Hollywood Meets the Austrian Business Cycle
Hollywood has captivated our collective imagination for over a century. We tend to view it as something other than an industry subject to the same immutable laws of economics like cars, coffee, lumber and everything else. The current strike by Hollywood writers and actors in the face of multiple movies losing almost unheard-of amounts of money, cash bleeding streaming services and declining stock prices has been a wake-up call to an industry that narcissistically believed that it was immune to the business cycle. Surely, Hollywood has a classic malinvestment problem.
Near the end of February 2009, the Fed Funds rate hit 0.2 percent during the height of the Great Financial Crisis. In the turmoil of the day, Disney stock hit a low of $16.77. This was down from the company’s all-time high of about $40.00 in May of 2000. During the decade preceding the G.F.C., Disney stock traded in a range and was considered a blue-chip stock; dependable but unexciting. Eventually, the stock climbed to almost $200 by March 2021.
Disney could do no wrong and senior executives were hailed as geniuses. The company was unassailable. Then, a series of disappointing films and a loss in popularity of their themes parks after the pandemic lockdown resulted in an over 50 percent drop in share price and a loss of $150 billion in shareholder value in just two- year period.
We are in a culture war and Hollywood is a major battleground in the struggle. Critics are quick to point out that the travails of entertainment giants like Disney, Paramount, Warner Brothers, and others was a result of placating “woke” narratives as studios inserted feminist and LGBT themes, and race and gender swapped iconic characters who were originally apparently straight males. Another criticism of film and television was the over-reliance on tentpole franchises. These criticisms are valid, to an extent. We assert the industry’s main problem is an economic one more than a cultural one. There was an explosion in the number of films and T.V. shows released, thanks to streaming services and the fact consumers could now watch content almost anytime and anyplace. In 2009, there were slightly over 200 television series produced. In 2022 that figure was 599 according to Statista. Movies also saw an explosion in the number of features produced.
Frankly, the industry has only so much talent. Actors and writers would have been waiting on tables at the Pink Taco on Sunset Boulevard were now senior writers and lead or co-lead actors on network programs. Directors who would be lucky to direct an episode or two a year of a one-hour cop show a year in the 1980’s were greenlighted on films with $100 million budgets.
The stated reasons by most pundits for the implosion of the industry fail to consider the difference between cause and effect, symptoms and disease. Hollywood is a victim of its hubris. It believed that economics did not apply in its case. It is transitioning from the growth to maturity phase of its cycle. Also, the industry was sustained by artificially low interest rates for years. Movies like The Flash and Indiana Jones 5, and series like the Lord of the Rings prequel are the very epitome of malinvestment. The Flash lost at least $200. The latest Indiana Jones film lost well over $100 million.
Mises and Rothbard would be laughing if they were alive today. As we say in the investment business, never confuse brains with a bull market.
The current situation the film industry finds itself in was predictable and began in the early 2000’s. Somewhere around that time, the number of tickets sold at North American theatres peaked and gradually began to decline.
Fortunately for producers, ticket prices were increased and more than offset the fall in attendance so total revenues increased. Also, foreign revenues grew. Worldwide box office revenues increased peaking in 2018. They have not recovered from pre-pandemic numbers.
Hollywood executives, fueled by cheap capital provided by artificially low interest rates, which in turn turbocharged stock market multiples swelled already inflated egos and began paying steep prices for intellectual properties like Lucasfilm and Marvel. The average film budget exploded. Raiders of the Lost Ark was released in 1981 and was produced for a cost of about $67 million in current dollars. The film generated a box office figure of almost $400 million or about $1.3 billion in current dollars.
In contrast, the current installment of the Indiana Jones franchise cost $300 million to produce and has generated under $400 million in revenue. Given that marketing costs are typically equal to production costs and the fact the theatre takes about half the revenue from ticket sales and Disney faces a potential loss of over $300 million.
Yet studios like Disney, Warner Brothers and Paramount continue to produce expensive flop after flop. No wonder, producers are in no rush to settle with striking actors and writers when most productions have negative cash flows. Credit metrics are deteriorating. In a capitalist system that is working properly, one might assume that given this catastrophic level of failure, senior executives would have been escorted out of their palatial offices and replaced by hard-nosed managers who would run a “tight ship”, as we used to say. The formula for survival and thriving is simple; cut costs, improve product quality, adopt technology, eliminate deadwood employees, and sell or close business units that are not core to the business and increase the bottom line.
This would have happened in previous generations. Hollywood rose to challenges in the past from talkies to television to cable. However, with the advent of our current form of corporate socialism this has not been the case, at least so far. Studios get lucrative government incentives from local governments and tax breaks from national ones. In return, industry executives and workers contribute to political campaigns and celebrities shill for favored candidates and disparage opponents of the regime on social media and at Hollywood premiers. Imagine car company or fast-food chain employees publicly insulting their customers. Studios produce films with a social agenda even if it means antagonizing fans and financially harming shareholders.
This situation has manifested because shareholders’ interests are not effectively represented. Asset managers, buying into the entire E.S.G. “stakeholders” narrative allowed executives to continue to destroy the value of the companies their shareholders own. They do enjoy benefits like going to the best parties at the Toronto International Film Festival and hobnobbing with A-listers. Senior fund managers are even more culpable than studio executives because they are obligated to hold managements accountable. They did not and stood by as entertainment companies let production costs and overhead explode. They also did little while productions conveyed the “message” also known as the woke narrative, thus alienating a large part of their customer base.
For the longest time, customers seemed to put up with a decline in product quality and increase in being lectured to by poorly educated Hollywood narcissists. Coincidentally or not, when rates began rising in 2021, there was a sea change in attitude. The era of cheap capital ended right at peak wokeness and an industry that seemed unassailable and avoided the post 2008 slowing of economic growth, is now in a serious downturn.
Hollywood has endured challenges before and will again. However, like any other industry adjusting to tough times, it will have to adjust by cutting costs, improving product quality, satisfying customers much like the U.S. automotive industry did in the 1970’s and 1980’s.