After Record Growth, Entertainment Industry, Local Economy Could Be Hit Hard If Actors, Writers Stage Threatened Strikes.

IF the year ahead was a movie, it might be called "Perfect Storm II." As Hollywood coasts into 2001 on the momentum of consecutive record-breaking years, a number of circumstances will soon converge that could take the wind out of the entertainment industry's sails.

Against a backdrop of a slowing economy, possible strikes by actors and writers loom ominously in 2001, threatening to halt film and television productions and causing a ripple effect in the local economy that would cost the region hundreds of millions of dollars a week.

In addition, mega-mergers, volatile disagreements between managers and agents, economic woes in the theater industry, and the evolving role of studios in the filmmaking process speak to a potentially turbulent year in the entertainment world.

While dire predictions of protracted labor strife and declining profits are overblown, according to some analysts, others see tougher times ahead in the film and television industries.

With so much uncertainty, the question of whether Hollywood will keep its head above water in 2001 or go down like George Clooney's Captain Frank William Tyne in "The Perfect Storm" is open to debate.

What is clear is that major dislocations are in store for the latter half of 2001 and 2002 if the Screen Actors Guild and its sister union, the American Federation of Radio and Television Artists, and the Writers Guild of America do not reach new contract agreements with the studios by July.

In the meantime, producers are stockpiling scripts and speeding up shooting schedules, and actors, writers and everyone else in the industry are cramming in as much work as possible before an anticipated summer work stoppage.

"It would be a situation where no one wins," said Morrie Goldman, vice president of communications for the Entertainment Industry Development Corp., which conservatively estimates the negative economic impact of a strike at $50 million a day -- or more than $1 billion a month. In the Los Angeles area, entertainment is a $30 billion a year industry that accounts for about 10 percent of the overall economy.

"The commercial actors strike (which was settled in October) was really devastating for a lot of people, and this would be even worse," Goldman said. "It would be a very bleak situation for L.A."

Bishop Cheen, an entertainment analyst with First Union Securities Inc., agreed that a long strike would be harmful, but he was optimistic the industry would sort its labor troubles out.

"We've had good times and bad times in movie land and we'll have good times and bad times again. You're talking about an industry that is eight decades old and keeps reinventing itself," he said. "Yes, 2001 could be challenging. The bottom line is that as long as somebody is turning out a good story with good acting, there will be fannies in the seats."

Trouble ahead

On the surface, it seems an odd time for labor strife in Hollywood. The local economy has been humming along for the better part of a decade and the film industry is poised to break last year's all-time revenue high of $7.5 billion in ticket sales by the end of this week.

But higher revenues don't necessarily translate into higher profits. The proliferation of cable, new overseas markets and even the Internet has meant more opportunities, but it has also opened a can of worms in which actors, writers and others insist they are being denied their fair share of the pie.

Screen Actors Guild President William Daniels stressed that his union does not want to strike when its contract expires at the end of June. Nevertheless, actors will walk unless progress is made on a host of issues ranging from foreign television and cable residuals to future Internet earnings and video-cassette and DVD payments.

"The outlook is good to sit down in a polite manner and negotiate. There is a deal to be made," said Daniels, an actor who had no union management experience before ousting former SAG president Richard Masur earlier this year in a bitterly waged contest.

SAG has put off negotiations on a new contract until the spring as it evaluates a residuals study that was recently turned over by the Alliance of Motion Picture and Television Producers, the industry's bargaining group, Daniels said. "If the industry is willing to put out a decent proposal, even without the residual report, then SAG is willing to look at it," he said.

Nevertheless, the unions and the studios remain miles apart philosophically on most of the big issues and many see strikes as a forgone conclusion, particularly on the part of writers.

Chris Dixon, an entertainment industry analyst with UBS Warburg, said a strike would be a risky proposition for the unions that could actually benefit the studios in the end by reversing a trend toward higher salaries.

"The industry is more ready for a strike than anytime in its history," Dixon

said, pointing out that many of the big motion picture companies now are part of conglomerates with multiple revenue sources. "You have a situation where (the studios) can reverse the excesses of the past. The reality is the studios are more likely to stand firm."

Joe Saltzman, assistant dean of the Annenberg School for Communication at USC, agreed that the union members would be taking a big gamble by going on strike, but he predicted enough grief to go around.

"This is a dangerous strike, particularly for the writers. It has the potential to change the TV landscape for a long time to come," Saltzman said. "They're going to kill the goose that laid the golden egg. It could be disastrous for everybody."

Although Dixon rejects a gloom-and-doom scenario for the industry in 2001, he agrees that a strike would exacerbate the problem of runaway production in which the region is losing out as producers flee to other states and Mexico and Canada in search of cheaper costs.

"You are going to see a lot of production go out of L.A. and a lot of non-union projections," Dixon said. "The upside is you may see a lot of new filmmakers come on the scene if studio production drops."

Local legislators, including former Assemblyman Scott Wildman, D-Burbank, and former state Sen. and Congressman-elect Adam Schiff, D-Glendale, have introduced state bills to stem the flow of television and film projects out of California through grants and tax breaks.

Still, Goldman said, L.A., with its extensive entertainment infrastructure, remains safely at the center of the industry.

"We always have to be concerned about it but L.A. is still a very popular place for filming," Goldman said. "Really this is an issue that needs to be addressed nationally, in Congress."

Changing landscape

Labor disputes are not the only major industry disagreement on the horizon in 2001. In November, negotiations to form a new governing agreement between the Association of Talent Agents -- including such heavy hitters as Creative Arts Agency and International Creative Management -- and SAG stalled over money issues.

Agents, who want greater freedom to finance projects, contend that current SAG rules are antiquated and restrictive. They say that managers, who often act like agents but are free to finance and produce films and television shows, are moving in on their deal-making territory.

However, SAG has argued that Creative Artists, ICM and other agencies already wield inordinate power in the industry because of their ability to package productions in which they represent actors, writers, producers and directors.

The fight between agents and managers could lead to a bitter power struggle in 2001 but an issue of more immediate concern for the film business is the financial woes of the theater industry, Cheen said. Several North American film exhibitors went belly-up in 2001, including Edwards. Cinemas, and others are feeling the pain of a decade of overbuilding.

"With the theater industry in shambles, it creates a lot of uncertainty," Cheen said. "Right now, you've got too many screens chasing too few quality releases."

A byproduct of the screen glut is that theater owners can't or won't invest in the transition to digital projection and distribution, which the studios say will give consumers a better product and save tens of millions a year in transportation and print-making.

Who will pay for the conversion to digital, estimated to cost about $100,000 per screen, will also be a topic of discussion in 2001.

In a similar vein, studios will be looking to save money in 2001 by cuffing back on production and focusing more on distribution.

With the real power in the industry tied to distribution, an area controlled by the studios, the shift away from heavy investment in filmmaking is not likely to have major repercussions. However, it signals a more conservative business outlook by the studios as they shed some of the risk - and potential profit - of financing feature films.

Another area to watch in 2001 is the possibility of additional mega-mergers involving important players in the entertainment field. French media giant Vivendi's recent acquisition of Seagram Co. Ltd., and with it Universal Studios, establishes Vivendi as the first company outside of North America to own a major studio. Vivendi, which will be known as Vivendi Universal SA, is selling off Seagram's beverage empire to concentrate on entertainment and distribution.

Another example of the trend toward studio companies joining global conglomerates is the $126 billion merger of America Online Inc. and Time Warner Inc.

How these mergers change the economic landscape of Hollywood remains to be seen, but Paul Dergarabedian of industry-watcher Exhibitor Relations said Vivendi would be wise to take a hands-off approach.

"Universal is on such a role, I wouldn't imagine (Vivendi) would want to come in and tinker with what they are doing right now," he said.

With a handful of highly anticipated releases on tap for 2001, Dergarabedian believes the studios may be heading for another record year. He acknowledged, however, that a long strike by either writers or actors could have harmful long-term implications.

"I'm optimistic, but any time you have a slowdown or stoppage of work, it can have a chilling effect," he said.

Michael Bobenko, vice president of operations for the EIDC, said it will be anything but business as usual for Hollywood in 2001.

"Whether we have a strike or not, because everything has been pushed up, we're going to see a slowdown in the summer," Bobenko said. "The first part of the year is going to be very busy and then it will stop. I think it's going to be a very different kind of year."