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Hollywood Feels the Credit Crunch


Tinseltown may have been recession-proof in the past, but this time around studios are laying off staff, and funds to make movies are scarce

Over risotto at Ca' Brea, former Sony (SNE) Pictures Chairman Peter Guber is lamenting the state of his industry. A movie he's trying to get made is in limbo, held up by a bank that wants him to put up more money before making a deal. "No one wants to lend money these days for an asset that will take months to create," Guber says, before rushing off to plead with his banker.

Like the rest of Hollywood, Guber is discovering that Los Angeles' Dream Factory is not immune when the rest of the country slips into recession. Cinemas around the U.S. are selling fewer tickets. DVD sales, a major profit engine, are tanking. And within weeks, the Screen Actors Guild may authorize a strike that could throw Hollywood into its second work stoppage in a year.

It's hard to spot the worry lines when half the town is botoxed. But the angst is there. Yes, television production is booming. But a lot of that activity is the networks and studios playing catch-up after losing 14 weeks to the writers' strike that shut down Hollywood earlier this year. And while some wonder whether SAG would actually strike at a moment of such economic vulnerability, the studios are quietly pulling back. They are slower to green-light pricey films, and the networks are ordering shows without expensive pilots.

Even before the economy went off the rails, studios were making fewer movies. Box office tracker Media by Numbers says they will release about 450 films this year, 67 fewer than in 2007. Next year there will be even fewer. Paramount (VIA) has said it will make 20 films each year, not 25. Time Warner (TWX) shut its New Line Cinema unit. Meanwhile, even leviathans are having trouble funding movies. Steven Spielberg's DreamWorks SKG has been talking to banks for weeks about how to structure a $750 million line of credit.

COMPETING LOCATIONS

To make matters worse for the Los Angeles economy, cash-strapped states are using hefty tax incentives to lure away films and TV shows. In late November, Illinois passed a 30% tax credit to woo productions (Michigan already has a 40% credit), and earlier this year New York upped its credit to 35%. Los Angeles has since lost two TV shows to New York: HBO's (TWX) In Treatment and ABC's (DIS) Ugly Betty. "L.A. needs to do more, or this will keep happening," says Ugly Betty creator Silvio Horta. "Sooner or later, Hollywood will just be a state of mind, not an actual location for productions."

Back in California, an alarmed Governor Arnold Schwarzenegger is urging the state legislature to pass its own sweeteners. His plea comes as some studios are starting to lay off people. NBC Universal is whacking its budget by $500 million, and staff there are bracing for pink slips. Lions Gate Entertainment (LGF), which produces AMC's (AC) Mad Men, laid off 41. And just before Thanksgiving, The Weinstein Co. let go 24 people, or 11% of its staff.

The economic situation in Hollywood is hardly as dire as it is in, say, the Midwest. But then, Tinseltown has long prided itself as being recession-proof. "This is nuts," says an actor-turned-waiter named Justin. "It's like we're in the auto industry."

Grover is Los Angeles bureau chief for BusinessWeek. Lowry is a senior writer for BusinessWeek in New York.

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