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Downturn may not aid studios this time

In a recession, online diversions could be a drain on Hollywood.

October 29, 2008|Dawn C. Chmielewski and Meg James | Chmielewski and James are Times staff writers.

Worried by the worsening economy, Kristen Olson decided she'd better start saving money. She tallied her expenses and was walloped by sticker shock: She and her roommates were spending $900 a year for cable TV.

"I'm not watching $900 worth of cable," said the 25-year-old advertising account coordinator, who lives in North Hollywood. She's trying to persuade her roommates to drop the service.

"You can watch so many shows online for free; most of them are on Hulu now," Olson added, referring to the year-old video site that makes available at the click of a mouse more than 1,000 shows, including her favorites, "Ugly Betty" and "House."

Such changes in consumer behavior signal trouble for media companies. For decades, entertainment executives have boasted that Hollywood is "recession-proof." No matter how dire the economy, the argument goes, consumers will always be willing to spend on entertainment to escape.

Studio executives note that during the Great Depression, when more than a quarter of the country was out of work, people still scraped together dimes to see the latest motion picture. In subsequent economic slumps, consumers spent freely on new technology, expanded their home video libraries and, most recently, invested $1,000 or more on high-definition, big-screen TVs.

This time, however, past may not be prologue. Unlike the rudimentary entertainment economy of 75 years ago, when the downtown Bijou was about the only diversion, consumers now have a near-limitless array of entertainment options to occupy their leisure time.

"While Hollywood films have traditionally fared well during economic downturns, this time around may be quite different," said Bobby Tulsiani, an analyst at Forrester Research, which recently examined consumer spending on media.

Blame the Internet. With faster processors, improved technology to compress video and more than 60 million homes in the U.S. with high-speed connections, the computer seamlessly delivers full-length episodes of television shows and movies. As a result, the computer now vies with the TV and cinema as the go-to screen for entertainment.

One telling sign was the first "Saturday Night Live" parody with Tina Fey impersonating Republican vice presidential nominee Sarah Palin, which drew nearly as many viewers online as watched it on NBC. Only one-third saw the Sept. 13 skit that Saturday night live, according to San Mateo research firm Integrated Media Measurement Inc. The rest caught it online or on their digital video recorder.

Olson is representative of a younger generation that values the Internet above other media. The recent Forrester Research survey found that adults ages 25 to 34 were the most willing to sacrifice a night at the multiplex or premium cable if money gets tight. What were they least willing to surrender? High-speed Internet access.

The endless stream of free content, through legitimate services as well as pirate sites, appears to be shifting viewing habits more quickly than industry executives had anticipated -- or intended. That creates a dilemma for media companies because the Internet generates substantially lower revenue than established business models -- 30-second TV commercials and home video sales -- which have long supported the costly economics of TV shows and movies. That's not Hollywood's only problem.

When Midori Connolly's family business in San Diego, which supplies audiovisual equipment for conferences, began to feel the economic slowdown this summer, she and her husband trimmed expenses.

The monthly subscription to DVDs-via-mail service Netflix was the first to go. Now they rent movies for $1 a day from a kiosk at the supermarket. Next they saved the $10 to download George Strait's new "Troubadour" album on iTunes. Instead, they bought two tracks for 99 cents each. And they didn't rush out to spend $17 for the DVD of "Sex and the City." They checked out a free copy from the library.

"We started finding alternatives that we didn't have to spend money on," said the 31-year-old mother of two. "I don't feel that we've lost any quality."

Media companies are bracing for the fallout from decisions by families like the Connollys. With the economy cooling, Netflix has lowered its revenue and subscriber forecasts for the fourth quarter. Viacom Inc., which owns Paramount Pictures and MTV, and CBS Corp. said profits would be lower than expected, citing weaker ad sales. NBC Universal plans to slash $500 million in spending -- 3% of its budget -- because it anticipates "unprecedented economic challenges" in the year ahead.

The wild card is the length and depth of the downturn. No one knows how bad things will get.

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