80 million a day in the county area. It could cost $30 billion a year if it stretches on that long. They're getting those statistics by looking at the writers strike that occurred in 1988 and lasted 22 weeks. It cost the California economy half a billion dollars back then. The scary thing about this strike is that the studios knew it was coming, and they stockpiled material and paid writers in advance. So they've got a lot of scripts and movie treatments in the can, meaning this strike could easily last two months or more.

Is the impact going to be limited to Southern California, or will it be felt nationwide?

The entertainment industry is mostly centered here in L.A., but there are a lot of production companies in New York and a lot of supporting small businesses there also. The middle of the country probably isn't going to be affected, except for some location shoots that go on in various places. But for Los Angeles County, which has the 26th-largest economy in the world, this is enormous.

Who's really going to suffer the most if it does stretch out that long?

It's the small business player who is the unsung victim here, and there will be a big trickle-down from them throughout the entire economy. The average person doesn't realize how many small businesses support these entertainment productions. A mid-budget film costs about $17 million to produce, generates $1.2 million in state and local taxes, and employs more than 300 contractors and subcontractors to support it. A big-budget film costs an average of $70 million and employs an estimated 928 direct and indirect contractors. The bulk of those are independent, small contractors doing lighting, wardrobe, catering, and many other niche jobs.

What other kinds of jobs do they perform, and why aren't they provided by the studios in-house?

We're talking about companies that provide locations for shoots, do all kinds of technology, including animation, computer data services, editing, sound, set construction and teardown, supplying flowers and gifts, leasing out props, providing extras for background scenes, doing casting, training animals. Anything you can imagine a production would need, there are small firms that do nothing but that. It's estimated that 70% to 80% of the services provided to production companies are supplied by entrepreneurial firms with less than 100 employees.

The studios outsource as much of the production as possible because they don't want to pay workers' comp insurance for 50 employees to do catering. It's a great situation for the studios, because they don't have to hire people and then lay them off when something like this happens, or when shows get canceled.

How many of these small firms have restricted their client base—and maybe their entire business model—to the entertainment industry?

A lot of them. The smarter guys will do lighting for movies and TV but also for restaurants and construction projects. But most of the smallest businesses are dependent solely on the entertainment industry. And if that industry is shut down, they won't have any customers.

What can these small firms do to avoid bankruptcy?

Well, it's a little late for many of them, but they'd better diversify. If you're supplying flowers to the movie industry and proud that you've got a big contract with Sony (SNE), you'd better look at developing contacts with hotels and restaurants. If you're a firm that supplies extras to sets, think about supplying temporary labor for companies. Prop houses can look at supplying parties and working with event planners. The larger lesson, for all small business, is that it's absolutely critical you don't put all your eggs in one basket. A healthy client mix is really important because you never know what's going to happen.

Karen E. Klein is a business journalist who covers small-business issues for several national publications. She writes her Smart Answers column twice a week.