James Bond (Daniel Craig) shields Bolivian spy Camille (Olga Kurylenko) in a scene from Quantum of Solace. James Bond (Daniel Craig) shields Bolivian spy Camille (Olga Kurylenko) in a scene from Quantum of Solace. (Sony Pictures) Judging by the box office — a record-setting $70 million US opening for Quantum of Solace, fans camping out for Twilight and a blockbuster holiday season ahead — things seem great in Hollywood. But look away from the glow of the screen, and Tinseltown gets a lot darker.

All of the 10 highest-grossing studios, which control 91 per cent of U.S. market share have scaled back or combined their operations in recent months. This year's top-grossing studio, Warner Brothers Entertainment, shuttered two of its independent arms, Picturehouse and Warner Independent Pictures, and absorbed a third, New Line Cinema, in an effort to cut costs. Their total film output will drop to 20 films this year, down 25 per cent from last year's slate. Paramount and 20th Century Fox made similar cuts.

It isn't the terrible economy — yet. People are still going to movies. The big problem is Wall Street. Without money from private equity and big investment banks, which injected an estimated $10- to $18-billion into Hollywood in the last four years, studios have had to change the way they do business — fast.

"I would be very dubious for Hollywood as we know it surviving," says David Thomson, film critic and author of Have You Seen ...?

The American film industry "can't sustain much higher growth rates or attract capital at the same low rates the way they could a year or two ago," says Harold Vogel, CEO of Vogel Capital Management and author of Entertainment Industry Economics. "All the risk has been repriced."

What's hurting Hollywood

(Forbes.com)As financing costs escalate, so will production costs. That means fewer films.

Though the reduction ripple won't hit the box office until 2010, the number of productions will be down 5 per cent to 10 per cent over the next few years, predicts Vogel. The total number of feature films in wide release climbed from 478 in 2000 to 631 last year, a 32-per-cent increase. The number of movie tickets sold increased by only 1 per cent in that same period.

The independent film industry may shrink even more. According to remarks made by Mark Gill, CEO of The Film Department, at the L.A. Film Festival last June, of the 5,000 films submitted to Sundance last year only "maybe five" would make money. There were 477 independent films made in 2007, according to the Independent Film & Television Alliance, each costing an average of $16.5 million to make.

'There's been an open spigot of money flowing into Hollywood, and the pictures are killing each other.'—John Fithian, National Association of Theatre Owners

"There's been an open spigot of money flowing into Hollywood, and the pictures are killing each other," says John Fithian, president of the National Association of Theatre Owners. "We can't handle the number of movies we're getting right now."

International financing has increased importance. Recently, Abu Dhabi Media announced it will spend $1 billion over the next five years on U.S.-produced feature films. Steven Spielberg's new venture is being funded with $1.5 billion in equity and debt from India's Reliance ADA group.

Going digital

The theater industry is also feeling the pinch as it transitions from film to digital projection.

"The traditional funding sources are currently shut down," says Bud Mayo, CEO of Access IT, a third-party integration company that has converted 70 per cent of the digital screens in the U.S. Last fall, Access IT announced plans to furnish 10,000 additional screens in by the first quarter 2011. They've installed eight so far this year.

Loans from investment banks provided companies like Access IT with the credit to install the new equipment, while studios essentially pay off that debt through a fee — usually around $1,000 — for every digital copy they ship to the movie theaters.

"As long as the movie theaters show movies, we're going to get paid," says Mayo. "We're very bullish on the industry."

Though the nationwide overhaul would cost near $3 billion, it would save distributors and theater owners nearly a billion dollars a year by replacing the cumbersome, costly film reels with digital versions. Currently 5,200 screens, or 13 per cent of all the screens in the U.S., are digital.

Theaters without digital technology will be at a loss in the coming years as consumer demand for, and output of, 3-D movies increases. Starting in 2010, about 20 per cent of all wide-release films will be in 3-D, a format that can only be shown on digital projectors with an additional converter.

Fithian remains an optimist.

"History clearly shows that the cinema business tends to do better during recessionary times," says Fithian. "We have to have good movies to get people to come to the cinema."

Maybe just not so many.