Hollywood Is Getting Back to Work

By Berna Barshay

Tuesday, June 16, 2020
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It’s time for Hollywood to play catch-up, and it may be expensive…

Last week, Los Angeles County issued its safety guidelines for film and television to resume production. This is welcome news for an industry that has been shut down for three months, leaving the largely freelance workforce mostly unpaid.

It’s also good news for consumers, especially those who have “finished Netflix,” as sometime this fall most networks and streaming services would start running out of fresh content without a filming restart. Theater chains should be celebrating as well because despite a backlog of postponed movies awaiting release, further production delays now could lead to content shortages starting in 12 to 18 months.

Yesterday, the Academy of Motion Picture Arts and Sciences announced that the 2021 Oscars would be pushed back to April 25, versus its previous late February date. Eligibility would be extended to films released up to February 28, 2021 as opposed to sticking to the normal December 31 cutoff. The Academy had earlier suspended its longtime eligibility rule that required a seven-day theatrical run for films to be considered for nomination, as long as a film had previously been scheduled for theatrical release.

The rescheduling of the awards ceremony and bending of the rules – something that must have irked the exhibitors who were already feuding with studios over direct-to-home releases during the pandemic – show just how much the coronavirus has hit the entertainment industry.

While most participants are thrilled to get back to business, the safety accommodations won’t be cheap…

Last month, media outlet Variety summed up some of the high incremental costs of production during the pandemic…

Shorter shooting days will lead to longer shooting schedules; casts and crews will be put in quarantine; there will be added breaks for temperature checks and accurate COVID testing; there will be more extensive visual effects where extras once stood; newly trained personnel dedicated to health and safety will need to be hired; medical-grade cleaning equipment and PPE – and insurance if producers are lucky enough to secure it – will balloon the hard costs of production.

One anonymous studio production chief added, “We’re looking at more than incremental increases. It’s very hard to say, but on a major movie, as much as 20% increases. And that’s on paper.”

The rising production costs couldn’t have come at a worse time. Production cost inflation has already been squeezing the profits of traditional studios for several years, as they find themselves competing for talent and projects with a crop of new digital competitors like Netflix (NFLX). And these competitors often aren’t held to the same profit or cash-flow generation standards by investors.

Other new media industry entrants from the digital world are exempted from even disclosing their profit metrics, and are small parts of giant organizations who can use entertainment as a loss leader or business generator for other parts of their massive business. Amazon’s (AMZN) studio and Apple’s (AAPL) new streaming service fit into this category. Their ability to bear a margin squeeze from extra COVID-19 costs without investors punishing them is much higher.

The cost structure isn’t the only thing that will change about production…

Some safety procedures – like temperature checks, regular COVID-19 testing, on-set hand-washing stations, off-camera mask wearing, and catering limitations – will be relatively easy to implement and invisible to viewers. But other constraints in the LA County guidelines might affect what viewers see on their screens.

Everyone on set is encouraged to maintain a distance of at least eight feet, which will be awkward for actors. Some have even speculated that for kissing scenes, actors may perform the task with masks on that will later be removed digitally or may kiss “solo” and have separate scenes melded together utilizing CGI techniques.

The LA Country rules also stipulate that scenes in which cast or crew must be within six feet of each other have to be brief and performed silently, to discourage the passing of COVID-19 droplets. This raises questions of whether actors will silently mouth lines to be dubbed over later. It’s hard to see how this rule gets implemented without affecting a production’s quality, and the heavy unionization of the industry may make it difficult to skirt rules.

Some remain skeptical, including one film director who spoke to Variety

A movie can’t work with masks and social distancing – everyone is all over each other all the time. To not face that, either you’re in denial or you’re ignorant, or you’re pretending to not know so the company isn’t liable.

Naturally, some types of productions are easier to create with distancing than others…

One TV insider told me to expect more comedies and reality on the fall schedule, because dramas would be harder to film within these constraints. Also hurting TV production will be the need to minimize crew size, which can often run up to 300 people on a high-budget show.

The type of movies hitting the cineplex in 2021 and 2022 may also change. Crowd scenes are a no-no for both TV and film, although visual effects may be able to replace extras digitally. But international travel restrictions and foreign quarantine requirements may limit the ability to film the big-budget, tentpole action films that have been the bread and butter of both the studios and movie exhibitors for so long.

As one studio executive told Variety, “I think the really big crew, lots of extras, multi-country production where you sort of are required to globe-trot is probably last in the queue.”

For now, with combat scenes, exotic locales, and intimate scenes off the menu, the tide may temporarily shift in favor of the smaller-budget, independent films that have been out-of-favor at studios for years. With smaller casts and crew filming in just one or two locations for shorter durations, these productions may prove more friendly to COVID-19 regulations.

Some questions about how this will work remain unanswered…

If someone in the cast or crew tests positive for COVID-19, the rules may require that anyone who was within six feet of them for 15 minutes or more be quarantined. Both stopping and restarting production can be extremely costly and will force shows to miss deadlines if a key player tests positive.

Additionally, even if only one person tests positive and didn’t expose anyone else, production could still be forced to shut down if the star or the director of the show or film tests positive. “Key-person risk” is high on these productions… and it’s unlikely that insurance will cover any expenses incurred due to COVID-19.

Unions will have to get on board with skeleton staffing, even though they’re typically in the business of advocating for minimum staffing levels. They show signs of easing requirements however, as many members have been without a paycheck for months, and if unions are too strict, they may see more productions leave the city or country for areas with lower operating costs.

The ‘new normal’ for Hollywood will affect distribution players differently…

For Netflix, which has enough content in the can to make it through this year, this timing is almost perfect. Assuming production restarts without a hitch, getting back to work in the next month or two should be enough for the company to play catch-up for the 2021 schedule. Additionally, some filming locales in Europe are a few weeks ahead of the U.S. restart, with production already underway in Denmark, Sweden, and Iceland, and soon to restart in France. This can allow European content production to stay on track.

Both Disney (DIS) and AT&T’s (T) WarnerMedia have missed prior new content release dates at their more recently launched streaming services, Disney+ and HBO Max. They’re in catch-up mode with the services… so for them, the restart can’t come soon enough.

Disney+ is off to a strong start, and has tried to fill holes in its schedule by moving previously scheduled theatrical release Artemis Fowl. Disney+ also shifted the release date for its high-profile live original cast taping of Broadway’s popular Hamilton musical to Independence Day 2020, which was previously expected much later. HBO Max was forced to launch last month without its highest profile new content offering, the Friends reunion show.

The networks are in an even bigger scramble to meet the start of the fall TV season, which typically starts production in the spring. According to industry website TVLine…

Thus far, CBS’ fall schedule at least is kinda counting on returning shows being ready in time, while Fox and The CW announced largely “pandemic-proof” schedules that rely on already-produced or acquired programming. (ABC and NBC thus far are mum on their fall plans.)

The movie theaters are in the most uncertain spot, as they depend on the studios for content…

Thus far, studios have been reluctant to gamble huge investments in potential blockbusters on an audience that may not be ready to come back this summer. Just last week, Warner Bros. pushed back highly anticipated films Tenet by two weeks (from July 17 to July 31) and Wonder Woman 1984 from August to October. As of now, the first big release of the summer should be Disney’s Mulan on July 24.

Looking ahead to 2021 and 2022, theaters could see the box office under pressure if the mix of film releases starts to skew toward independent dramas and comedies, versus the superhero and action films that have driven revenues for the past decade. With the bar for revenues currently near zero, even a box office at 85% to 90% of normal levels in a year would be a huge win for the theaters.

While it won’t be Hollywood as usual, restarting production will be a welcome relief for all participants in the entertainment value chain – perhaps no more so than for the freelance workers who have been without income for three months. While TV and movies may be somewhat changed, it will be interesting to see how creative the industry will have to get.

It’s a quiet day in the mailbag…

What shows are you eagerly awaiting the return of? Shoot me an e-mail at [email protected].

“Hi Berna, Comment on your writing about VIX and market volatility. Overall, you made volatility trading sound risky.

“I became fascinated with Enrique’s newsletters and his use of options. And so, I have been studying and deploying options. I can’t believe I have been missing such a useful tool all this time. It can be used for hedging, speculation, or income generating like a dividend.

“Like many tools, volatility trading is what you make of it. It can be both beneficial and harmful. It ultimately depends on the user. Don’t get carried away.” – Michael C.

Berna comment: Volatility trading is risky. I enjoy using options as well – trading them used to be my job – but they inherently involve leverage, which is risky. Options have their place… but should only be used by people who really understand them, as you said.

Regards,

Berna Barshay
June 16, 2020

Whitney Tilson
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About Whitney Tilson

Prior to creating Empire Financial Research, Whitney Tilson founded and ran Kase Capital Management, which managed three value-oriented hedge funds and two mutual funds. Starting out of his bedroom with only $1 million, Tilson grew assets under management to nearly $200 million.

Tilson graduated magna cum laude from Harvard College with a bachelor’s degree in government in 1989. After college, he helped Wendy Kopp launch Teach for America and then spent two years as a consultant at the Boston Consulting Group. He earned his MBA from Harvard Business School in 1994, where he graduated in the top 5% of his class and was named a Baker Scholar.

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