Even Silicon Valley And Hollywood Hit by Slowdown (Updated)

The people I know in IT (even though they are in New York. they are doing bleeding-edge work) all professed that they were not affected by the stomach-churning market gyrations of the last six weeks: clients were moving ahead with projects underway, prospects still were keen to meet, contracts were being signed. However, if you pushed them a bit harder, they’d fess up that the checks weren’t arriving as punctually as they had in the past.

They may be unusually lucky, for it seems that the gravity-defying tech sector is starting to come to earth. I don’t have any intelligence on the film industry, but the Wall Street Journal reports that it is cutting back on production (amazing when you consider that movies did well in the Depression, although both costs and ticket pricing were far more modest then than now).

Update 3:45 AM Reader CrocodileChuck provided a link to an apparently-infamous Sequoia Capital slide show mentioned in the FT article below from the original post. A picture is indeed worth a thousand words:

From the Financial Times:

A wave of job losses has started to spread across California’s Silicon Valley as the trademark optimism of the region’s technology start-ups has turned to pessimism amid the financial market rout.

The rapid reversal in mood has reawakened memories of the dotcom bust in 2001.

The entrepreneurs making the cuts, however, claim a much greater sense of realism than was shown during the first great internet shake-out, when many web companies reacted too late to the downturn.

“It’s the need to get profitable immediately. We’re heading for some tough times,” said Iggy Fanlo, chief executive of AdBrite, an online advertising network that made 40 of its 100 employees redundant last week.

“I made the decision to go very deep, very quickly so we won’t have to do it again.”

The change in mood in Silicon Valley was highlighted at a private meeting called this month by Sequoia Capital, one of California’s blue-chip venture capital firms, for the bosses of all the companies it has backed. Entrepreneurs attending the meeting were greeted with a presentation that began with a slide showing a gravestone and the words “RIP good times” and were told to treat every dollar they spent as though it was their last…

Fears of a deep economic downturn have hit as members of a new generation of web companies, created in a start-up boom since 2004, have only just started to try to make money, with most still a long way from profitability.

“I think the situation is very, very serious,” said Loic Le Meur, founder of Seesmic, a video blogging site, who has made 10 of his 24 workers redundant during the past month. “From my network of entrepreneur friends, half are in a critical situation for the next six to 12 months.”

Cyan Banister, co-founder of Zivity, an adult entertainment website that last week cut eight of its 22 staff, said: “We needed to clamp down and weather whatever storm is about to hit.”

Other experienced start-up investors have been spreading the same warning as Sequoia, telling companies to cut back in anticipation of a severe downturn.

From the Wall Street Journal:

Paramount Pictures’ abrupt decision to delay two major holiday films — including one with Oscar aspirations — may be an early sign of Hollywood’s retrenchment in the midst of the U.S. economic crisis.

Paramount late last week said it would delay “The Soloist” — a Los Angeles drama about a homeless violin player and the newspaper columnist who intervenes in his life — until next March…

The studio also delayed the limited release of “Defiance” — a war picture with Daniel Craig from its Paramount Vantage specialty unit — until the end of 2008, meaning the film won’t be in wide release until January.

Paramount, a unit of Viacom Inc., announced the delays as part of a new business strategy in which it is cutting costs by reducing the number of films released each year from about 25 to 20. To start cutting back in 2008, the studio delayed a couple of films, which puts off most of the cost of marketing and distributing the movies until next year.

Including other reductions the studio has made this year, Paramount will wind up saving about $60 million in overhead in 2009….

The new plan “is definitely responsive to the current economic climate,” Mr. Moore said. …

The film industry has long argued that it is recession-proof, able to attract audiences during down times because moviegoing is cheaper than some other forms of entertainment such as sports and travel. Paramount’s cutbacks signal that Hollywood is nonetheless bracing for the impact from the current economic turmoil.

Hollywood already made a round of reductions this year. Most of the major studios shuttered or downsized their “specialty” divisions — which release small, indie-like films — in reaction to a crowded marketplace that has made it more expensive to compete for audiences.

I have been very disappointed in the movies this year, and now they are pushing some of the holiday releases, which are usually the pick of the crop, into next year? Aargh.

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  1. Anonymous

    Silicon Valley is seeing the downturn, no contest. Start-ups are having a very bad time with VCs right now and the big names are seeing a slowdown in order for hi-tech durable goods and services.

    That being said, it’s shaping up to be quite different from the dotcom bust. Better or worst, dunno, but certainly different. The dotcom shock was really endogenous. The Valley was ground zero on the way up then on the way down. 2001 was a devastation.

    This time around, the Valley is “just” feeling its share of the general recession, nothing special. Also, there is no obvious build-up of enormous excess capacities like for the dotcoms. For the past 3 or 4 years, the mood has certainly been rather good around here with even a handful of mini-bubbles (web 2.0, optical, green, google, …) but not that ebullient. So don’t expect a spectacular pratfall. It’s more that business is just starting to go “bleeh, whatever”.

  2. bg

    Your post is accurate about Sequoia, as their memo has made the rounds on the west coast. The startup VC environment has moved hard to ‘conserve cash’. It is a not so clear to read the tech bell weathers. Many had slowed their pace of growth over the last year, but most are also printing a lot of cash still. A lot of tech is tied to consumer discretionary, so you can be certain that they are reading the tea leaves carefully. But I do not think you can (yet) make a case for the earth quake that hit finance and housing has yet been transmitted to tech.

    Housing is still strong in Silicon valley and microsoft-land, and the good people are still getting job offers.

  3. Yves Smith


    As long as a movie is not about plunging stock markets, foreclosures, or bread lines and is well made and well acted, it’s distraction enough for me. I recently watched “The Lives of Others” again and found it a very good remedy. Those of you who missed it are encouraged to rent it ASAP.

  4. Anonymous

    Well, big difference between 1930s Hollywood and today’s crap. Better off renting a classic from the Golden Age.

  5. a

    All quotes from Sullivan’s Travels, the great Sturgess comedy.

    Sullivan: There’s a lot to be said for making people laugh. Did you know that that’s all some people have? It isn’t much, but it’s better than nothing in this cockeyed caravan.

    (Studio executives, arguing over a movie)
    Mr. Lebrand: It died in Pittsburgh.
    Mr. Hadrian: Like a dog!
    Sullivan: Aw, what do they know in Pittsburgh?
    Mr. Hadrian: They know what they like.
    Sullivan: If they knew what they liked, they wouldn’t live in Pittsburgh!

    Sullivan: This picture is an ANSWER to Communists. It shows we’re awake and not dunking our heads in the sand, like a bunch of ostriches. I want this picture to be a commentary on modern conditions, stark realism, the problems that confront the average man.
    Mr. Lebrand: But with a little sex.
    Sullivan: A little, but I don’t want to stress it. I want this picture to be a document. I want to hold a mirror up to life. I want this to be a picture of dignity, a true canvas of the suffering of humanity.
    Mr. Lebrand: But with a little sex.
    Sullivan: (resigned) With a little sex in it.

  6. David

    My perceptions of the “Collapse” is that it’s still mostly just in our heads (due to both correct anticipation and media hoopla) but not in reality. We are anticipating a ‘collapse’ but not really feeling it yet. I am a little ahead of the curve being in ‘construction’ and have noticed the slow-down for sometime now, but survival isn’t an issue for most of us yet.

    In other words, we haven’t seen nothin’ yet, it’s gotta get much worse. The comparison to 1929 is revealing. The man on the street didn’t feel the pinch until a year or two later and there was even a temporary rally of the stock market a few monthes after the ’29 crash….and it was much later that the real Depression set in.

    I am hoping we are just being Y2K about this! My Pollyanna offering for the day.

  7. EvilHenryPaulson

    The reason the films are being pushed back:
    – SAG (the actors) are set to strike within weeks over the same residuals as the writers did. There has been no real progress and the SAG is better funded/timed to go on strike

    – Hollywood did not (have the chance to) anticipate a downturn and since they would cut output in a downturn anyways, are planning to extract the most earnings per feature

    There are some peripheral things like AMC theaters working with the major studios to introduce digital cinemas/enable digital distribution which would cut costs long term, but require up front financing for the capital outlay.

    Other movie industry topics include blu-ray, IMAX, online piracy, online sales, new PPV/on-demand opportunities as the cable co.s upgrade their networks and set-top boxes

  8. buzzp

    The studios did not ride placidly through the Depression – B.O. dropped by more than 50% by ’31, and studios went bankrupt – the myth of the biz doing well is mainly due to MGM, which did do well while securing to itself ~60-65% of the entire industry’s profits in the ’30’s

    And I personally remember the bad times of the ’70’s, with feature production in L.A. so quiet that stages were turned into indoor tennis courts

  9. EvilHenryPaulson


    We should see 2 things that ultimately are in our favour versus the great depression.

    • ‘better’ bankruptcy laws that do more to realize you cannot get blood from a stone, and poor-houses are illegal. The sooner the debt overhang is gone, the sooner the growth feedback loop can resume

    • There will be as Dianne Garnick has said “a tale of two tails”. We will see greatly underperforming companies and greatly outperforming companies during a credit contraction. Deals happen a lot faster today than even 30 years ago, so perhaps the culling of weak companies will be quicker to happen. I don’t think anti-monopoly laws will interfere much with the process given the general fear and violent interest rate movements

    A housing-led recession is the worst variety and a global one is even worse. Still people in certain countries have been living in tougher conditions for the past year than we are close to. They find a way and get through it one day at a time.

    The sector this global recession will hit the hardest is the military and its support services. National deficits will hit extraordinary levels without considering growth in military spending.

  10. EvilHenryPaulson

    Don’t forget that the massive consolidation which kept corporate profits healthy, did so in extracting cost savings from cast and crew.

    I do not see many stars being able to negotiate multi-million dollar riders in addition to 10% of sales and $10mn up front. Actors in the 1930s were owned by the studios and management violently opposed labour organizing.

    I suspect we will see some of this deflation to happen with pro sports as well

  11. mndean

    I wouldn’t make too many comparisons about Hollywood circa ’29-33 and Hollywood now. Very different business models. Remember the big studios were owned by theater chains, and the theaters and studios had a huge technological change to attract the customer – namely sound, which cost the chains a lot of money to refit theaters with and the studios a lot to make sound films. This change started in ’29, so the reason for the bankruptcies is a little more complex than just the Great Depression.

  12. Anonymous

    New production by the big guys is crazy-expensive and quite risky.

    Better, safer profits lie in:

    1) Repackaging older films from the vaults for HD/home theater. Big difference from the pre-television 30s.

    2) Buying up festival hits that only need promotion. At least you can see what you’re buying–at a fraction of the cost/risk of a mega-production.

    3) Extending properties with established fanbases (the comic book franchises should continue to proliferate).

    And file sharing is the wolf scratching at the door (the music biz having already been digested).

    Bad times.

  13. Anonymous

    "a" is correct.

    Par is postponing those films because the appetite for them is apparently lacking:

    Beverly Hills Chihuahua led weekend grosses for 2 weeks (& only dropped to 2nd this week) against better dramas/thrillers with big names.

    & this week's #1, MaxPayne, is a video game adaptation popular with the teen-boy segment of the population who don't care about current events: definitely not the audience Par is courting with The Soloist or the R-rated Ed Zwick Defiance.


  14. Marsha Keeffer

    I’ve worked in SV for 10+ years…all the major companies have simply turned off purchasing. Budgets are being slashed. This is not “operating as normal.” BTW, a colleague’s son is a successful director in Hollywood – 6 months ago he told me his son simply couldn’t get a new project funded. Still the same today – LaLa land has dried up.

  15. Lune

    WRT to Hollywood:

    There was a tremendous slowing down of production during the late spring/early summer months. Because there was a very real possibility of a Screen Actors' Guild (SAG) strike, many productions didn't want start filming and risk actors walking out in the middle of an expensive shoot. The only productions that went ahead were indie pics that could secure waivers from SAG in essence guaranteeing that even if there was a general strike, their specific production wouldn't be subject to it.

    That decrease in production this summer means many mainstream studios are left with significant holes in their schedules for next year. I'm assuming some of this delaying of completed films is an attempt to plug those holes and/or take advantage of the light schedule likely to be in effect for next year.

    While print & advertising budgets for releasing a picture can easily run in the tens of millions of dollars, studios also face financing costs on the production loans that are taken to fund the filming of high budget, mainstream flicks, so there's usually a pressure to release early so as to recoup their money ASAP before interest accruals eat into profits.

    So in the final analysis, I'm not sure exactly what has prompted Paramount to delay their scheduled releases. The economics of determining release schedules can be quite complicated. Moreover, this being Hollywood, it could even be some internal battle over artistic differences that might be necessitating a new edit or new filming or something else completely unrelated to money. Unless more studios start to cut output, I'm not so sure Hollywood can be listed as a casualty of the credit crunch just yet.

  16. Anonymous

    Another difference between the 1930s and now is that we have videogames and multiplayer online games, which compete for the onscreen visual entertainment dollar, providing a much longer-lasting experience. There’s also Netflix, which means old movies cannibalize the market at a much lower price point. Finally, TV didn’t exist back then either, nor did Internet porn. People wanting visual distraction from their miseries have a lot more options nowadays.

  17. dilbert dogbert

    Heard, yesterday, a confirmation of the Sequoia event from a source close to a partner. “Spend each dollar as if it was your last”, “Cut and cut deep” “Go Into Survival Mode” was what I remember of the conversation.

  18. Anonymous

    buzzp and Evilhenrypaulson, I watched a documentary on Turner Classic Movies, as a prelude to the pre-Hayes code festival they organised.
    There was a lot of sex and risqué scenes in the US movies from 29 to 34, to attract audiences which were dropping.
    It stopped through regulation.
    But movies from this period looked a lot like 70s movies, actually.

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