Recessions and Hollywood production houses: how do they weather the storm?

A slight departure from the typical short prose, I analyse how periods of economic downturn like the Great Depression and the 2008 Financial Crisis have impacted production houses in Hollywood, such as Warner Brothers. This piece was originally written for a course at Yale-NUS College: Hollywood in the 1930s.

Head of Domestic Production at Warner Bros, Jeff Goldstein, once claimed, “Generally we are an industry that’s recession proof [...] If there are good movies, [people] will want to see them.” (Lang et. al, “Recession Fears Grip Hollywood: Can the Movie Biz Survive a Downturn?”). To a large extent, his claim is rational: the performance of the entertainment industry relies heavily upon the quality of content that is produced. High quality films ought to attract high revenues and positive reviews at the box office. What Goldstein fails to note, however, is the impacts of a recession upon content quality, and moreover, the public’s ability to consume content at theatres. Throughout history, these impacts have ranged from inconsequential anomalies (Busby Berkeley’s smash hit musicals despite the Great Depression) to industry altering changes (2008’s Financial Crisis prompting the worldwide shift to franchise films). Giving Goldstein the benefit of the doubt, it is worth exploring the extent to which Hollywood has remained “recession proof”. We consider: The Great Depression of 1929, and the more recent Great Financial Crisis of 2008. In tandem, the Warner Bros. production house was one of America’s most prominent studios which withered through both crises.

To convey the effects of both these recessions on Warner Bros, it becomes crucial to provide a quick primer on the crises themselves. The Great Depression of 1929 lasted a full decade till 1939, making it the most significant global economic crisis till date. Following the economic boom of the Roaring Twenties, the stock market crashed in October 1929 (henceforth known as “Black Thursday”) sending Wall Street investors into a panic, consumption into a downward spiral and unemployment levels sky high for the next decade. The trough of the crisis in 1933 cemented America as the hardest hit nation with 15 million unemployed, and it wasn’t until Roosevelt’s presidency that America began to recover. Roosevelt’s New Deal was monumental in reversing the crisis through adjustments to key areas like Social Security, creation of jobs and federal aid. In comparison, the Great Financial Crisis of 2008 was short lived but widespread. Following an economic boom based on faulty mortgage loans, a housing bubble was created. It would eventually burst in October 2009 as debtors failed to pay back. The crisis ballooned as banks like Lehman Brothers went bankrupt globally, Asian markets were hit, and European countries using the Euro ran into debt. Like the Great Depression, the financial crisis was also largely alleviated by the fiscal policies of an incoming president, Barack Obama. These economic details from both events are woven into their overall impacts on Hollywood. While these overall impacts are mostly negative, the specific effects on Warner Bros. remain to be seen.

Delving into these specific effects, we address Warner Bros’ changes through three lenses: budget, production and marketing. Sedgewick and Pokorny use the original William Schaefer ledger to provide an excellent analysis of Warner Bros’ company budget during the Great Depression (Sedgewick et al, “The Risk Environment of Film Making: Warner Bros in the Inter-War Years”). While Warner was on a steep climb through the Roaring Twenties, making large investments in sound production and purchasing motion company First National, it too would crash with the Great Depression. Much like its competitors, the company was hit hard with a $14 million loss with a late wave of the Depression in 1932, forcing retrenchments all around. Rather than outsourcing their finances to the equally unreliable Wall Street, Warner Bros. chose to internalize the full loss within their accounts . Roddick summarizes their logic, “since the actual physical cost of filming had increased, a proportional reduction had to be made in non-technical costs—that is to say, in sets, schedules, stars and story material”. Having run a tight ship since their days as a second grade production house, Warner simply continued this strategy to further decrease costs all around. It was probably this very strategy that would allow them to produce the anomaly that was Busby Berkeley’s series of smash hit musicals. Once they discovered the steady stream of revenues Berkeley’s works could bring, Warner used Lloyd Bacon as the secondary producer and kept plots largely similar in order to reallocate funding from their story material, stars and schedules to extravagant sets. Accompanied by the studio system which allowed him to combine film production and distribution, Warner could produce a steady stream of expensive films like Footlight Parade and 42nd Street while remaining budget conscious. And while Berkeley’s individual motives will always remain unknown, we can surmise the immense opportunities his productions presented to performers, actors and technicians in the midst of a trying period. Despite the initial blow in finances and employment, we conclude that Warner Bros. was able to successfully manage their budget by themselves until they could increase it back to its original level later in the 30s.

Comparatively, the Great Financial Crisis forced the exact opposite change in Warner Bros’ budgeting. Unlike the self reliant production house of the past, Warner Bros was now part of the bigger media group, Time Warner, and funded by a stream of Wall Street banks and hedge fund managers (Asbhy, xvi). The extent of this financial dependency is perhaps best captured by the fact that 50% of The Dark Knight’s (2008) production budget was borne by venture capitalist Thomas Tull and investment bank JP Morgan. Had the film not been filmed earlier, Warner Bros. would have likely lost out on one of its highest grossing franchises once Wall Street started retreating. Consequently, between the average film budget skyrocketing to $65.8 million and their dependence on external sources, Warner faced significant budgeting struggles during the Great Financial Crisis (Hoffman, 2). This outsourcing also creates another key difference between both recessions: the ability to obtain data. While the independent Warner Bros was able to provide clear data on production budgets and revenues in the William Schaefer ledger in the 1930s, modern times have made it much more difficult to procure data from all of Warner’s investors. According to the Telegraph, the overall company Time Warner’s revenues fell by approximately $0.5 billion while its stock declined by 30% and the company was forced to lay off 1500 employees. While these statistics don’t provide exact costs or budgeting strategy, they are sufficient to reflect the negative effect of the Great Financial Crisis upon Warner Bros.

These changes in Warner’s budget are also evident in their film choices through both crises. As aforementioned, WB initially capitalized upon the musical trend through the first few years of the Depression to maintain high quality and low costs. Along with the Depression, however, Busby Berkeley too ran into a litany of personal problems from alcoholism to trial for murder, and the company needed means to survive the Depression (Brody, “Such Great Heights: Busby Berkeley Speaks”). Completely flipping their existing image, Warner Brothers chose to specialize in gangster films ranging from The Public Enemy to I Am a Fugitive in a Chain Gang (Sedgewick et al, “The Risk Environment of Film Making: Warner Bros in the Inter-War Years”). To summarize this change, [Warner became] “notable for producing films which were topical and hard hitting, with urban subjects and settings such as crime, gangsterism, bootlegging, federal agents, prisons, night clubs, prostitution, newspapers, and backstage intrigues that provide recurring contexts, particularly during the first half of the decade” (ibid). The “recurring contexts” would have allowed films to be produced cheaply with basic lighting, sound and repeated sets within the studio. Meanwhile, WB also reduced their expenditure on stars by popularizing a new line of heroes like James Cagney and Edward G. Robinson who could better play the gritty realities of gangster films. Thus, it becomes evident that Roddick’s statement of minimizing costs of sets, schedules, stars and story material accurately represented the myriad of budgeting techniques employed throughout by Warner Bros. Ergo we see that the Depression significantly influenced Warner’s production choices, transitioning from the producer of frothy musicals to the gangster house.

In a similar fashion, Warner Brothers would again change the trajectory of their film choices during the Financial Crisis for the purpose of lowering costs. This time, rather than genres however, the recession marked a change in film originality and distribution (Asbhy, xvi). As soon as the crisis hit in October 2008, studios across Hollywood were plagued by issues ranging from investor expectations and competing forms of entertainment, to budget cuts and layoffs. Most of these issues would be corrected by movie franchises: sequels, remakes and reboots. Much like the gangster films of the 30s, these lowered the cost of producing and marketing original content but raked in high revenues. They also provided steady competition to other forms of entertainment and guaranteed a steady level of profits. Given Warner Brothers’ existing success in the Harry Potter franchise (worth $7.7 billion today), it was then simply a matter of following up with the Batman franchise (“Because It’s His Birthday: Harry Potter, By the Numbers”). Eventually, it would prove to be an excellent money maker for WB with 3 films (Batman Begins, The Dark Knight, The Dark Knight Rises), the popular Arkham video games and increased sales of toys, comics and other branded merchandise. Moreover, Warner Bros. managed to piggyback on this trend and produce some of its most notable franchises including The Sisterhood of the Travelling Pants 2 (2008), Star Wars: The Clone Wars (2008), Terminator Salvation (2009) and The Hangover (2009) (“All Time Worldwide Box Office for Warner Bros. Movies”). It becomes clear that Warner utilized the same tactic of changing the types of films it produced in order to retain its high reputation and maintain a buffer against the economic impacts of the recession. In addition, the company also toyed with their mechanisms of distribution to promote sales. Unlike the Great Depression, the Financial Crisis occurred at a time when society could access films via other means like DVDs, the Internet and Blu Ray. Consequently, when the US economy began to shrink in 2008, Warner’s first move was to go exclusively Blu Ray and eliminate their sales of DVDs (Li, “Economy, DVD sales slip drove Warner to Blu-ray”). According to an interview with the Entertainment Group President Kevin Tsujihara, this would benefit the company by improving the quality of Warner movies people watched at home (BluRay rather than DVD). In other words, it was a buffer that would provide Warner with a source of revenue even when the recession hit its lowest point. Looking at all of its film choices and strategies cumulatively, it becomes obvious that Warner had the same reaction to both recessions: completely altering their house’s style of production to minimize costs as much as possible.

Lastly, we could also analyse the impacts of the economic recessions through a marketing perspective. Returning to the political history of the Great Depression, the 1933 election of Franklin D. Roosevelt actually created an excellent advertising tool for Warner Bros (Nelmes, 13). Roosevelt’s key campaign, the New Deal, promoted collectivism and promised to bring America out of the Depression with unemployment relief, financial reforms and public work project. Consequently, WB was able to easily leverage upon the image of Roosevelt and his New Deal to create their own patriotic image. This was done both literally and figuratively in the musical era; on one hand, we see themes of the Depression and the New Deal through storylines like Gold Diggers of 1933. On the other hand, we also find literal symbols throughout films: Footlight Parade’s finale shows the National Recovery Administration’s Blue Eagle and a massive poster of Roosevelt himself while the advertising posters for 42nd Street called it “A New Deal in Entertainment” (Motion Picture Herald, Dec 1932- Mar 1933). These tactics would have allowed Warner to market their own image as a patriotic company supporting the revival of America, and attract more audiences to theatres using this image. Another marketing strategy that came out of the Depression was Warner’s marketing to foreign audiences (Sedgewick et al, “The Risk Environment of Film Making: Warner Bros in the Inter-War Years”). Since America was the hardest hit by the recession, the company could look to audiences abroad for higher revenues: and surely enough, the William Schaefer ledger shows a clear and steady increase in foreign revenues during the time (1930-1932), primarily from Britain (ibid). Both cases we see how features of the Depression were utilized as marketing strategies by WB: allowing them to shape their public image, attract audiences to theatres and raise sales through whatever avenues were available. These techniques would also be valuable for WB in future years. So while the strategies’ exact success cannot be determined, it can certainly be said that the Depression was a significant force shaping Warner’s advertising at the time.

In contrast, the features of the Great Financial Crisis did not lend themselves to new marketing strategies just as easily: instead, Warner would simply amplify common existing tricks to boost their sales. This was largely due to the two key differences between both crises. Foremost, the Great Depression was centered in the US, allowing companies to sell products abroad to make up their revenue; 2008’s recession was far more widespread globally. So increasing ads abroad would not produce a foreign revenue high enough to compensate for the losses in the American market. The maximum Warner could do was to convert to Blu Ray in the hopes that the higher picture quality would encourage the masses to watch the films at home (Li, “Economy, DVD sales slip drove Warner to Blu-ray”). Secondly, marketing was particularly hit during the 2008 recession as Time Warner cut out spending on film marketing to compensate for the reduced ad sales at AOL and Time magazines (“Time Warner profits drop as recession hits advertising and DVD sales”). Reduced expenditure would immediately erase any opportunities for new, or innovative marketing techniques like the political slant given to Berkeley’s movies. Mimicking the political advertising of the 30s would also be of little use in the modern world, whereby a patriotic production house is unlikely to boost audiences. Thus, Warner was relegated to amplifying techniques such as product placement (Ashby, xvi). While Warner was familiar with product placement since the 30s, this crisis made it far more prevalent amongst movies; examples included Lamborghini and Ray Ban in The Dark Knight (ibid). Comparing both economic declines, it becomes apparent that the first recession shaped WB for the better in terms of marketing techniques, whereas the latter had a complete negative effect.

So, what does this all mean? Moreover, what are the implications for the future? Across the events, a key distinction that emerges is that Warner was able to effectively transform and adapt its entire filmmaking process (from production to marketing) around the budget of the Depression; whereas, its response to the Financial Crisis seems significantly rougher. A potential reason could be the modern times: a larger studio makes it far more difficult to collect data from all potential sources. Modern cinema also has a tremendous volume of movies produced, at far higher budgets, using far more marketing and advertising methods. So it is indeed possible that Warner Bros. was less affected by the recent recession, in comparison to that of the 30s. Within the scheme of this paper, however, the main impact of a recession upon Hollywood appears to be the budget contractions it imposes. Depending on the recession, this contraction then has a ripple effect on a range of factors including production choices, film marketing, actors and sets. And regardless of the specificities, Hollywood and Warner Bros are certainly not “recession-proof”.

Given the unprecedented times we are living in, it now seems more important than ever to understand the impacts of an economic downturn on Hollywood and production houses like Warner Bros. Predicting these and acting in advance would help the commercial aspect of Hollywood immensely. The Great Lockdown presents a myriad of futures, ranging from feature length films on our iPhone to the death of cinema theatres. Regardless, the purpose of Hollywood should remain as Spielberg said: “This is a time when we need to smile more and Hollywood movies are supposed to do that for people in difficult times.”