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The Entertainment Economy


Cover Story

THE ENTERTAINMENT ECONOMY

Lee A. Iacocca knows a good opportunity when he sees one. Three weeks after he retired from Chrysler Corp. in late 1992, Iacocca and his wife visited Branson, Mo., a small town nestled in the Ozarks that has become a mecca for country music. Strolling along Branson's rialto, a garish strip called Route 76, Iacocca was stunned to see crowds pouring out of theaters and dozens of construction cranes looming overhead. "I was never at Sutter's Creek during the Gold Rush," he says. "But that's what I imagine this was like."

Iacocca immediately wanted to get in on the action. And today, he is a partner in a production company that is bringing Broadway's The Will Rogers Follies to Branson. Separately, Iacocca is starting a merchant bank to finance new ventures in video games and entertainment. Why is he betting on fun and frolic? "I asked myself, 'What is the growing business in America that's exciting?'" he explains.

When one of the leading industrialists of the 1980s says that entertainment is the growth industry of the 1990s, it's a sure sign the U.S. economy is changing in dramatic ways. Indeed, Iacocca's instincts are confirmed by some startling numbers. Using data from the Bureau of Labor Statistics, BUSINESS WEEK calculates that the entertainment and recreation industries added 200,000 uorkers in 1993--a stunning 12% of all net new employment. That's more workers than were hired last year by the health-care industry, the preeminent job creator of the 1980s (chart, page 61).

Or just look at the $340 billion that Americans spent last year on old-fashioned and newfangled ways to amuse themselves, from video rentals to theme parks to casinos. Europe and Japan used to mock America by calling it a "Mickey Mouse" economy. Well, they're right. By any yardstick, Mickey and his friends have become a major engine for U.S. economic growth. Since the economy turned up in 1991, entertainment and recreation--not health care or autos--have provided the biggest boost to consumer spending (chart, page 61).

The entertainment economy has not revved up without some noisy backfires. The loudest by far came on Feb. 22, when Bell Atlantic Corp. called off its megamerger with Tele-Communications Inc. Four months earlier, Wall Street had hailed the deal as a sign that telephone and cable companies were ready to throw a ribbon of electronic highway across the country, bringing TV viewers a rich menu of entertainment and information. But after the FCC cut cable rates, the Bell Atlantic-TCI deal turned out to be built on speculative sand.

Still, the sinking of one merger should not obscure the already huge momentum of the entertainment economy. Interactive technology isn't likely to produce much revenue until the late 1990s. But whatever their interest in the prospect of 500 TV channels tomorrow, it's clear that Americans already have an almost insatiable thirst for the forms of entertainment that are here today.

STAGGERING ARRAY. Consider that over the last 10 years, entertainment and recreation have claimed a steadily increasing share of consumer spending (chart). Or that since 1991, consumers have boosted their outlays on entertainment and recreation by some 13%, adjusted for inflation--more than twice the growth rate of overall consumer spending. Small wonder, then, that the day after he scuttled his merger, TCI President John C. Malone was already plotting his next sally--by some accounts an investment in a Hollywood studio or in home-video giant Blockbuster Entertainment Corp.

Americans stand to gain much from this frenetic activity. Like the defense and financial-services industries in the 1980s, the entertainment economy is creating tremendous prosperity. From Branson to Las Vegas to Orlando, companies such as Walt Disney, Blockbuster, and Matsushita's MCA are breaking ground for a staggering array of theme parks, theaters, casinos, and ballparks. More than $13 billion in big entertainment projects are in the pipeline, with many more to come (map, page 62).

DINO DESIGNS. Beneath the ground, TCI, Time Warner, and other cable-TV and telephone companies are snaking fiberoptic wires that will bring interactive services, such as movies and games at the touch of a button, into America's living rooms. Silicon Valley is riding the wave as well by designing the software and networking systems to turn the TV set into a multimedia machine.

"The entertainment industry is now the driving force for new technology, as defense used to be," says Edward R. McCracken, CEO of Silicon Graphics Inc., one of a growing number of companies that supply technology and software to the entertainment industry. "Making a dinosaur for Jurassic Park is exactly the same as designing a car."

It may also be more--well--fun. Iacocca notes that the auto industry "is tough and cyclical as hell." By contrast, entertainment and recreation saw consumer spending increase right through the recession. And entertainment is profiting from the exploding global appetite for American movies, TV programs, and other entertainment products. Indeed, Hollywood earned foreign revenues of some $8 billion in 1993, which took a big bite out of the $63 billion foreign trade gap.

At home, the entertainment boom is receiving added lift from potent economic forces. With the economy recovering sharply and productivity on the rise, personal incomes are starting to climb again. In 1993, real wages and salaries for U.S. workers went up significantly for the first time since 1986. At the same time, one of their key expenses--medical bills--is rising more slowly than the breakneck pace of the late 1980s. The result: Consumers have more discretionary money to spend on fun.

Demographics play a key role as well: The number of households headed by 34- to 54-year-olds is growing, and they spend far more on entertainment and recreation than anybody else. "Baby boomers are moving into middle age," says Gerald M. Levin, chairman of Time Warner Inc. "And they seem to have brought their movie-loving habits with them." Not just movies, either: Time Warner is luring record numbers of boomers and their children to its Six Flags amusement parks.

Not everyone views the entertainment economy with unalloyed enthusiasm. For one thing, the fastest-growing part of the industry is gambling, which until recent years had an unseemly taint and was restricted to casinos in Vegas and Atlantic City. Now, starved for revenue, states and cities are allowing casinos to sprout from Indian reservations to riverfronts. Televised gambling is still illegal. But Raymond W. Smith, chairman of Bell Atlantic, points out that if it were legalized, interactive technology could turn gambling on TV into a vast new business.

In the face of staggering social problems such as homelessness and a troubled public education system, there's some reason to wonder whether spending billions on gambling is a wise idea. Even more innocent forms of entertainment--consumed in great quantities--may deprive us of the chance to enrich ourselves through reading, conversation, or real experiences that haven't been filtered and packaged as entertainment commodities (page 66).

UNCERTAIN APPETITE. Even some media moguls, most of whom also publish books, profess to be uneasy. "I'm quite worried about reading," says Levin. "But I worry more about the quality of our education system than about whether entertainment is a big negative factor in our country's reading habits."

Social worries aside, the surge in entertainment investment could lead to overcapacity problems down the road if it outruns consumer demand. Companies are planning to spend tens of billions on the Information Highway over the next 5 to 10 years even though the savviest executives admit they can't predict the consumer appetite for interactive-TV services. And the flurry of building could eventually end in a glut not unlike the one that provoked the real estate crash of the early 1990s.

The result could be lost jobs, economic disappointment for regions that rely too heavily on the industry, and the ignominy of bankruptcy for some entertainment companies. "The question is: Will the market grow quickly enough to accommodate all the new players at the table?" asks Frank J. Biondi Jr., chief executive of Viacom Inc. "I think probably not."

Biondi is careful to distinguish between the growing home-entertainment market and what he thinks are more risky out-of-home ventures. After all, Viacom intends to merge with Blockbuster. The company arranged the deal to help it prevail in a takeover battle for Paramount Communications Inc., an entertainment company with a film studio. Still, Paramount also owns theme parks and sports teams. So by spending almost $10 billion for the company, Biondi and his boss, Sumner M. Redstone, are making a breathtaking bet on the vibrance of the entertainment economy--indoor and outdoor.

For now, the statistics seem to vindicate that gamble. Take the film industry: Wilkofsky Gruen Associates Inc., an economic consulting firm, estimates that domestic spending on filmed entertainment--box-office admissions, home video, and television--will total some $30 billion in 1994, up 7.4% from the previous year. To satisfy such demand, the major Hollywood studios will produce 198 films this year, up 10% from 1993.

LUDDITES. Americans are also buying more electronic gizmos on which to watch all those flicks. Sales of TVs and VCRs are up some 23% over the last two years, according to the Electronic Industries Assn. Meanwhile, over the same period, video-game sales, which were turbocharged by hot games, such as Sonic the Hedgehog, rose by 18%, to $4 billion. Sales of electronics may grow even faster at the end of 1994, says Michael P. Schulhof, president of Sony Corp. of America. That's because Sony and other manufacturers are rolling out new products, such as multimedia video games.

Luddites among us still seem to be flocking to low-tech attractions, such as pro sports. Major League Baseball and the National Football League each added two new teams last year. And the National Hockey League added five franchises in the last three seasons, attracting new owners such as Blockbuster Chairman H. Wayne Huizenga and Walt Disney Co. Anaheim's Mighty Ducks may be fourth in their division, but Disney has sold 12,500 season tickets at up to $6,800 apiece. Huizenga, meanwhile, plans to build an arena for his Florida Panthers near a stadium for his newly acquired football team, the Miami Dolphins. The NHL is trying to grow by luring more families to its games. To do that, NHL Commissioner Gary B. Bettman is installing interactive games and other attractions in the unused portions of some of his arenas.

Family is the watchword for other entertainment categories as well. Both Blockbuster and Viacom's Nickelodeon unit are among those planning to build regional amusement centers that cater to boomers and their kids. Overall attendance at theme parks reached record levels in 1993, helped by attractions such as a stunt show based on the film Batman at Six Flags' Magic Mountain park in Valencia, Calif.

Even live theater--which a few years ago seemed to be on the wane--is now booming. Consumer spending on country music, rock concerts, and other live attractions has soared over the last two years, to $6 billion, according to the Commerce Dept. Productions of Phantom of the Opera and Cats have raked in $2.5 billion worldwide. And so far this season, box-office receipts for stage shows in North America are 15% ahead of last year's record pace and may hit $1.1 billion.

RIVERBOAT BETS. Such results have enticed Disney to produce its first Broadway show, based on the film Beauty and the Beast. Eventually, says Walt Disney Studios Chairman Jeffrey Katzenberg, dozens of Disney stage shows could be playing around the country. Disney also recently pledged $8 million to renovate the dilapidated New Amsterdam theater off New York City's Times Square. If it revitalizes the area, Disney would add a new chapter to the uneven history of entertainment companies and urban redevelopment (page 64).

Of all the entertainment engines, right now gambling is humming the fastest. Casinos took in about $13 billion in 1993, a figure gambling experts say will double by the year 2000. Throw in state lotteries, offtrack betting, and other forms of gambling, and Americans spent $27 billion on legal gambling last year, according to the Commerce Dept. That's as much as they spend on airline tickets. "People just love the excitement of betting," says Fort Worth investor Richard E. Rainwater, who holds options to buy 14% of slot-machine operator United Gaming Inc.

Casino operators are laying huge bets of their own with a bevy of new palaces in Las Vegas. At $1.1 billion, Kirk Kerkorian's MGM Grand is the most opulent. But Mirage Resorts isn't far behind with its $475 million Treasure Island. Both casinos are playing the family card by including theme parks and stunt shows in their vast complexes. But you don't have to travel to gamble anymore: Colorado, Mississippi, and Connecticut are among the states that allow riverboat or casino gaming, in an effort to generate needed revenue.

The states are also lured by gambling's promise of new jobs. The MGM Grand alone employs 8,000 people, from croupiers to cocktail waitresses. By comparison, BMW's new assembly plant in Spartanburg, S.C., will employ 2,000 workers. In New Orleans, which will soon have a $600 million Harrah's casino, gambling could create 15,000 jobs. And in Chicago, where gaming may soon be legalized, the number could be closer to 18,000. Depending on how many states legalize it, gaming could generate 500,000 new jobs nationwide in the next decade, says President Philip G. Satre, of casino operator Promus Cos.

JOBS BONANZA. True, casino jobs are generally unskilled and low-paying. But proponents of gambling argue that casinos offer an option for workers who might otherwise be left out of today's high-tech economy. Says J. Thomas Johnson, chairman of the Illinois Gaming Board: "They are the kinds of jobs needed for the workforce that's available."

The same argument is true of theme parks. Disney, for example, plans to spend $700 million on Disney's America, a theme park outside Washington that could generate thousands of jobs in the region. And Matsushita's MCA will create thousands more in Orlando, where it plans to build a second theme park and entertainment complex to complement its Universal Studios. Theme parks and attractions already employ more than 40,000 workers in the Orlando area.

But the entertainment economy isn't only for ticket-takers and cocktail waitresses. As Hollywood ramps up, it will add more directors, producers, and key grips. Even below Arnold Schwarzenegger's level, movie employees are well paid. Average annual earnings for Hollywood are about $38,000, 50% above the average for manufacturing workers--and the gap is widening.

From the perspective of wages, the most promising segment of entertainment is the evolving business of multimedia technology. Companies are luring educated and creative people with well-paying jobs. Crystal Dynamics Inc., for example, now employs 60 staffers, up from 3 just 15 months ago, to design computer games for PCs and the new 3DO player. Salaries for new hires at the Palo Alto-based company range from $30,000 to $100,000.

Of course, job security in such a nascent industry is unpredictable. So, too, are jobs at casinos such as the MGM Grand. With so many vying for customers--even an expanding pool--some will inevitably fail. For that matter, the entire entertainment economy may experience a wrenching shakeout if it ends up overbuilding or if consumers fail to embrace new interactive-TV services.

SLOTS IN THE SKIES. Some experts also question whether the industry will be at war with itself, since it is pouring money into both home entertainment and out-of-home diversions. If consumers truly use their TV sets for a panoply of new activities, will they have time to visit Disneyland? "People need to get out of their homes," says Disney Chairman Michael D. Eisner. "Kids need to get away from their parents, the parents away from the kids." Eisner, whose company gets 40% of its revenue from theme parks, fervently hopes this economy is not only for the sedentary.

Of all the segments of the entertainment economy, the Information Highway generates the most angst among executives. They know it will be powered by entertainment. But the capital investments are gigantic: Time Warner and its telephone partner, U S West Inc., have committed $5 billion to upgrade their networks for multimedia services. Next to these players, even MGM Grand's free-spending owner, Kirk Kerkorian, seems a piker.

The sums would be less daunting if executives knew that consumers really want to do more than vegetate in front of their TV sets. "We don't have the slightest idea of what people are going to buy," says Rupert Murdoch, who owns the 20th Century Fox studio.

Levin and other champions of the highway argue that it's not such a leap into the unknown. Despite technological snags, Time Warner still plans to offer interactive services to 4,000 cable subscribers in Orlando this year (page 30). But the company is adding services only piecemeal. That way, it can determine what consumers want.

Skeptics argue that the new services will cannibalize existing businesses, such as home video. That's true, to a degree. But new delivery systems also enlarge the overall market. While some people will watch The Fugitive on video, rather than see it in a theater, more will see it--one way or the other. And some will see it both ways. Companies can recycle their products in other ways. Disney is using its Anaheim hockey team as an excuse to release a sequel to its 1992 film, The Mighty Ducks.

Finally, the industry is betting that technology will make entertainment more convenient for consumers, allowing them to pack fun into every nook and cranny of the day. Virgin Atlantic Airways Ltd., for example, is testing a machine that allows travelers to gamble while on international flights: Insert your credit card to play the slots or poker at 30,000 feet.

With an economy more and more dependent on amusement, though, Americans must ask themselves a serious question: Can we play hard enough to justify all the work and money now being spent? More than a good time hangs in the balance.Michael J. Mandel and Mark Landler in New York and Ronald Grover in Los Angeles, with Gail DeGeorge in Miami, Joseph Weber in Philadelphia, Kathy Rebello in San Francisco, and bureau reports


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