A sector by sector look at the industry's financial prospects after the impact of the Sept 11 events and the threat of economic slowdown. To be published over the next few days. Part 1: broadcast TV.

Abstracted from the weekly edition of Screen International

Three weeks on, and like the rest of the world, the film industry has begun to move beyond the initial shock and outrage of September 11 to start asking questions about the impact of the tragedy on business.

More salient are questions as to whether the terrorist actions, and the subsequent events, which still to unfold, have pushed the world economy into recession, or whether it was already heading that way. Is film as recession proof as is sometimes argued'

Jonathan Davis, media economist with the C-Quential division of consultancy giant Arthur D Little, argues that history is at best a misleading indicator. The film industry did indeed grow through the early 1930s Great Depression, but this was already a time of systemic shift in the industry; from silent films to talkies and from not enough cinemas to meet demand to a time of screen sufficiency.

"Non-specific anxiety was given a twist by Sept 11. Economists call this a 'shock' but it is not a new factor, rather it simply accelerates the existing economic downtrend. The direct impact on demand for entertainment products is probably not significant. Ultimately it will depend on good and bad films," says Davis. His comments are echoed by Rick Sands, chairman of worldwide distribution at Miramax, who says: "European TV started going down months ago. That had nothing to do with Sept 11."

The reactions of the first few days are not necessarily instructive. Cinema attendance dipped sharply on the first days after the crisis as people watched TV for news. But by the weekend US theatrical attendance had recovered and video rentals were soaring. The same was true in many international territories, although both the dip and the recovery were shallower.

Family entertainment, comedies and romantic titles are widely cited as becoming the cinematic trend in the short- to mid-term, post Sept 11.

But how long will it be before the common mantra about action films being unreleasable is modified, or even reversed'

Concerns for the longer term are about how changing consumer confidence will affect different segments of the entertainment industry. For it should be clear that a recession will not sink every enterprise, although if the politicians' war of words turns into a hot war that involves in many nations, the situation will change dramatically.

A series of articles over the coming days will try to identify some of the winners and losers.

To date the worst affected companies are the advertising-dependent networks and free-TV companies. Increased news coverage has pushed up their costs at exactly the same time as advertisers have cut back their spending. Viacom chief Mel Karmazin said this week that CBS had suffered an $85m loss of ads and that it had suffered some $200m in costs due to the Sept 11 crisis.

But as the crisis has settled, advertising has not fully recovered, reflecting a serious change in consumer and business confidence. While the IMF last week tried to argue that recession is not inevitable many economists are now talking about a U-shaped or even a "bath-shaped" pattern of economic slowdown and eventual recovery.

Davis reminds us that recession does not mean that the economy stops, rather it reverts back to the levels of a few years ago. What makes the plight of the commercial broadcasters so dramatic is that they have thin margins, may be heavily borrowed and their paying customers react very swiftly.

"The media sector was already in recession [before the events of September 11], with free TV companies among the worst hit. They are companies with the most operating leverage [in the entertainment sector] and any fluctuations in revenue fall straight through to the bottom line," says Neil Carter, European media analyst at ABN Amro.

According to ad tracking company CMR, national TV groups in the US lost $188m of revenue in the September 11 week, while local stations lost a further $93m, or 30% of their weekly advertising. In contrast cable stations lost only 16% or $32m.

But although they are nothing like as advertising dependent as the free networks, the share values of cable, satellite and pay-TV companies have also plunged. Carter explains: "They are long duration shares. The value of the stock is all in the terminal value. And the cost of capital has increased as the market risk premium has shifted. The cost of holding equities compared with bonds has moved against them." And although many cable firms are massively borrowed, interest rate cuts have not yet made much difference.

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