Squeeze time for producers

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The commercial production business, traditionally made up of private companies with low overhead that rely on a flexible freelance pool, has been relatively immune to economic busts-until now.

"If there ever was a perfect storm for the production business," said Steve Dickstein, CEO of Partizan Films, "this would be it."

In the aftermath of Sept. 11, the estimated $5.5 billion a year U.S. industry is being sorely tested. Fewer commercials are being made and less money is being spent to produce them as the economy teeters on the brink of recession. "The feeling out there is, yes, production has slowed down," said Lynn Apel, senior producer at Publicis Groupe's Saatchi & Saatchi, New York. "There is more test work being done before committing tons of money on full productions. There is cautiousness about moving forward."

Despite efforts by industry organizations to encourage shoots in New York and elsewhere in the country, industry executives say a fundamental decline in the business still exists.

Some believe the particularly tough time production companies are experiencing goes deeper, beginning with the decline of the :30 TV spot as the linchpin of new campaigns. "The reality is this isn't a fallout from Sept. 11," said Matt Miller, president of the industry's trade group, the Association of Independent Commercial Producers. "We saw companies get larger and staff up to handle traffic in a booming dot-com economy. The [Screen Actors Guild] strike this year was the first pin in the balloon. It pushed a lot of work out of the country."

For the last few years, production jobs have routinely moved to locations such as Canada, where it is cheaper to shoot. Even before that, producers' margins were being squeezed. "The deterioration began in 1994," said Bob Greenberg, CEO of Interpublic Group of Cos.' R/GA, a post-production house turned interactive agency now returning to production work. "The business changed from a situation in which production companies simply added a markup to a given budget to a situation in which agencies gave production companies a number that they had to sort of figure out how to back into. The clients put pressure on the agencies which put pressure on us, the vendors."

Today, an average profit margin is 10%, according to one executive, down from 35% as recently as five years ago. Propaganda Group of Cos., owned by the Sundance Group and SCP Equity Ventures, recently laid off about 30% of its 75-person staff, the company's CEO Trevor Macy stepped aside and both owners injected more cash into the operation.

In the post-production business, which relies on expensive editing and special effects equipment and highly paid employees who know how to use them, staff reductions have already occurred and more will come. "We are preparing for layoffs right now," said Steve Hendricks, CEO of Creative Content Artists, a company that owns several post-production houses. He wouldn't give specific figures; CCA, with 200 employees, let go 30 people earlier this year.

Anonymous Films, a privately held production house with a blue-chip list of directors-including David Fincher, David Kellogg and Mark Romanek-and partially owned by shopping mall developer Herb Miller, is also feeling the pinch. "The market is brutal right now. ... We are booking jobs but it is a struggle. There are no more $2 million [shoots]," said Steve Golin, Anonymous CEO. Mr. Golin is currently negotiating, along with producer Jim Tauber and director David Fincher, to buy out Mr. Miller's share. Anonymous has also instituted a hiring freeze for its staff of 45.

Industry giant Radical Media, owned by partners Jon Kamen and Frank Scherma, is husbanding its resources. "We are rolling up our sleeves. ... We're ordering cold cuts and pizza now," Mr. Kamen said, instead of expensive catered meals on shoots.

Even the commercial production division of heavyweight Industrial Light and Magic, owned by entertainment mogul George Lucas, has had to adjust. The unit, a hybrid shop of directors as well as sophisticated post-production services, is now doing special effects-only commercials as the market for live action tightens up. "There is a lot of pressure on the market," said Marcy Malooly, VP-executive producer.

Some say to survive today, production companies need to expand. "The 30-second commercial will become less important," said Mr. Golin, whose company created short films in a high-profile marketing campaign for BMW of America (AA, July 23). "We are trying to merge the TV business into the brand integration business." Others are surviving on a steady diet of music videos, which provide even smaller margin; Radical produced a stage play with Nike and Wieden & Kennedy.

Commercial production houses may have no choice. "The consumer has choices nowadays, they don't like to watch TV advertising," said Mitch Kanner, CEO of the Idea Bridge, an entertainment and advertising consultancy. "Remember Desert Storm? The commercial production industry fell off about 50% and that part of the business never recovered. The industry says this time it will bounce back. Based on what? Because they want it to?"

Contributing: Anthony Vagnoni

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