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Industry Outlook 1991: SERVICES
THE WORLD IS HOLLYWOOD'S OYSTER
There's no truth to the rumor circulating in Hollywood that the Polo Lounge will soon start serving sushi. But the fact that so many people believe it says a lot about the U. S. entertainment industry. Lured by the booming international market in videocassettes and compact disks that feature American stars, foreign companies flocked to Hollywood in 1990, takeover money in hand. By the end of the year, only three of America's seven largest studios were still U. S.-owned.
In 1991, the dealmaking will continue. But after sitting on the sidelines for the past few years, U. S. companies may finally get in on the action. The reason: The Federal Communications Commission is expected to stop fussing around and drop or soften a 20-year-old set of rules that have kept U. S. networks and Hollywood studios from merging. That could set the stage for a wave of get-togethers that could pair Walt Disney Co. with CBS, or Paramount with Capital Cities/ABC.
GLOBAL CARTEL? The FCC's Financial Interest & Syndication rules, or Fin-Syn for short, have restricted the Big Three networks from owning companies that make and syndicate television programs. They have also kept the networks from syndicating reruns of their own shows, a big disadvantage in view of the growing strength in programming of electronic giants such as Sony Corp., which owns Columbia Pictures, and Matsushita Electric Industrial Co. Domestic TV executives are becoming increasingly vocal about the consequences. "A global cartel is developing which threatens the existence of America's independent producers," said NBC Chairman Robert C. Wright before Matsushita completed its purchase of MCA Inc. for $6.1 billion on Dec. 31.
Wright, too, wants to get in on the foreign market, which is being fueled by strong home video sales in Europe, plus the privatization of European TV stations and the launch of a new satellite-delivered TV system. In 1991, says Jeffrey B. Logsdon, entertainment analyst with Los Angeles-based Seidler Amdec Securities Inc., Hollywood could sell $6.7 billion worth of movies and TV shows abroad, a 13% increase from 1990 and nearly double the dollar volume in 1985. Overseas sales account for 42% of Hollywood studios' income and are the fastest-growing part of their business.
The European market is no doubt one reason why the French cable company Canal Plus and Japan's Pioneer Electronic Corp. recently took equity stakes in Rambo producer Carolco Pictures Inc. Among others said to be looking for Hollywood purchases: Japanese electronics companies Toshiba and Hitachi and Korea's Samsung. "No other country can match U. S. stars," says record and film producer David Geffen, whose 11% stake in MCA brought him $660 million in the Matsushita buyout. "No one can recreate a Michael Jackson or a Sylvester Stallone."
For the TV networks, buying into studios would be a welcome diversification from their lackluster primary business. As they did in 1990, the three will lose viewers to cable, syndicated programs, and the Fox network. In late 1990, they held only 62% of the prime-time audience, compared with 82% in 1980. In 1991, say experts, their share could dip below 60%. This means slow advertising revenue growth. In 1991, says the Television Bureau of Advertising, NBC, ABC, and CBS may post $18.4 billion in total ad sales, a 4.3% increase over 1990. But cable ad growth will approach 15%, to $2 billion. Ads on syndicated programs may jump 17%, to $1.8 billion.
To lure viewers back, all three networks have spent heavily to sign up sports events. But combined with sluggish ad sales, that is cutting into earnings. CBS, which will spend $3.6 billion on a variety of sports over the next several years, has already written down $170 million on its $1.1 billion, four-year Major League Baseball contract. In 1991, CBS is expected to show a $12 million loss on its network programming, says Christopher P. Dixon of Kidder, Peabody & Co. Dixon expects ABC's network operations to be up slightly. Other analysts agree but add that earnings are likely to be off at General Electric Co.'s NBC Inc., as aging shows such as Cosby decline in ratings.
SPIRALING COSTS. Although Hollywood may look like the answer to the networks' troubles, Tinseltown has problems of its own. With international markets gobbling up their films, the studios have let their production costs spiral. In 1990, they spent an estimated $30 million on an average film, analysts say, up 27% from 1989. Stallone got $20 million for Rocky V, $1.5 million more than the average film cost just two years earlier.
With profit margins shrinking, the studios are trying to stop such excesses. Paramount Pictures Corp., saddled with big-budget disappointments such as Days of Thunder and Another 48 Hours, eased out its production chief and fired Thunder producers Don Simpson and Jerry Bruckheimer in November. "We're all looking for any way we can to keep costs down," says Tri-Star President Mike Medavoy.
In the short term, however, a hot market will probably hide many budget overruns. With Paramount's Ghost and Disney's Pretty Woman, the big hits of 1990, box-office receipts last year fell just short of 1989's record $5 billion. And since ticket prices are expected to jump to more than $7 in many areas in 1991, the take will likely be better.
As usual, Hollywood will load up on sequels in hopes of striking box-office gold. Among them: second installments of Honey, I Shrunk the Kids and Good Morning, Vietnam from Disney. The most eagerly awaited film, however, is Tri-Star's Hook, starring Dustin Hoffman and directed by Steven Spielberg. Tri-Star may spend $60 million on this story of a grown-up Peter Pan.
It may be worth the gamble. If Hollywood has learned anything the past few years, it's that the whole world is hungry for the latest it has to offer. And that should be true again in 1991.Ronald Grover in Los Angeles