In the world of commercial production, 1998 is shaping up as a tough year.
A recession in Asia and tighter production budgets in the U.S. are taking a toll on the nation's $4.5-billion commercial production business, which is centered in Los Angeles.
Faced with tougher economics, a business made up of hundreds of small production houses is consolidating. Big production companies such as publicly traded Harmony Holdings Inc. are shopping around for post-production outfits to bring all aspects of commercial production under one roof.
Meanwhile, other production companies are expanding by fashioning themselves as "idea shops" that also can develop ad pitches and write scripts--usually the job of ad agencies.
This is not to suggest that the commercial production business is in trouble. A-list commercial directors are busy and continue to command huge fees. And activity in Los Angeles is beginning to pick up, thanks to the auto industry's need for ads to launch new models in September.
A wild card in the mix is whether a downshift in the nation's economy will cause advertisers to pull back. When the economy gets tough, advertisers tend to reduce ad spending, as they did during the last recession.
Michael Russell, an advertising industry analyst with Morgan Stanley, Dean Witter, Discover & Co. in New York, expects growth in ad spending to slow slightly in 1999 to 6.2% from 6.8% this year. Underlying the numbers, Russell said, is an important shift in how money is being spent, with advertisers moving dollars from expensive broadcast TV into radio, promotions, direct mail and cable TV, in which costs are lower. Russell said the recession in Asia could accentuate the shift, as sellers of lower-priced goods make greater use of less expensive media to advertise their products.
"I'm hopeful this year will end up at least equal to last year," said Matt Miller, president of the Assn. of Independent Commercial Producers, a New York-based trade group.
Commercial producers in Los Angeles say advertisers are beginning to watch budgets closely. But it may not be just the economy that is to blame. Damon Webster, head of production at Saatchi & Saatchi in Los Angeles, said the rising cost of network television time is causing advertisers to shift dollars from production to help pay for media.
"Advertisers saw what they were charging for the final show of 'Seinfeld.' The money has to come from somewhere," Webster said. NBC charged an average of $1.5 million for a 30-second spot on the final "Seinfeld" episode.
Tighter production budgets mean fewer shooting days, smaller crews and less elaborate spots. Commercial producer Jeff Gorman said his well-regarded Los Angeles production company, Johns & Gorman, has been making about the same number of commercials as in previous years, but with fewer people.
"Bigger-budget productions have peaked," said Gary Paticoff, head of production at Rubin Postaer & Associates, an advertising agency in Santa Monica.
Another way advertisers are saving money is by editing old spots to include new products or offers, thus postponing the need for new commercials. One example is the AT&T spot from Young & Rubicam in New York, in which a mother spontaneously takes her young daughters to the beach, where she conducts business using her cellular phone.
The spot is pitching AT&T's digital one-rate service. When it first aired in 1997, it was used as a brand image spot.
Companies that produce commercials for use in Asia are feeling the impact of that region's economic crisis. Misato Shinohara, a commercial producer for Rainmaker Entertainment in Los Angeles, said Japanese advertisers are taking location work to Australia, Canada and Hong Kong, where labor costs are lower than those in the United States.
Asian advertisers that bring their domestic production business to Los Angeles are driving hard bargains. "We just finished a commercial for Toyota," Shinohara said. "The budget was tight, really tight."
These forces are adding to the financial pressures facing production companies in a highly competitive business. The field has become more crowded in recent years, as Hollywood directors and advertising agency personnel have flocked into commercial production.
Production companies say the markup they tack onto the cost of commercials has fallen to 25% from a lucrative 35% in the mid-1980s, as companies bid against one another for work. Markups of 17% are not uncommon.
Thus, production companies are taking steps to adapt. Pavlov Pictures, the commercial production unit of Sony Pictures, has launched a branding campaign to get attention from advertising agencies that choose production companies to shoot spots.
Harmony Holdings, which already has three commercial production companies under one roof, is on the prowl for post-production houses. With more control over production, Harmony can lower costs and be more competitive when bidding for work, said Jan Wieringa, president of the Los Angeles firm's Harmony Pictures unit.
Meanwhile, Johns & Gorman last week folded into a production company called Farm, which aims to develop ideas and scripts for commercials as well as produce them--presumably allowing it to charge more for its work. Before founding Johns & Gorman 13 years ago, Gary Johns and Gorman developed ads for the former Chiat/Day.
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Lights, Camera, Less Action
Here is a tally of outdoor commercial shoots in Los Angeles County according to permits from the Los Angeles film office.
Jan.-June 1995: 2,588
Jan.-June 1996: 3,230
Jan.-June 1997: 3,689
Jan.-June 1998: 3,444
Source: Entertainment Industry Development Corp.