How Interest Rate Hikes Are Hitting Hollywood
With Federal Reserve chair Jerome Powell not expected to hike interest rates yet again on Tuesday, don’t underestimate the impact on the media business made by the previous 10 rate hikes the Fed has approved over the past 14 months. It’s an impact felt even deeper considering these increases converge with the substantial cost pressures already delivered by inflation overall.
The Federal Reserve’s cumulative increase to date is five percentage points. While companies have different debt terms that put off the full impact of higher rates across a number of years, there is significant potential impact on jobs as companies try, at least partially, to offset bigger interest payments with forced job reductions as part of their mitigation strategies.
The top six companies in the motion picture and television sector are carrying just over an estimated $150 billion in total debt, based on the total debt levels they specified in company reports at the end of March (attributing $20 billion of Comcast’s $95 billion in total debt to NBCUniversal). That amounts to about a third each at Disney and Warner Bros. Discovery and the rest at Paramount, Fox, Netflix and NBCU.
Hypothetically speaking, if all of their interest rates increase the same five percentage points as the Fed's, that's an additional $7.7 billion in costs they need to cover just to stay even, and that $7.7 billion is just interest increases, not other inflationary costs.
Here's one way to look at it: Let’s assume an all-in number of around $150,000 in cost per employee for this exercise. This is way above the $86,060 the Bureau of Labor Statistics estimates is the average for the 417,000 people it says are in the motion picture and television sector.
But that salary number doesn't include actors and other part-year employees, and it also doesn't include payroll service costs — overhead — so I’m going with a higher number, which makes the results somewhat less ugly.
If you divide the $7.7 billion in additional costs by $150,000 per employee, that would equal about 51,000 employees, or a 12% staff reduction to cover the increase in interest to match the Fed hikes.
I could say something gratuitous here, like, “Of course, everyone hopes to increase revenues ... and find other ways to cut costs.” But the numbers are the numbers, and unless the Fed cuts rates ... companies are going to have to find ways to live with higher numbers as their debt rolls over.
Put that math in the context of the industry’s fast-evolving labor situation, and you see the broad environmental changes that set the stage for both sides. That said, here’s my starting, but by no means complete, list — before dealing with issues of the individual guilds:
1. Inflation and impact on…
• costs of living of employees
• operating costs by companies,
• interest rates driving up borrowing costs and reducing available debt
2. Decreased viewing of linear services:
• reducing sub fees
• reducing ad revenues
3. Reduced growth rates of streaming services:
• making finite estimates possible, reducing speculation for steady post-growth era
• drying up of capital from both equity and debt
4. Forcing focus on profitability, not expansion:
• resulting in diminished production slates
• resulting in layoffs and general tightening
5. Forward-looking economic uncertainty
Recession, soft landing — maybe we'll know by early 2024, but that’s after new contracts should all be in place.
What an incredibly difficult environment for everyone involved.
Tom Wolzien is an industry analyst previously with Wall Street research firm Sanford C. Bernstein & Co. as well as a former TV news executive who spent 15 years at NBC. This commentary is adapted from his annual address at the UCLA School of Law/Ziffren Institute Entertainment Bar Symposium on May 31.
