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THE DOMINATION OF HOLLYWOOD: OWNERSHIP CHANGES AND PRESENT-DAY IMPLICATIONS
Ashley Liu
TC 660H Plan II Honors Program The University of Texas at Austin
May 19, 2020
______Alisa Perren Radio Television Film Supervising Professor
Jonathan Cohn Finance Second Reader Liu 2
ABSTRACT
Author: Ashley Liu
Title: The Domination of Hollywood: Ownership Changes and Present-Day Implications
Supervising: Alisa Perren, Radio Television Film; Jonathan Cohn, Finance
Over the past century, the ownership of film and television companies has transferred from small-scale, private independent operations to large, often publicly held multimedia conglomerates. What does the ownership landscape for media corporations look like now? How does the current ownership landscape, in which telecommunications and technology companies are more actively involved, impact labor relations and the development of streaming services? This paper seeks to answer the questions above. The first question addresses the historical factors that drove the industry into its consolidated state; it also pertains to the ownership structures of individual media conglomerates, which currently operate across different media sectors. The second question addresses two direct implications of recent ownership changes: heightened labor tensions between the Hollywood writers and their talent agencies, and the traditional media companies’ efforts to join the streaming space to compete with technology companies such as Netflix and Amazon.
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Table of Contents Introduction ...... 4 Evolution of Ownership in Filmed Entertainment ...... 6 Early years of cinema (pre-1920s) ...... 6 The studio system (1920s – 1948) ...... 7 Fall of the studio system (1948 – 1960s) ...... 9 Deregulation within markets (1960s – 1980s) ...... 10 Integration of markets (1990s – 2010s) ...... 13 The modern landscape of filmed entertainment ...... 16 Conflict of Interest Between WGA and Talent Agencies ...... 20 Private equity in Hollywood ...... 20 Private equity buyouts of talent agencies ...... 23 Conflicted representation: affiliate studios ...... 25 Conflicted representation: packaging fees ...... 28 Past lawsuits ...... 31 CAA and Head of Class ...... 31 CAA and The Walking Dead ...... 31 WME and Who Wants to be a Millionaire ...... 32 ATA’s response to complaints about affiliate studios ...... 32 ATA’s response to complaints about packaging fees ...... 34 The ongoing legal battle between WGA and ATA ...... 36 Impact of the boycott on writers: increased disparity and loss of status ...... 40 The Growth of DTC Services and the Race for Content ...... 44 Competitive advantages from the tech sector ...... 44 New mode of vertical integration in legacy companies ...... 47 New entrants in the increasingly saturated SVOD landscape ...... 49 Focus on content ownership ...... 54 Implications on original production ...... 55 Conclusion ...... 58 Works Cited ...... 59 Biography ...... 67
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Introduction
The U.S. filmed entertainment industry consists of the production, distribution, and consumption of motion pictures and television; it generates more than $104 billion in annual revenue and institutionalizes talent to produce creative visual content.1 Over the past century, the ownership structure of filmed entertainment evolved from independent studios to transindustrial conglomerates. A rich pool of scholarship discusses the historical factors that contributed to the industry’s structural integrations and diversifications: William Kunz, Robert McChesney,
Jonathan Hardy, and Jennifer Holt are among the scholars surveying these historical changes.
However, there is a scarcity of literature that connects the ownership structure of the filmed entertainment industry to its present-day implications. This paper will first trace the historical ownership context and then discuss the modern ownership landscape of the industry. It will also address how recent changes are impacting labor relations and business models, especially in relation to streaming media.
In this paper, ownership will be consistently used as a framework in order to clearly illustrate the concentration of power in the production and distribution of visual content.
The filmed entertainment industry is extremely complex and continuously merges across traditional media barriers—it would difficult to directly make cross-sectional or time-series analysis on individual companies or even individual industries. The first section will examine the historical highlights of ownership changes in the industry and the political and socioeconomic influences behind them. The second and third sections will make the causal connections between
1 PwC. Filmed Entertainment: Key Insights At A Glance. 2019. https://www.pwc.com/gx/en/global- entertainment-media-outlook/segment-insights/assets/PDF/filmed-entertainment-key-insights-at- a-glance.pdf
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Evolution of Ownership in Filmed Entertainment
The television and film landscape today is occupied by dominant conglomerates who operate across traditional barriers and within industry sectors. To understand how the industry arrived at this state of consolidation, one must explore the historical evolution of its ownership since the early years of filmed entertainment. The following section will chronologically examine how horizontal and vertical integration and diversification have consistently shaped the film and television industries. In addition, this discussion will highlight the macro-environmental factors (federal deregulation, financial expansion, and technological innovation) that instigated these structural transformations.
Early years of cinema (pre-1920s)
The filmed entertainment industry has been defined by vertical integration since its origin. In December 1896, the Lumiere brothers from southeastern France invented the cinematograph, the first motion-picture apparatus. This device gave birth to a series of short film screenings around Europe in fixed theaters called nickelodeons. Early short films in major cities cost about a dollar to watch and spectators could stay for as long as they wanted. 2 By the early
1900s, movies gradually increased in length and quality as producers realized that they could charge more for a feature film that involved a well-known story or actor. The upgrade in film quality incentivized producers to buy out theater chains all over the U.S. in order to capture marginal revenues from movie tickets, effectively eliminating the theater-owners who
2 Bakker, Gerben. “The Economic History of the International Film Industry.” Economic History Association, 2015, https://eh.net/encyclopedia/the-economic-history-of-the-international-film-industry/ Liu 7 indefinitely profited from film showings at a fixed cost.4 This first wave of vertical integration in the film industry set up the foundation for the future studio model.
In addition, other factors encouraged early studios to expand in the face of rising market demand. Permanent theater chains and higher quality films were created to satisfy a growing middle class audience.5 European film production declined due to the lack of capital amid World
War I so studios began to exclusively distribute American feature films. Without substantive international competition, early Hollywood studios controlled international distribution networks and offered large portfolios of content at competitive prices. Also, the formation of the “film hub” at southern California lowered production costs even more since creative workers didn’t need to travel as much and could congregate trade knowledge more easily. All these forces created a robust landscape for early studios to grow in size and scale, further raising the barrier to entry in an increasingly capital-heavy business.
The studio system (1920s – 1948)
By the late 1920s, Hollywood became dominated by just five fully integrated, diversified, global studios known as the Big Five: 20th Century Fox, Warner Bros., Metro-Goldwyn-Mayer
(MGM), RKO Pictures, and Paramount Pictures.7 These studios controlled 77% of first-run exhibitions and 50% of the production and distribution of feature films in the U.S.8 The Little
Three, Universal, Columbia, and United Artists, were slightly smaller yet still influential studios.
Together these eight majors controlled 95% of exhibited films in the U.S by 1939.9
4 Id. 5 Silver, Jonathan. Hollywood Dominance of the Movie Industry. Queensland University of Technology, Nov. 2007, https://core.ac.uk/download/pdf/10885386.pdf 7 Kunz, William. Culture Conglomerates: Consolidation in the Motion Picture and Television Industries. Rowan and Littlefield, 2004, p.24. 8 Id. 9 Finler, Joel. The Hollywood Story. Wallflower Press, 2003, p.40. Liu 8
At this time, the motion picture industry became a mature oligopoly and assumed the features of a true American industry. Its streamlined processes of development, production, distribution, and exhibition laid the foundational structures for this industry for at least the next two decades (Figure 1).10
In the development phase of the factory system, studios would hire contract writers to supply source materials to potential film ideas. Then, studio executives would greenlight a few of these scripts and send the film into the production phase where actors and directors actually shoot the movie. Afterward, the studios distribute the finished product to either its own or other theaters. Lastly, movie exhibitors not owned by the distributors would collect ticket revenue and send a percentage back to the studio. An essential force behind this structure is the simple aim to achieve economies of scale. By providing an expansive network of global distribution and domestic theater chains, these studios magnified the value of a single film.
Development Production Distribution Exhibition
Figure 1. Value chain of a film
Consequently, the increase in profit and control attracted financial investors, accelerating the motion picture industry’s transformation into a mature capitalist vehicle for the American economy.11 Financial institutions provided funds for the studios’ film projects as well as their expansion activities.12 In exchange, the ownership of major studios gradually shifted from private
10 Id. 11 Id. 12 Cohen, Jessica. “Inside Film Financing.” Merril Lynch Research, 13 Sept. 2006. http://www.outofobscurity.com/downloads/Merril_Lynch_Report-Sept06.pdf Liu 9 founders to public shareholders and financial institutions.13 For example, William Fox, founder of Fox Film Corporation, borrowed substantial short-term notes in an attempt to merge with
Loew’s Inc. When the stock market crashed in 1929 and Fox Film went into receivership,14
Chase National Bank sold Loew’s stocks to the public and merged Fox with 20th Century.
Another feature that the filmed entertainment industry assumed was its ability to institutionalize and regulate creative labor. Because there were only a few players, movie studios used their bargaining power to “systemize and standardize the works of writers, actors, and cinematographers.”15 These creative talents worked under long-term contracts and had little say in a top-down culture; studios especially pushed attractive young actors to fake memorable personas for years to generate film publicity.16 In addition, most major studios like the Warner controlled their own production sets and editing equipment that were often too expensive for independent filmmakers to replicate.
Fall of the studio system (1948 – 1960s)
In July 1938, the federal government charged the Big Five and the Little Three studios with “combining and conspiring to restrain trade unreasonably and to monopolize the production, distribution, and exhibition of motion pictures,”17 effectively violating the Sherman
Antitrust Act of 1890. According to the prosecution, the studios fixed admission prices and license terms, engaged in block booking and blind bidding—all of which excluded independent
13 Bordwell, David. The Classical Hollywood Cinema: Film Style and Mode of Production to 1960. Columbia University Press, 1985, p.642. 14 Receivership is the term used when the creditor assumes control of the company in debt and liquidates its assets in order to get its money back 15 Regev, Ronny. Working in Hollywood: How the Studio System Turned Creativity Into Labor. The University of North Carolina Press, 2018, p.3 16 Schatz, Thomas. “Seismic Shifts in the American Film Industry.” History of American Film, Roy Grundmann et al., eds; Chapter One in Volume IV. Wiley-Blackwell, 2011. 17 Conant, Michael. Antitrust in the Motion Picture Industry. Arno Press, 1978, p.94. Liu 10 producers and theaters from fair trade.18 In 1948, the Supreme Court finally ordered the studios to divest their exhibitions, causing studios to solely focus on production and distribution. In addition, independent film producers became more competitive without the majors’ monopolistic grip on first-run theaters. The studios also lost bargaining power over the creative talent and were subjected to more demands from leading talent agencies such as William Morris and MCA.19
As the studio system’s market power dwindled, so did the profits of the motion picture industry in the post-war years. The emergence of television and other discretionary goods like appliances and automobiles took away consumer spending on films. From 1946 to 1956, annual box office earnings fell by 23% and the combined revenue of the ten largest studios fell by
74%.20 Financial capital became harder to secure and banks were often reluctant to fund film productions without a distribution agreement in place. As a result, independent film producers relied on the majors to provide distribution, financing, and studio space, essentially assimilating themselves into producers of alternative materials for the studio system. 21
Deregulation within markets (1960s – 1980s)
As revenue from motion pictures continued to decline, the ownership of major film companies transferred to large, diverse conglomerates who didn’t specialize in media, as shown in Figure 2 on the next page. The studios were often not acquired for the films that they were making, rather, conglomerates targeted their content libraries as a gateway into the media industry.22 For example, Kinney National Services’ acquisition of Warner Bros. in 1969 was
18 Id. 19 Bordwell. The Classical Hollywood Cinema. p.68. 20 Kunz. Culture Conglomerates. p.25. 21 Balio, Tino. The American Film Industry. University of Wisconsin Press, 1985, p.419. 22 Kunz. Culture Conglomerates. p.28. Liu 11 quickly followed by its acquisitions of other media companies who were restructured into
Warner Books, Warner Music Group, Warner Cable, etc.23
At the same time, broadcast television emerged as a separate industry with the post-war suburban migration creating a huge demand for at-home entertainment. Unlike film, television is a widely accessible medium; some even believed the industry ought to advance the public interest rather than private profits. Though television remained privately owned, a wave of federal regulations prevented the mass concentration of ownership in the industry until the mid-
1980s. In 1941, the Federal Communications Commission capped the number of broadcast stations each company could own at three, later raising it to five in 1944, seven in 1954, and finally twelve in 1984.24 The gradual relaxations of ownership caps adjusted for the “explosive growth” in media markets and reflected an increasingly laissez-faire attitude over time, spurring a wave of mergers to further the integration and diversification efforts of conglomerates in the mid-1980s.
After enjoying structural independence for over three decades, ABC, NBC, and CBS— the three largest networks in the U.S.—merged with conglomerate parents during 1984-1985.
Out of the three deals, only ABC’s buyer, Capital Cities, had already owned significant media assets; the other two acquisitions were mainly viewed as diversification efforts.25 The transfer in ownership from private stakeholders to public conglomerates further erased the idea that networks are a “public trust.” General Electric’s chairman Jack Welch even stated that NBC’s obligation did not belong to the public who owned the airwaves, but to the GE shareholder.
23 Id. 24 Bordwell. The Classical Hollywood Cinema. p.47-64. 25 Id. Liu 12
The deregulations in the 1980s proved to be a turning point for the television industry as well as the motion picture industry. Under the Reagan administration, the Antitrust Division workforce was cut by 50% and the assistant attorney general William Baxter described the
Paramount decrees of 1948 as no longer necessary, practically permitting producer-distributors to reenter the exhibition space.26 By 1986, major studios like Columbia, Tri-Star, Paramount, and
Warner Bros. acquired 20% of domestic theaters, over half of which earned above-average box office revenues.27 As the industry vertically integrated for the second time, the ownership of exhibition went back into the hands of the major studios, effectively outcompeting and bankrupting a number of independent producers and theaters.
Furthermore, the integration of the motion picture industry and the television industry saw its roots in the mid-1980s as the power of Financing and Syndication (“Fin-Syn”) rules waned. 28 The FCC first passed these rules in 1970 to prevent broadcast networks from owning or participating in the syndication revenues of their own programming, essentially separating production from distribution and exhibition. 29 The rules were extremely beneficial to film studios, as they accounted for 70% of prime-time television programming in 1980.30 Ironically, the FCC’s original intent was to use the Fin-Syn rules to protect independent producers but their market share has actually decreased from 55% to 26% since then.31
In addition to delaying the monopolization of the three major networks, the Fin-Syn rules also kept the markets and traditional structures separate between the film and television
26 Holt, Jennifer. Empires of Entertainment. Rutgers University Press, 2011, p.98. 27 Id. at p.102. 28 Christian Science Monitor. “The ‘Fin-Syn’ Chronology: A Brief History of the Financial and Syndication Rules.” 4 Apr. 1991, https://www.csmonitor.com/1991/0404/finsyn.html 29 Kunz. Culture Conglomerates. p.53. 30 Id. at p.60. 31 Id at p.148. Liu 13 industries. In the early 1980s, however, markets boundaries began to dissipate. Both film studios and broadcast networks had found their way into cable, a physically transmitted service that allowed for an unprecedented number of channels and programming. Given its potential to fuel diversity and competition, cable gave the FCC a rationale for relaxing its regulations on ownership concentration. By 1984, the big three broadcast networks and most of the major film studios had acquired major ownership interests in cable channels.32
Integration of markets (1990s – 2010s)
In the early 1990s, the filmed entertainment industry saw a massive jump in global demand coupled with increasing foreign direct investments and export efforts. According to a
Department of Commerce report in 1993, cross-ownership across industries could increase efficiency and competitiveness in a rapidly expanding international market, a field in which “the
U.S. cannot afford to be complacent in.”33 As a result, the government’s tolerance for vertical and horizontal integration grew stronger than ever.
Despite lobbying efforts from pro-Fin-Syn film studios, the FCC allowed the three major broadcast networks to produce up to 40% of their own programming while retaining syndication revenues.34 When the FCC finally repealed the Fin-Syn rules in 1995, the broadcast networks quickly moved into producing the majority if not all of their programming. More importantly, the repeal meant film studios and broadcast networks could now have common ownership, leading to another wave of mergers that would continue to define the media landscape until this day.
32 Id. at p.67. 33 National Telecommunications and Information Administration. Globalization of Mass Media, U.S. Department of Commerce, 2013. https://ntrl.ntis.gov/NTRL/dashboard/searchResults/titleDetail/PB93203669.xhtml 34 Kunz. Culture Conglomerates. p.150. Liu 14
Figure 2. Major media merger and acquisition deals, 1989 – 200535
One of the first major integrations of film and broadcast television was Viacom’s acquisition of Paramount Communications for $7.6 billion in 1994, making it the second largest media conglomerate at the time.36 The deal combined Viacom’s cable production, television library, and film theaters with Paramount’s film production and distribution. A few years later,
Viacom acquired CBS, completing its presence on all stages of film, broadcast television, and cable.37 Similar integrations occurred between Disney and ABC in 1995 and Time Warner and
Turner Broadcasting System in 1996.
As ownership continued to converge, the filmed entertainment industry saw another entrant—telecommunication companies known as the “Baby Bells.” 38 Due to their monopolistic
35 Schatz, Thomas. “Seismic Shifts in the American Film Industry.” 36 Holt. Empires of Entertainment. p.98. 37 Viacom and its parent National Amusement own other media-related businesses including radio, publication, video stores, and theme parks. 38 The “Baby Bells” are seven independent, local companies that emerged from AT&T’s forced dissolvement from the loss of its antitrust case in 1982 Liu 15 ability to carry services on pre-existing infrastructures, telecommunications companies had previously been banned from cable ownership. However, the cable industry matured with its own conglomerates and the government no longer felt the need to protect it. In 1996, President
Clinton signed the Telecommunications Act, which has been described as the “last piece of legislation to solidify the blueprint for new millennium entertainment empires.”39 Specifically, the Act removed cross-ownership bans (broadcast network-cable and telecom-cable), directly leading to some of the largest mergers of the century: Viacom-CBS and AOL-Time Warner. 40
As media ownership converged even more, conglomerates captured synergies from cross- promotion and cross-selling strategies between their integrated platforms. In addition, constant innovations in technology created new “pipelines” through which the companies could distribute filmed productions. The markets of film, broadcast television, cable, and telecommunication interacted so much that their boundaries grew no longer distinct enough for the government to effectively regulate.41 Since then, the term “filmed entertainment” has been one of the phrases adopted to encompass traditional film, television production, home video, electronic delivery, television licensing, and all other related to consumer products. 42
By the 2010s, around 90% of filmed entertainment’s domestic revenue came from five media conglomerates: NBCUniversal (Comcast), ViacomCBS (National Amusement), Warner
Media (AT&T), Walt Disney Studios (The Walt Disney Company), and Sony Pictures (Sony).43
It is important to note these companies are not structurally independent; their ownership belongs to even more diversified conglomerate parents as listed in the parentheses. Comcast mostly
39 Holt. Empires of Entertainment. p.165. 40 Id. at p.166. 41 Id. at p.176. 42 Id. at p.172. 43 Lutz, Ashley. “These 6 Corporations Control 90% of the Media in America,” Business Insider, 14 Jun. 2012. https://www.businessinsider.com/these-6-corporations-control-90-of-the-media-in-america-2012-6 Liu 16 provides wireless services and equipment, with only 21% of its annual revenue coming from
NBCUniversal.44 Similarly, AT&T focuses on wireless services and infrastructure, with 24% of its annual revenue coming from Warner Media.45 The Walt Disney Company is largely a pure- play content company with the majority of its annual revenue coming from its theme parks.46
Sony mostly produces hardware for electronics and gaming; its media content division Sony
Pictures only made up less than 10% of its annual revenue.47
By the end of this era, some of the largest companies in the world owned the most influential film studios, broadcast networks, and cable channels. Every major stakeholder in the filmed entertainment business has achieved almost complete vertical and horizontal integration through “the acquisition or the creation of business units,” allowing the production and distribution of visual content to capture higher efficiencies and synergies.48 However, as traditional market boundaries merge, the filmed entertainment industry itself has evolved into a smaller puzzle piece within the broader media, telecommunications, and technology sectors.
While the remainder of this paper will focus on the filmed entertainment industry, it is important to understand that the ownership of these filmed entertainment companies extends to much more diversified and structurally unique conglomerates.
The modern landscape of filmed entertainment
More recently, the traditional media conglomerates mentioned above have been facing significant competition from the technology sector. Big Tech companies like Google, Amazon,
Apple, Facebook, and Netflix are entering and fundamentally disrupting the content production
44 Comcast. Form 10-K. 2018. https://www.bamsec.com/filing/116669120000008?cik=1166691 45 AT&T Inc. Form 10-K. 2018. https://www.bamsec.com/filing/156276220000064?cik=732717 46 The Walt Disney Co. Form 10-K. 2018. https://www.bamsec.com/filing/174448919000225?cik=1744489 47 Statista. “Sony’s Revenue Worldwide by Segment Fiscal Years 2012 to 2018,” 2020. https://www.statista.com/statistics/297533/sony-sales-worldwide-by-business-segment/ 48 Kunz. Culture Conglomerates. p.50. Liu 17 and distribution space.49 According to PwC’s TWT Deals Insights, the number of media deals made by technology firms rose by 29% in 2017.50 The ownership of filmed entertainment is once again joined by a bigger, neighboring sector.
Within the past two decades, technological innovations enabled consumers to receive cheaper and more personalized content through the open Internet rather than an “over-the-air” or wired signal. This emergence of online video distribution has already disrupted and altered the traditional business models of filmed entertainment.51 First, online video distribution quickly eliminated the mass market for physical home videos like DVD and Blu-ray. Second, television programming and movies now have a new platform (perhaps the most valuable one) for downstream distribution. Lastly, the new market in online video distribution has attracted Big
Tech companies to heavily invest in developing direct-to-consumer platforms and original content production. More detailed implications regarding streaming will be discussed in the third section of this paper.
49 Hesmondhalgh, David. “Why It Matters When Big Tech Firms Extend Their Power Into Media Content.” The Conversation, 15 Nov. 2017. https://theconversation.com/why-it-matters-when-big-tech-firms-extend-their-power- into-media-content-86876 50 PwC. Perspectives from the Global Entertainment & Media Outlook, 2018-2022. p.8. 51 Basin, Ken. The Business of Television. Taylor and Francis, Inc., 2018, p.24. Liu 18
Figure 3. Media landscape of content production, distribution, and streaming, 201952
At the present, digital content companies backed by Big Tech are beginning to occupy not just one, but essentially all positions on the value chains of filmed entertainment.53 Ranked as the world’s biggest companies in terms of market capitalization, firms like Google and Apple are often able to rapidly expand into new territories with cash-heavy balance sheets, making it difficult for traditional media companies to compete. In fact, Disney, the largest of the Big Five
52 Molla, Rani. “Here’s Who Owns Everything in Big Media Today,” Vox, 5 Dec. 2019. https://www.vox.com/2018/1/23/16905844/media-landscape-verizon-amazon-comcast-disney-fox-relationships- chart 53 Id. at p.29. Liu 19 media companies, is only worth $267 billion in market capitalization—less than half of
Facebook and less than one-fifth of Google and Apple.54
The aggressive expansion by Big Tech has caused the ownership of film and television to grow more complex than ever, making cross-sectional and time-series analyses of filmed entertainment almost impossible on a single industry basis. In Figure 3 above, one can see that the modern film and television landscape involves radically diverse owners across traditional media, telecommunications, and now technology. Yet today, each player is “simultaneously acting as the producer, distributor and retailer” of television and film, “uniting content, commerce, communications, and deep financial roots under a single corporate roof.”55 From here on, this paper will explore the contemporary implications of this concentrated yet incredibly intricate ownership in the filmed entertainment industry, specifically zeroing in on the transformations of talent agencies into media conglomerates in their own right along with the ongoing arms race between technology, telecommunications, and legacy media companies to build streaming platforms.
54 Figure 3 55 PwC. Perspectives from the Global Entertainment & Media Outlook, 2018-2022. p.9. Liu 20
Implication One: Conflict of Interest Between the WGA and Agencies
Because filmed entertainment has been dominated by media, telecom, and tech monoliths, smaller players need scale to a level that both ensures their independent survival in the industry and capitalizes on rising market demand for visual content. In other words, “the rise of the supercompetitors has created a deep-pocketed class of market participants that can buy content, invest in startups and serve as buyers for maturing businesses.”56 According to a PwC report, this huge influx of capital brought in by industry giants will eventually find its way to
“production companies, studios, agencies and content creators of all sizes.”57
One prime example of smaller players scaling up is the expansion of the Hollywood talent agencies. Aided by the injection of capital from private equity buyers, these talent agencies have crossed traditional industry boundaries and extended their role to employer-agents through packaging fees and affiliate studios. This following section examines the conflicts of interests implied by the talent agencies’ expansion, specifically dissecting the emerging tensions between labor, managers, and owners.
Private equity in Hollywood
Driven by the industry’s consistent growth in revenue and projected market demand, private equity has been aggressively investing in the filmed entertainment space for the past decade.58 It is important to note that private equity buyouts are fundamentally different from the acquisitions mentioned above due to its distinct nature as a financial buyer. A financial buyer can be a PE fund, hedge fund, venture capital, or even high net worth individual; it usually realizes
56 PwC. Perspectives from the Global Entertainment & Media Outlook, 2018-2022. 57 Id. 58 deWaard, Andrew. “Financialized Hollywood: Institutional Investment, Venture Capital, and Private Equity in the Film and Television Industry.” JCMS: Journal of Cinema and Media Studies. Forthcoming. Liu 21 short-term returns through an exit strategy. In comparison, most strategic buyers are companies from the same or at least neighboring industries; these deals are made to realize long-term shareholder value through synergies and integration. For example, Viacom’s acquisition of
Paramount back in 1994 and AT&T’s acquisition of Time Warner in 2018 are both considered strategic acquisitions. In fact, before the 2000s, the largest mergers and acquisitions in the filmed entertainment industry were mostly strategic in nature.
Compared to strategic buyers, financial buyers like private equities usually leave a different set of implications for the target. Specifically, private equity realizes profit through an exit strategy such as resale or IPO in three to five years.59 Most of these acquisitions are structured as leveraged buyouts where the majority of the purchase is financed by debt and the target firm’s assets become the collateral60. Essentially, private equities try to add value by financial engineering,61 increasing operational efficiency (often through mass layoffs or divestments), or simply identifying undervalued targets and then upselling them. For the targets, this means they now face higher pressures to realize short-term growth in cash flows, often achieved by changes in traditional practices and sudden expansion efforts.62
Because private equities operate in private market and are not obligated to disclose their financial statements, there is little public access to the exact number of deal flows in the filmed entertainment industry.63 However, there are some statistics on the broader group of internet and digital media; this data might be able to provide an idea of how PE acquirors compare to their
59 Cohn, Jonathan. “Academic Research on Private Equity Buyouts.” Financial Analyst Program, McCombs School of Business, University of Texas at Austin, Sept. 2019. 60 Barber, Felix. “The Strategic Secret of Private equity.” Harvard Business Review, Sept. 2007. 61 Financial engineering here refers to the common practice of replacing the target’s equity with cheap debt and capturing tax shields benefits. 62 deWaard.“Financialized Hollywood: Institutional Investment, Venture Capital, and Private Equity in the Film and Television Industry.” 63 Id. Liu 22 strategic counterparts. From 2015 to 2019, the three most active financial buyers of internet and digital media firms were Providence Equity Partners, Kohlberg, Kravis Roberts (KKR), and
Vista Equity Partners.64 Judging from volume, these players were only on average five deals behind the top three strategic buyers, Accenture, Microsoft, and Alphabet.
Figure 4. Private equity buyouts in Hollywood, 2004 – 201565
In the past two decades, private equity has been quite active in the filmed entertainment business, as can be seen in Figure 4. Each acquisition has often brought changes in management as well as business objectives. For instance, a group of private equity funds acquired MGM, one
64 Deloitte Corporate Finance. “Technology, Media, and Telecommunications (TMT) Quarterly Update.” Deloitte Investment Banking, Q1 2019. https://www2.deloitte.com/content/dam/Deloitte/xa/Documents/corporate-finance/us- dcf-tmt-update-q2-2019.pdf 65 deWaard. “Financialized Hollywood: Institutional Investment, Venture Capital, and Private Equity in the Film and Television Industry.” Liu 23 of the oldest film studios in Hollywood, for $4.85 billion in 2004.66 As a result, the distribution and marketing segments were cut along with more than 50 jobs. Similarly, a consortium of private equity firms purchased the media conglomerate VNU for $9.7 billion in 2006.67
Afterwards, David Calhoun replaced Robert van den Bergh as the CEO, sold off the firm’s media publications like The Hollywood Reporter and Billboard, and rebranded VNU as a data research center called Nielsen Holdings. The private equity owners successfully exited their investment through an IPO at an unprecedented 10% return in 2011.68
As evidenced above, financial buyers can alter the structure and monetary well-being of media companies just as much as strategic buyers. In fact, acquisitions backed by private capital can produce even more dramatic effects due to a shorter investment horizon and increased pressure to raise cash flow. In the following case, the entrance of private equity owners arguably accelerated the talent agencies’ interests in maximizing short-term cash flows and provided the necessary funding for their expansions. As a result, the talent agencies now have the capacity to become “conglomerates” themselves. However, as agencies expand beyond traditionally separate industries, conflicts of interests arise and trigger protests. A prominent example of such protests comes from the Writers Guild of America.
Private equity buyouts of talent agencies
The talent agency sector today is an oligopoly dominated by four players: Creative
Artists Agency (CAA), William Morris Endeavor (WME), United Talent Agency (UTA), and
66 Dave McNary. “MGM Slashes Staff Ahead of Bankruptcy Exit.” Variety, 17 Dec. 2010. https://variety.com/2010/film/news/mgm-slashes-staff-ahead-of-bankruptcy-exit-1118029254/ 67 Pfannerand, Eric. “Buyout Bid for Parent of Nielsen.” The New York Times, 17 Jan. 2006. https://www.nytimes.com/2006/01/17/business/buyout-bid-for-parent-of-nielsen.html; “VNU Group Brings in a New Chief to Lead a Revival Attempt.” The New York Times, 23 Aug. 2006. https://www.nytimes.com/2006/08/23/business/worldbusiness/23iht-vnu.2571115.html 68 Tech Crunch. “Nielsen Prices IPO at $23 Per Share to Raise $1.8 Billion.” Tech Crunch, 24 Jan. 2011. https://techcrunch.com/2011/01/26/nielsen-prices-ipo-to-raise-1-8-billion/ Liu 24
International Creative Management Partners (ICM). Together they represent over 18,000 clients such as A-list actors, directors, writers, models, etc.69 Over the past decade, the business’ unique access to talent and lucrative earnings have attracted major investment interests. Today, three of the four major agencies (CAA, WME, and UTA) now belong to private equities.70
Starting in 2010, TPG Capital—a diversified private equity firm—invested $165 million into CAA for a 35% minority shareholder stake; TPG later added an additional $225 million to acquire a 53% majority shareholder stake in 2014.71 In 2017, around $100 million more minority stake was purchased by a consortium of foreign investment funds such as China Media Capital and Fubon Financial Holding Co.72
Likewise, private equity firm Silver Lake Partners acquired a 31% shareholder stake in
WME for $200 million and later increased the stake to 51% for $500 million in 2014.73 A minority stake of $1.8 billion was also sold to a group of institutional investors including GIC
Private Limited, Canada Pension Plan Investment Board, SoftBank Group, Fidelity Management and Research Company, etc. 74
In 2018, UTA sold 40% of its minority stake to private equity firms PSP Investments and
Investcorp for $200 million.75 As of December 2019, ICM Partners initiated talks with private equity firm Crestview Partners to sell a third of its ownership for $150 million. Interestingly, this
69 Sun, Rebecca. “The THR Guide to The 7 Major Hollywood Agencies.” The Hollywood Reporter, 4 Jun. 2015. https://www.hollywoodreporter.com/news/thr-guide-7-major-hollywood-799743 70 Writers Guild of America West. No Conflict, No Interest. Writers Guild of America, 2019. 71 deWaard. “Financialized Hollywood: Institutional Investment, Venture Capital, and Private Equity in the Film and Television Industry.” 72 Writers Guild of America. Agencies For Sale. Writers Guild of America. 18 Mar. 2019. 73 Matthew Garrahan, “Silver Lake Looks to Turn WME into Gold,” Financial Times, 21 Nov. 2014. https://www.silverlake.com/Images/Uploads/docs/Silverlake20111709432928705.pdf. 74 Id. 75 Fleming, Mike Jr. “United Talent Agency Sells Minority Stake to Investcorp & Public Sector Pension Investment Board.” Deadline, 7 Aug. 2018. https://deadline.com/2018/08/united-talent-agency-equitystake-sale-jeremy- zimmer-1202441680/. Liu 25 deal comes seven years after ICM Partners bought back 80% of its ownership from another private equity firm, Rizvi Traverse Management.76
Given that private equity funds historically outperform the S&P 500 Index by 3-4%78, talent agencies now face greater profit expectations and the pressure to expand into new ventures that directly conflicts with the interests of many of their clients. For example, the WGA, a labor union comprised of thousands of writers—75% of whom are represented by CAA, WME, UTA, and ICM—has been especially vocal in response to the agencies’ expansion into other media activities. Its 2019 protest report states, “this investment-fueled expansion is incompatible with, and threatens to overwhelm, the major agencies’ core purpose as agents—to represent their clients.”79 Specifically, WGA members cite two major conflicts of interest: expansion by the agencies into content production and their receipt of packaging fees. Both practices negatively impact the guild members’ ability to receive objective representation and optimal compensation.
The following section highlights how the financialization of the media industries accompanied by further conglomeration and consolidation has impacted workers and led to growing tensions between labor and management.
Conflicted representation: affiliate studios
According to WGA, talent agents serve a fiduciary role, which is to “represent the interests of a client with a legal and moral obligation to put the client first…[and] is expected to refrain from acting for his/her private advantage or otherwise contrast to the interests of his/her client.” While slight variations of this interpretation exist, almost every state including California
76 Id. 78 Brown, George. “Have Private Equity Returns Really Declined,” Institute of Private Capital at the University of Chicago Booth School of Business, Apr. 2019. https://www.kenaninstitute.unc.edu/wp- content/uploads/2019/05/HavePrivateEquityReturnsDeclined_05022019.pdf 79 Writers Guild of America. Agencies for Sale. Liu 26 and New York have this legal concept in place.80 Though an individual agent obviously cannot be the employer and the representative at the same time, the legal gray area appears when the agencies began to launch so-called “affiliate studios."
In recent years, the Big Four talent agencies have been aggressively expanding into content creation and ownership; this move has allowed their business model to stop being solely dependent on talent representation fees. Instead, they have moved toward generating revenue from multimedia deals worldwide. For example, CAA invested $150 million in a movie production fund with the Chinese studio Bona Film in 2017.81 Shortly after, the agency infused an undisclosed amount into another television studio Wiip, which has already booked two series for Facebook Watch and another for Apple TV. 82 TPG Capital, CAA’s majority shareholder, also holds major stakes in TV studio Platform One Media, film distributor STX Entertainment, and digital media company Vice.83
Likewise, WME edged into production by buying the sports and entertainment company
IMG for $2.2 billion in 2014.84 It later fortified the move through a series of sports and fashion- related acquisitions such as the Miss Universe Organization, eSports league, and the Ultimate
Fighting Championship.85 In 2017, WME renamed itself Endeavor and launched its own separate
80 California Civil Code §2322(c) and California Probate Code §16002 81 Faughnder, Ryan. “CAA and China’s Bona Film Group Create $150-Million Film Fund.” Los Angeles Times, 25 May 2017. https://www.latimes.com/business/hollywood/la-fi-ct-caa-bona-film-fund-20170525-story.html? 82 Otterson, Joe. “Apple Orders Emily Dickinson Series with Hailee Steinfeld Set to Star.” Variety, 30 May 2018. https://variety.com/2018/tv/news/emily-dickinson-series-apple-hailee-steinfeld-1202825290/ 83 Press Release, TPG, TPG Growth and Liberty Global Launch Independent Television Studio, Platform One Media 17 Jul. 2017. http://press.tpg.com/ phoenix.zht l?c=254315&p=irolnewsArticle& ID=2286787; Investors, STX Entertainment, https://stxentertainment.com/investors; Merced, Michael. “Vice Shows the Perils of the ‘Greater Fool’ Theory.” The New York Times, 11 Jan. 2018. https://www.nytimes.com/2018/06/11/business/dealbook/viceshowsthe-perils-of-the-greater-fool-theory.html. 84 Patten, Dominic. “Talent Agency WME Acquires IMG in Huge $2.2 Billion Deal.” Business Insider, 18 Dec. 2013. https://www.businessinsider.com/wme-acquires-img-in-huge-22-billion-deal-2013-12 85 Littleton, Cynthia. “WME/IMG Acquires Miss Universe Organization from Donald Trump.” Variety, 14 Sept. 2015. https://variety.com/2015/biz/news/donald-trump-miss-universe-wmeimg-acquisition-1201592910/; Jarvey, Natalie. “WME|IMG Team with TBS to Launch eSports League.” The Hollywood Reporter, 23 Sept. 2015. https://www.hollywoodreporter.com/news/wme-img-teams-tbs-launch-826847; Merced, Michael. “UFC Sells Itself Liu 27 production and distribution arm, Endeavor Content; the entity is expected to produce at least ten scripted television series for Amazon and Apple TV by 2020.86 During the same year, Endeavor bought a majority stake in Bloom, a film production and sales company. It also established a partnership with Chernin Entertainment, another studio that develops and finances television and digital content.87 At present, the representation segment covers less than half of Endeavor’s multimedia business.
Following the other agencies-turned-media conglomerates, UTA CEO Jeremy Zimmer said his agency will use its private investment of $200 million to expand “in content creation and distribution.”88 Shortly after, UTA launched a joint venture called Civic Center Media that finances and produces television series.89 Out of the Big Four, ICM remains the only agency with no plans to expand outside of the representation business.
As agencies become increasingly affiliated with the production side, the WGA argues that they can no longer be trusted to act in the clients’ best interest. The agency-producer now
“has the incentive to keep talent costs low in order to increase profits.”90 Furthermore, it is questionable if agencies are prioritizing their own projects for talent over outside projects, and often without the talent knowing what has been declined for them.
for $4 Billion,” New York Times, 11 Jul. 2016. https://www.nytimes.com/2016/07/11/business/dealbook/ufc-sells- itself-for-4-billion.html?_r=0 86 Fleming, Mike Jr. “Endeavor Content Bolsters TV & Film Ranks, Fully Integrates Global Sales Company Bloom; Alex Walton is EVP, Dan Guando Sr Veep.” Deadline, 10 Oct. 2019. https://deadline.com/2018/10/endeavor- content-bloom-alex-bloom-dan-guando-david-greathouse-patrick-mcdonald-lorenzode-maio-1202479929/. 87 McNary, Dave. “WME-IMG Buys Majority Stake in Film Sales-Finance Company Bloom.” Variety, 30 Aug. 2017. https://variety.com/2017/biz/news/wme-img-majority-stake-bloom-1202542878/ 88 Littleton, Cynthia. “UTA Sells Minority Stake to Investcorp and PSP Investments.” Variety, 7 Aug. 2018. https://variety.com/2018/biz/news/uta-jay-sures-david-kramer-1202896205/ 89 Hayes, David. “UTA and Valence Media’s MRC Form TV Production and Finance Venture Civic Center Media,” Deadline, 10 Oct. 2018. https://deadline. com/2018/10/uta-valence-media-media-rights-capital- tvproductionfinancing-venture-civic-center-1202480359/ 90 Writers of America West. No Conflict, No Interest. p.31. Liu 28
In addition to salary negotiations, this conflicted representation can negatively impact film and television talent in many other subtle ways. For instance, the agency-producer could entice the lead actor with generous compensation at the cost of lowering compensation for the supporting actors and crew. This directly violates the agent’s duty to fight for the best deal on the client’s behalf. Furthermore, the agency could hide or purposely downplay outside work offers from the client if it wants the client to work on an in-house production. If the clients did take an outside job, they could be directly competing with the agency-producer for funding or access. In another scenario, if the client has disputes with the agency-studio (e.g. creative differences), he or she might have no other consultant or protection. Overall, none of these problems would exist if the agency didn’t take on the producer role.
Conflicted representation: packaging fees
Due to the massive funding provided by private equity firms and their heightened focus on timely returns on investment, this surge in market power for agencies has enhanced the practice of packaging. Before the emergence of the agency-employer role, agencies largely took a ten percent commission from their client’s pay. Now, packaging allows agents to collect a percentage of the creative project’s long-term revenue instead of receiving a commission. In
2017, packaging fees took place in 90% of television series and Endeavor and CAA were responsible for 80% of those.91 While clients no longer need to pay commission, WGA notes that packaging fees are much greater; also, these fees reduce the total project budget that could have otherwise gone to the writers’ compensation.
In addition to representing talent, agencies justify these generous packaging fees by assembling just the right team of writers, actors, and intellectual property. At times, providing
91 Id. Liu 29 the property rights to a creative project can be more important than providing the actual talent.
As an unnamed senior agency executive told the Los Angeles Times, “the major agencies have invested heavily in cultivating and procuring in-demand IP for decades and our job is to set those projects up and sell them to buyers…the demand for valuable IP hasn’t changed whether we represent writers or not.”92 The insider also mentioned that most movies and TV series originate from a book, an article, a podcast, a format, or an original character rather than a screenwriter.
Packaging fees usually consist of three percent of the series license fee upfront (around
$30,0000 to $100,000 per episode for TV), three percent of license fee deferred until the show profits, and ten percent of gross profits for the show’s indefinite life.93 This is a type of profit participation agreement where the studio decreases its production risks by offering its talents
“gross” profits in the long run in exchange for smaller compensation upfront.94 Under this model, the agency’s profit is dependent on the success of the project rather than its client. In most cases, the long-term revenue of the project is usually far higher than a pre-determined commission.
ICM reportedly made $200 from the popular sitcom Friends long after the show concluded its run.95 In the film industry, agencies collect the ten percent commission in addition to a packaging fee.96 It is also worth noting the most lucrative projects tend to be in television for the agencies.
Because agents collect their packaging fees no matter how much the client makes
(sometimes even more if the show’s total costs are lower), there is no incentive to fight for
92 Lee, Wendy. “Hollywood Writers Fired Their Agents. Now Agencies Are Sidelining Writers in New Deals.” Los Angeles Times, 14 Nov. 2019. https://www.latimes.com/entertainment-arts/business/story/2019-11-14/despite-the- wgas-objections-talent-agencies-continue-to-package-tv-shows 93 Polone, Gavin. “Gavin Polone on TV’s Dirty Secret: Your Agent Gets Money for Nothing.” The Hollywood Reporter, 26 Mar. 2015. https://www.hollywoodreporter.com/news/gavin-polone-tvs-dirty-secret-783941 94 Eghbali, Doron. “What Are Gross Participation and Net Profits in Motion Pictures?” AVVO, 15 Dec. 2010. http://www.avvo.com/legal-guides/ugc/what-are-gross-participation-and-netprofits-in-motion-pictures.I 95 Gervich, Chad. How to Manage Your Agency: A Writer’s Guide to Hollywood Representation. Focal Press, 2013, p.36. 96 Id. Liu 30 higher compensation on behalf of their clients. As a result, talent maintains that they receive less fair information about their objective value as the market power is mostly in the hands of the agency-producer. Some anonymous Guild members claimed their shows were “held hostage” after turning down packages while others said their work was sold as a package without knowing.97 John Gary, Team Captain of the WGA, said even agents themselves want to help clients book deals without packaging but can’t because “the system doesn’t reward them.”98
Contrary to the agencies’ claims, the writers did not fare better when their talent agencies scaled up to better compete with other growing media companies. According to WGAW data, the median weekly compensation for writer-producers declined 23% between 2014 and 2016.99
Even when adjusted for inflation, the fees per-episode are barely higher than they were in the late
1990s. In contrast, CAA shareholders received $155 million in dividends in 2017 and four executives received more than $250 million combined.100 CAA’s private equity owner TPG also made a 3.3x multiple on invested capital when the median private fund return on capital was
1.59x in 2017. Likewise, Silver Lake’s investment in WME achieved an above-average multiple of 2.5x in 2017 and WME management’s equity stake rose to over $1 billion in 2016. In conclusion, the overall amount of wealth in the talent agency is disproportionately rising in comparison to their clients’ wages. Instead of raising incomes for their clients, writers maintain that agencies have boosted their own value via packaging fees and affiliate studios.
97 Writers Guild of America West. No Conflict, No Interest, p.31. 98 Crucchiola, Jordan. “The Hollywood Fight That’s Tearing Apart Writers And Agents, Explained.” Vulture, 18 Apr. 2019. https://www.vulture.com/article/wga-hollywood-agents-packaging-explained.html 99 Writers Guild of America West. No Conflict, No Interest. p.31. 100 Id. at p.33. Liu 31
Past lawsuits
While some may argue the complaints against talent agencies are fairly hypothetical, there have been numerous cases of fiduciary breaches in real life. The following cases exemplify some long-standing conflicts of interests between the writers and their agents.
CAA and Head of Class
As early as 2011, creators of the sitcom Head of Class (1986-1991, ABC) , Michael Elias and Richard Eustis, sued CAA for breach of fiduciary duty and unjust enrichment.101 CAA supposedly secured a package deal with Warner Bros. to take ten percent of the gross profit when the creators were only getting a percentage of the net profit. This means CAA was directly taking income away from its own clients since the packaging fees reduce the net profit. Over five years of the show’s lifespan, CAA received $8.8 million in profit participation while Elias and
Eustis received none. The duo also accused CAA of intentionally hiding its lucrative deal with
Warner Bros. and claimed they had only heard about it after CAA accidentally emailed out its own earning statements. CAA denied the allegations in response and there has not been a public report of the case since.
CAA and The Walking Dead
In a more recent well-known case, former The Walking Dead (2010-2020, AMC) showrunner Frank Darabont sued the AMC Network for $280 million in unpaid profits.102 The case was originally about AMC using affiliate distributors to purposely reduce the “pool of funds for the show’s profit participants.” In response to the lawsuit, AMC’s attorney Orin Synder wrote
101 Belloni, Matthew. “Lawsuit CAA Cheated TV Creators Out of Millions in Profits.” The Hollywood Reporter, 11 Jul. 2011. https://www.hollywoodreporter.com/thr-esq/lawsuit-claims-caa-cheated-tv-209735 102 Patten, Dominic. “Walking Dead Lawsuit: AMC Accuses CAA of Ripping Off Frank Darabont in Hefty Packaging Deal.” Deadline, 20 May 2019. https://deadline.com/2019/05/walking-dead-lawsuit-amc-caa-wga-ata- packaging-dispute-frank-darabont-1202618820/ Liu 32 that Darabont’s claims might have been caused by “a misunderstanding created and/or by advanced by CAA to hide their conflict of interest.” The litigation produced emails that revealed
CAA arguing for packaging fees on all seasons of The Walking Dead and its spinoffs, which completely failed to benefit Darabont since he left before season two.103 More importantly,
CAA’s profit is an “off-the-top deduction” from the show’s modified adjusted gross receipts
(MAGR),104 which means there is now a smaller pool for Darabont to take his percentage from.
The lawsuit is set to go to trial in May 2020.
WME and Who Wants to be a Millionaire
In 2010, a British production company, Celador, sued Disney for unpaid profits on its successful game show, Who Wants to be a Millionaire (1999-present, ABC).105 According to the plaintiff, Disney’s subsidiaries bought the show’s copyrights but used affiliated distributors to keep long-term profits away from Celador. In response to the lawsuit, Disney stated Celador’s agency, WME, never offered to renegotiate its client’s deal after the show became a hit and instead increased its own packaging fee without disclosure. In fact, Celador made $21 million as the creator whereas WME made $16 million as a mere representative. Eventually, Disney was ordered to pay Celador $269 million in damages and Celador never filed charges against WME.
ATA’s response to complaints about affiliate studios
As the grievances from the WGA have piled up, the Alliance of Talent Associations
(ATA) responded with a written letter, “Negotiating A New Artists’ Manager Basic Agreement,”
103 Exhibit AAA to the Affidavit of Aileen Candace Frazier In Support of Defendants’ Motion for Summary Judgment (July 12, 2017) in Darabont v. AMC Network Entertainment LLC, 128 A.D.3d 472 (N.Y. 1st Dep’t 2015). 104 Strum, Eric. “Hollywood Accounting: Profit Participation and the Use of Mediation as A Mode of Resolving These Disputes.” Cardozo Journal of Conflict Resolution, 2016. https://cardozojcr.com/wp- content/uploads/2017/01/CAC207_crop.pdf 105 Belloni, Matthew. “Disney Loses Appeal of Massive $319 Million ‘Millionaire’ Verdict.” The Hollywood Reporter, 3 Dec. 2012. https://www.hollywoodreporter.com/thr-esq/disney-loses-appeal-massive-319-397394 Liu 33 in February 2019.106 The ATA consists of the Big Four agencies as well as over a hundred other smaller talent agencies. In response to its expansion into content production, ATA said “no agency member employs writers” and called its affiliate studios “investments [that] will serve artists’ interests as more buyers will equate to more opportunities for artists and a more vibrant workplace.”107 In addition, ATA claims that content producers that stem from talent agencies tend to be more “talent friendly and creator-driven,” providing their clients with more “creative control and better financial terms.” In other words, content production headed by agencies is held to be ultimately good news for clients since it creates a more robust, talent-driven marketplace.
Moreover, ATA’s letter stated that any agency with affiliate studios has “submission processes that require projects to be shopped to multiple buyers.” In the end, they maintain that the talent will see every offer on the table and make his or her own decision despite the WGA’s complaints about the biased information and lack of transparency given to clients.
Lastly, ATA said its affiliate studios are “legally separate businesses with separate management and separate operations, housed in separate offices and with separate employees.”
Agencies also disclose their relationships to clients and work closely with affiliate studios to make sure that the deals are just as good as the others in the market. Although the ATA admits that there is a need to “formalize rules of the road” and increase transparency, the letter firmly states “agents always put artists first.” Interestingly, both WGA and ATA have been and remain unwavering about their completely opposite viewpoints on the conflict of interest regarding affiliate studios.
106 ATA. Negotiating A New Artists’ Manager Basic Agreement. Feb. 2019 107 Id. at p.5. Liu 34
ATA’s response to complaints about packaging fees
When accused of losing the incentive to fight for the talent’s wages, ATA argued that its packaging fees actually align the interests of clients and agencies. They claim that a canceled show means less money for both parties. Without packaging fees, studios would retain the money that would otherwise go to agencies and worse, studios would have to pay writers less to assemble the team of talents and intellectual property rights that a package agent normally brings. Because studios are responsible for packaging fees, members of the WGA would also be free from paying the usual ten percent commission.
Furthermore, ATA argues that its hefty packaging fees are well-deserved. Throughout the show’s entire lifecycle, agencies seek out new talent, assist with ongoing network negotiations, find new hosts for cancelled shows, and regularly negotiate new and better compensation for clients. Simply put, agencies hold that they are ultimately benefitting their clients by lengthening the lifetime and profitability of their projects. Although the agencies’ packaging fees remain constant, the work they put into their clients’ shows are ever-increasing.
According to the ATA, the “3-3-10” structure often exaggerates the agencies’ income because the ten percent payout is rarely realized in full. In reality, most packaging fees are divided among multiple agencies and each one only scores 7.5% or 5% of MAGR based on their client’s profit definition. This means agencies can only take a percentage out of the gross profit if their clients’ pay is also based on gross profit. It is important to note that at present, neither the
WGA nor ATA has disclosed how frequently the agency and its client are paid by different profit definitions (e.g. the client gets a percentage of net profit while the agency gets a percentage of gross profit). Liu 35
Lastly, the ATA pointed out that the number of employed writers and their collective earnings have consistently increased since 2014, as shown below by WGA’s own 2018 financial report. However, the rate of growth in employment and earnings have drastically decreased over the past few years despite the recent proliferation of television. Between 2014 to 2017, film writers’ earnings increments rose from 2.1% to 6.1% but television writers’ earnings increments dropped from 14% to 1.4%. Based on these statistics, ATA argued the slowing of writers’ wage growth can only be attributed to changes in the television industry: shorter seasons and longer waits between projects. These are “issues that the agencies and the WGA should be working together to address—not any actions by the agencies.”108
Figure 5a. WGAW employment and earnings109
Figure 5b. WGAW television and digital platforms employment and earnings110
108 Id. at p.2. 109 Writers Guild of America West. Annual Financial Report. 29 Jun. 2018. https://www.wga.org/uploadedfiles/the- guild/annual-report/annualreport18.pdf 110 Id. Liu 36
Figure 5c. WGAW theatrical employment and earnings111
The ongoing legal battle between WGA and ATA
After years of seeing stagnant wages despite a general production boom in the filmed entertainment business, the WGA officially asked the ATA to renegotiate the Artists’ Manager
Basic Agreement (AMBA) in April 2018. The AMBA is a contract that every talent agent must sign in order to represent a WGA member; its provisions regulate how agencies can represent writers in wage negotiation, career development, etc. This contract had not been modified since
1976 and the WGA would consider it nullified if the ATA cannot renegotiate new terms before
April 6, 2019.112
According to the ATA, the WGA refused to meet with the agencies for seven months and flat out rejected 27 of the ATA’s proposals when they finally met in February 2019.113 Both sides accused each other of acting too late and in bad faith; hours before the AMBA’s expiration, the
WGA agreed to extend the deadline by a week.
On April 12, the ATA finally offered to share 80% of “a percentage” of the agency’s profit with writers who do not have back-end deals and to spend the other 20% on the “inclusion
111 Id. 112 Crucchiola, Jordan. “The Hollywood Fight That’s Tearing Apart Writers and Agents, Explained.” 113 Andreeva, Nellie. “ATA’s New Proposals Has Gotten No Response from the WGA as Hopes for Quick Return to Bargaining Fizzle.” Deadline,14 Jun. 2019. https://deadline.com/2019/06/ata-new-proposals-no-response-the-wga- hopes-quick-return-bargaining-negotiation-fizzle-1202632933/ Liu 37 of historically underrepresented writers.” ATA did not put a hard number on exactly how much
“a percentage” is since other Hollywood guilds such as the DGA (directors) and SAG-AFTRA
(actors) might demand the same thing. The ATA also promised more transparency regarding affiliate studios and pledged a $6 million investment on inclusion efforts.114
However, because the ATA’s proposal still includes packaging fees and major ties to affiliate studios, the WGA rejected it on the spot without a counteroffer. WGA President, David
Goodman, said “you are still receiving money from our employers for access to us. It does not change your incentives at all. It is not a serious proposal and we reject it.”115 As a result, the 43- year-old AMBA expired on April 13 and the WGA implemented its own Code of Conduct.
The Code of Conduct is a written replacement of the AMBA that requires all agencies to sell their majority stake in affiliate studios such as Wiip and Endeavor Content in addition to reverting back to the ten percent commission model.116 This new contract was supported by 95% of the 8,274 WGA members including high-profile writers such as Tina Fey and Oliver Stone.117
Since its original drafting, the Code has been modified to allow packaging until Jan. 2021 and enabled agencies to own up to 5% of affiliate studios.118 In order to represent a WGA member, the agency must sign the latest version of this contract.
114 Littleton, Cynthia. “Talent Agents Offer to Share Packaging Fee Revenue With WGA,” Variety, 11 Apr. 2019. https://variety.com/2019/film/news/wga-talent-agents-packaging-rules-1203187768/ 115 Crucchiola. “The Hollywood Fight That’s Tearing Apart Writers and Agents, Explained.” 116 Writers Guild of America East. AMBA Proposals. 6 Apr. 2018. https://www.wgaeast.org/negotiations/amba/proposals/ 117 Id. 118 Robb, David. “WGA Poised to Lose Antitrust Dismissal Move Against CAA, WME & UTA; Case on Track for Trail,” Deadline, 6 Dec. 2019. https://deadline.com/2019/12/wga-lawsuit-antitrust-hollywood-agencies-caa-wme- uta-packaging-1202801930/
Liu 38
Shortly after the Code of Conduct went into place on April 17, 2019, the WGA filed an official lawsuit against the Big Four in the Los Angeles Superior Court.119 The lawsuit claimed packaging fees are illegal due to breaching fiduciary duties and allowing illegal kickbacks from employers to employee representatives, both of which violate section 302 of the federal Labor-
Management Relations Act. The WGA is also seeking declaratory and injunctive relief as well as monetary damages for past violations.
By April 22, the ATA had released their own “Agency Standards for Client
Representation,” which is a longer version of their previous proposal promising greater transparency for all clients.120 Nevertheless, over 7,000 of the 8,800 WGA members fired their agents and replaced them with a Staffing and Development Platform. The online system relies on showrunners to directly post available jobs and set up in-person interviews. Yet, because showrunners are much more likely to hire reputable and experienced writers without an intermediary, this program was seen as potentially jeopardizing low and mid-level writers—the very same people who were squeezed out during the packaging era.
Writer Ayelet Waldman, at 54 years old, said “I don’t have three years, and that’s how long I anticipate we’ll be waiting…in three years I’ll have no career.”121 Another unnamed writer agreed that “writers don’t walk in a studio and get a green light…you need other elements attached to the project, and big agencies can do that for you.” According to Matthew Sand, creator of Deepwater Horizon, many other low-level writers have refrained from publicly criticizing the WGA’s strategies because “dissent feels like betrayal.”122
119 Littleton, Cynthia. “WGA Sues Talent Agencies In Battle Against Packaging Fees.” Variety, 17 Apr. 2019. https://variety.com/2019/biz/news/wga-sues-talent-agencies-1203191199/ 120 ATA. Agency Standards for Client Representation. 4 Apr. 2019. 121 Koblin, John. “Dissent in Ranks of Hollywood Writers Who Fired Their Agents.” The New York Times, 15 Jul. 2019. https://www.nytimes.com/2019/07/15/business/media/writers-guild-hollywood-agents.html 122 Id. Liu 39
While some newer writers definitely feel disadvantaged, there is still spectrum of difference voices and opinions on how to best resolve the problem. For writers who enjoy more seniority and status, their perspective might be overwhelmingly supportive of the WGA’s decision to boycott the agencies. As priorities vary for different groups within the guild, it is difficult to objectively find the “right” way to address labor conflicts as one entity.
Furthermore, the WGA deputized managers and attorneys to replace talent agents in representing guild members.123 Although California Talent Agencies Act (TAA) states that “no person shall engage in or carry on the occupation of a talent agency without first procuring a license from the Labor Commissioner,” the WGA argued its exclusive bargaining authority over wages, hours, and terms of employment has been vested by the National Labor Relations Act.
Ironically, the TAA was originally enacted in 1978 to protect artists from fraudulent and unqualified agents. Moreover, the WGA promised to financially and legally support managers and attorneys in the face of litigations.
Unsurprisingly, three of the Big Four (CAA, WME, UTA) filed a countersuit against the
WGA in June for abusing its union powers and violating the Sherman Antitrust Act by restraining competition through illegal boycotts.124 The agencies also claimed the guild unlawfully has pressured managers and attorneys to act as agents without licenses. The WGA filed for a motion to dismiss the lawsuit which was denied by federal judge Andre Birotte in
December. The lawsuits between WGA and ATA are scheduled to go on trial in March 2021.125
123 Robb, David. “WGA Deputizes Managers and Lawyers to ‘Fill the Gap’ If Agents Are Fired En Masse.” Deadline, 20 Mar. 2019. https://deadline.com/2019/03/wga-deputizes-managers-and-lawyers-to-fill-the-gap-if- agents-are-fired-en-masse-1202579781/ 124 Fleming, Mike Jr. “United Talent Agency Sells Minority Stake to Investcorp & Public Sector Pension Investment Board.” 125 Hipes, Patrick. “WGA and Big 3 Agencies Aiming at March 2021 Trial Start.” Deadline, 27 Dec. 2019. https://deadline.com/2019/12/wga-agencies-march-2021-trial-start-offered-1202817895/ Liu 40
Impact of the boycott on writers: increased disparity and loss of status
Thus far, more than 80 smaller agencies have consented to the WGA’s Code of Conduct, mostly because many aren’t large enough to package or own affiliate studios to begin with.126 Six mid-tier agencies127 also broke ranks with the ATA, but many managed to negotiate an extended sunset date for packaging deals (around July 2021) and an ownership percentage higher than the
5% demanded by the WGA. The Code has also been modified to allow writers to decide for themselves if they want the WGA to have access to their work contracts and invoices.
Starting in March 2020, fears around the coronavirus led to the shutdowns of thousands of Hollywood film and television productions. The fifth-largest talent agency, Paradigm, laid off more than 100 employees and sought relief by finally signing the WGA’s franchise agreement on
March 23. The agency will collect packaging fees until Dec. 31, 2021 and limit its content ownership to 10%.128
As of now, none of the Big Four have been in dialogue with the WGA even though they still constitute 70% of its members’ earnings. However, industry insiders from Variety reported that more than two dozen prominent and seasoned writers have returned to working with their former representatives at WME, CAA, UTA, and ICM.129 Although Goodman claims these rumors are spread by the ATA to undermine the writers’ solidarity, many industry executives confirmed that many agents at the Big Four have returned to work for their clients. The WGA
126 Lee, Wendy. “WGA Reaches Deal with Gersh, Gaining Momentum in Battle Against Talent Agencies.” Los Angeles Times, 17 Jan. 2020. https://www.latimes.com/entertainment-arts/business/story/2020-01-17/the-gersh- agency-signs-agreement-with-wga 127 The six ATA members to sign the Code of Conduct are Kaplan Stahler, Buchwald, Abraham Artists Agency, Rothman Brecher Ehrich Livingston Agency, Gersh, and Agency for the Performing Arts 128 Lee, Wendy. “Paradigm Becomes First Big Talent Agency to Sign with WGA. Is It A Turning Point in Labor Fight?” Los Angeles Times, 23 Mar. 2020. https://www.latimes.com/entertainment-arts/business/story/2020-03- 23/paradigm-talent-agency-signs-franchise-agreement-with-the-wga 129 Littleton, Cynthia. “Writers Stealthily Return to Big Agencies Even As Other Firms Sign WGA Code.” Variety, 12 Feb. 2020. https://variety.com/2020/biz/news/writers-agents-new-code-negotiations-1203501010/ Liu 41 actively investigates and imposes sanctions against members who don’t abide by the rules, further polarizing writers into those who struggle with short-term job prospects but fear ostracization from the rest of the guild.
This strange divide between the boutiques and major agencies has fostered a bifurcated market in which the most experienced writers are reconnected to the best resources and job postings. Meanwhile, less reputable writers lack an intermediate to help them get “discovered” and are restricted to working with smaller and less resourceful agencies. Before the WGA’s boycott, many new writers needed a powerful agency to get hired because other components of the package (actors, directs, IP rights, etc.) will help leverage their employment. Until large agencies cave into the demands of the WGA, writers will either secretly return to their former agents or become vulnerable to an “agent-free” system that favors those who already have an accomplished resume.
Right now, large agencies have little financial incentive to cave into the WGA’s demands: the value of their larger business ventures seem to outweigh the relative worth of losing writers as clients. In addition, studios are still purchasing packaged deals, with or without writers. At least two major agencies said television package sales have remained steady; one agency executive said 75% of television shows are still packaged even though two-thirds of those do not have writers.130
The trend of adapting popular books, articles, and podcasts into film and television has also made it easy for agencies to package low-risk, attractive deals to studios without original writers. For instance, UTA sold a well-known television show “Over My Dead Body: Joe
Exotic” to NBCUniversal last October; the package included “Saturday Night Live” comedian
130 Id. Liu 42
Kate McKinnon and the IP rights from the original podcast but has no writers assigned.131
Likewise, WME sold the rights to adapt the famous book “The Seven Keys” to Netflix without any writers. Hollywood attorney Elsa Ramo commented that studios are more interested in buying adapted shows because the original source already has a massive audience and a
“proven” idea inherently carries less risk. In some cases, studios might even prefer packages without writers in order to exert more creative control over the project.
When writers are excluded from the agencies’ packaged deals, they’re forced to apply through open writing assignments to provide episodic scripts rather than to execute an overall vision over the show. While some find this structure helpful in staying employed, others say this demotes the position of writers in the industry. An executive producer for National Geographic said, “that’s certainly not just a loss of power, but it’s a loss of the creative integrity that has helped TV to be one of the most creative parts of the industry.132 Ethan Drogin, producer of Suits, added “if agencies can package without us and we’re pushed to the back of the line rather than the front of the line…it would be tragic for us as storytellers because we would be executing someone else’s story rather than our own.”
Despite the WGA’s united efforts to boycott, the studios remain in a tough spot since they are also the clients of the agencies. The WGA has no longer demanded studios cut off ties with the major agencies who have not signed the franchise agreement in early March 2020.133
Most showrunners absolutely need large agencies to staff projects and some have even resisted the WGA’s request to anonymously report writers who have returned to their agencies. This
131 Id. 132 Id. 133 Lee, Wendy. “WGA Drops Demand for Studios to Only Work with Guild-Approved Agencies.” Los Angeles Times, 3 Mar. 2020. https://www.latimes.com/entertainment-arts/business/story/2020-03-03/wga-drops-demand-for- studios-to-only-work-with-wga-approved-agencies
Liu 43 modification in practices will help facilitate deals between studios and agencies. However, it further reduces the writers’ leverage.
When entities in the filmed entertainment business reach beyond traditional industry barriers, conflicts of interest will naturally arise. Due to the larger agencies’ diversification and their lack of financial dependence on writers as clients, the boycotts will likely not generate enough pressure to inspire major changes in the short-term. By attempting to end the century-old relationship between Hollywood writers and their agents, the WGA now witnesses the creation of a market which allegedly impacts the least experienced members and contributes to a general loss of status for writers—all without stopping the major agencies from practicing packaging deals and content production.
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Implication Two: Growth of DTC Services and the Race for Content
The investment of technology companies into the film and television business has created additional competition for traditional media corporations. As the market for online video distribution expands, legacy companies are increasingly launching their own direct-to-consumer channels. They are doing so in part as a means of heightening vertical integration as well as to better compete with streaming pioneers like Netflix. The issue of ownership arises again as conglomerates from different sectors compete for a limited talent pool and consumer base.
This next section will first discuss the technology sector’s competitive advantages in the streaming space: its first-comer status, proprietary algorithms, and available spending. Then, this section will examine the new mode of vertical integration that has occurred with traditional media companies and the proprietary streaming services they are launching. Lastly, this section will analyze the expansion of power in content ownership and examine how this has led to the current era of “peak TV,” a term famously coined by FX CEO John Landgraf to describe the unprecedented volume of content production.134
Competitive advantages of the tech sector
In the late 2000s, Netflix, Hulu135, and Amazon Prime Video all launched within a few years of each other. All did so even before the filmed entertainment industry even understood the full economic and cultural potential of streaming. Although these services drastically varied in terms of business models and content offerings, they all contributed to the eventual growth of
“cord-cutting.” By 2018, 60% of Americans had canceled their cable subscriptions and 29% of
134 Basin. The Business of Television. p.xxi. 135 Although Hulu was originally founded by News Corp. and NBC Universal, the majority of its controlling interest now belongs to Disney. Liu 45 those who still had cable were close to cancelling.136 As linear television grew out of fashion, streaming platforms capitalized on their “first-mover” advantage and purchased (initially) massively underpriced content rights.137 Ironically, the suppliers of these content rights were the very same media companies trying to catch up with these tech-owned streaming services today.
Early entrance is not the sole reason for the technology sector’s domination of streaming today. In Netflix’s early days as a streaming platform, industry experts argue its most
“differentiated and defensible product” was not its content offerings but its advanced use of proprietary technologies. The application uses video compression algorithms to selectively optimize image quality; for example, the clarity of a sitcom show like Friends does not need to be as high as an Avengers movie.138 Furthermore, Netflix was arguably the first streaming platform to widely adopt technologies like A/B tested cover art, personalized homepages, and other engagement functions to ensure the best user experience.
In the case of Amazon Prime Video, the streaming service was released as part of the e- commerce giant’s subscription bundle. For the 150 million Amazon Prime subscribers, the service is essentially free and creates ample opportunities for cross-promotion.139 More importantly, both Amazon and Netflix aggressively collect user data to make informed decisions on which projects to develop and which stars to hire.140 Relatively younger players like Apple
TV and YouTube TV most likely use similar methods to target potential viewers, although thus far their success has been more mixed.
136 West Monroe Partners. Cord Cutting In 2019: A State by State Look. https://www.westmonroepartners.com/Insights/Newsletters/Cord-Cutting-Statistics 137 Ball, Matthew. “Netflix Is A Product And Technology Company.” Media Original. 12 May 2018. https://redef.com/original/netflix-misunderstandings-pt-2-netflix-is-a-product-technology-company 138 Id. 139 Amazon. Form 10-K. 2018. https://www.bamsec.com/filing/101872420000004?cik=1018724 140 Basin. The Business of Television. p.25. Liu 46
Other than their head start and technological expertise, companies backed by Big Tech also tend to outcompete legacy companies in available capital. As shown in Figure 6, the balance sheets of Amazon, Google, and Apple overwhelmingly outweigh traditional media companies like Disney and Comcast. Although Netflix doesn’t have a monolithic parent, its projected spending for 2020 is $15 billion, the highest in the industry.141 Netflix CEO Reed Hastings explained that its strategy is to sustain enough content through debt to monopolize potential viewers in the market.
Figure 6. Battle of the balance sheets142
As previously mentioned in the beginning of this section, these platforms started as direct-to-consumer streaming services, but most have evolved to build their own content pipelines either in-house or through affiliate studios. As of right now, they occupy just about every position on the value chains of filmed entertainment. In addition to reinventing the market
141 Katz, Brandon. “How Much Does It Cost to Fight in the Streaming Wars.” Observer, 23 Oct. 2019. https://observer.com/2019/10/netflix-disney-apple-amazon-hbo-max-peacock-content-budgets/ 142 Littleton, Cynthia. “How Hollywood Is Racing to Catch Up with Netflix.” Variety, 21 Aug. 2018. https://variety.com/2018/digital/features/media-streaming-services-netflix-disney-comcast-att-1202910463/
Liu 47 for content consumption, these Big Tech players have also created a more efficient business model fortified by advanced technologies and generous spending budgets.
New mode of vertical integration for legacy media companies
In response to the “Netflix phenomenon,” legacy companies have been trying to catch up by adding DTC services as a part of their business operations. Technically speaking, the addition of online streaming platforms is a new form of vertical integration. Media conglomerates who already own studios and networks can now directly interact with customers through a streaming service.143 Yet, this does not mean multichannel video programming distributors (MVPDs), the traditional way of reaching consumers, have been eliminated. As shown on Figure 7 below,
MVPDs like Spectrum, DirecTV, and Comcast still exist to provide viewers with bundles of channels via a linear feed; some have even evolved to operate virtually (called vMVPDs; e.g.,
Sling TV, PlayStation Vue) to accommodate the cord cutters.
This wave of vertical integration has slightly different implications from the previous ones that took place following the Fin-Syn rules’ repeal. During the 1990s, the convergence of ownership between studios and networks was mostly motivated by aligned economic interests
(the accumulation of syndication profits).144 Networks also wanted to avoid the demand of exorbitant license fees from a non-commonly owned studio for popular shows.145 Today, legacy companies are building a new DTC business model that will inevitably eat away the licensing fees that they usually generate from third-party distributors.146 In addition, the surge in DTC
143 Basin. Business of Television. p.6. 144 Lotz, Amanda. The Television Will Be Revolutionized. NYU Press, 2007, p.100. 145 Id. 146 Littleton, Cynthia. “How Hollywood Is Racing to Catch Up with Netflix.” Liu 48 services could accelerate the cord-cutting trend and cut the amount of carriage revenue from cable operators.147
In conclusion, the legacy companies’ vertical integration today is more of a defensive move to jump into a more promising market before the Big Tech companies completely dominate it. AT&T’s CEO Randall Stephenson stated, “the modern media company must develop extensive DTC relationships. We think wholesale business models for media companies will be really tough to sustain over time.”
Figure 7. Structure of the television industry148
147 Id. 148 Basin. Business of Television. p. 4. Liu 49
New entrants in the increasingly saturated SVOD landscape
For the filmed entertainment business, the most popular form of DTC services is subscription video on demand (SVOD).149 This business model relies on subscription revenues and provides blanket access to a library of content. Other forms of online video distribution include advertising-supported video on demand (AVOD), transactional video on demand
(TVOD), and free video on demand (FVOD), but these models tend to be less common.
Before discussing the ownership of individual SVOD players in the U.S., here is a snapshot of the overall landscape. As can be seen, it is an oligopoly characterized by declining growth rates and relatively high market penetration. In Figure 8 below, annual revenue is projected to grow from $11.9 billion to $12.9 billion by 2024 but the compounded annual growth rate (CAGR) is rapidly decreasing from 5.6% to 0.9%.
Figure 8a. SVOD total revenue in the U.S., 2017—2024150
149 Id. at p.26. 150 Statista. Video Streaming (SVoD). Dec. 2019. https://www.statista.com/outlook/206/100/video-streaming--svod- /worldwide#market-users Liu 50
Figure 8b. SVOD revenue CAGR in the U.S., 2017—2024151
Meanwhile, Figure 9 below illustrates that the number of U.S. users is expected to increase by 5.7 million in the next four years but projections of market penetration is leveling off at 37.6%, implying a growth rate of just 0.8% from the status quo. Likewise, the average revenue per user (ARPU) will also stabilize at around $101.79 in 2024, a small increase of $3.6 compared to an increase of $16.19 from four years ago. Simply put, streaming services are unlikely to increase profit by finding untapped audiences or upcharging current customers—they would have to battle for existing customers in a mature, defined market.
Figure 9a. SVOD total users in the U.S., 2017—2024152
151 Id. 152 Id. Liu 51
Figure 9b. SVOD user penetration in the U.S., 2017—2024153
Figure 9c. SVOD average revenue per user in the U.S., 2017—2024154
Although marginal growth and untapped users are both disappearing, the number of competitors in SVOD is still on the rise. In 2018, there were only three dominant players:
Netflix, Amazon Prime Video, and Hulu; all the other services took up 5% or less market share.155 In just two years, Netflix’s market share has decreased by 19% due to the wave of new
153 Id. 154 Id. 155 Id. Liu 52 entrants supported by media and technology conglomerates.156 Apple TV+ came out last year and easily attracted 10 million subscribers. This rapid growth came because everyone who purchased an Apple product received a free year of subscription to Apple+. The Google-owned YouTube
Premium has also acquired 20 million subscribers since its release in 2014, the service includes
YouTube Music Premium and ad-free YouTube in additional to original programming.
Among the Big Five legacy companies, Disney has made the most aggressive effort thus far to catch up with the tech upstarts. In addition to owning ESPN+ and taking a majority interest in Hulu (joint venture), Disney+ launched last year and immediately became the fourth-largest streaming service with 28.6 million subscribers.157 AT&T-owned WarnerMedia plans to release
HBO Max in May 2020; its pre-existing streaming platform HBO Now currently has eight million subscribers. ViacomCBS’s only SVOD service is CBS All Access with ten million subscribers; the service is also expected to incorporate the company’s other cable offerings this summer.158 Comcast’s NBCUniversal plans to launch its first streaming platform, Peacock, in
April 2020. Sony is the only one of the Big Five to not have an active streaming service.
156 Clark, Travis. “Netflix Is Still Growing Wildly, But Its Market Share Has Fallen to An Estimated 19% As New Competitors Emerge.” Business Insider, 24 Jan. 2020. https://www.businessinsider.com/netflix-market-share-of- global-streaming-subscribers-dropping-ampere-2020-1 157 Barnes, Brooks. “Disney Plus Racks Up 28.6 Million Subscribers.” The New York Times, 4 Feb. 2020. https://www.nytimes.com/2020/02/04/business/media/disney-earnings.html 158 Littleton, Cynthia. “ViacomCBS Plans to Rebrand CBS All Access and Launch International Streaming Platform.” Variety, 7 May 2020. https://variety.com/2020/tv/news/viacomcbs-cbs-all-access-rebrand-summer- 1234600528/
Liu 53
Parent Service Launch In Subscribers Suppliers Netflix, Inc. Netflix 2007 167 million Netflix Originals, Studio Ghibli Amazon Prime Video 2006 100 million Amazon Studios, Discovery, ITV Disney Hulu 2007 30.4 million NBC, ABC, Fox, Fox Sports, Bravo, E!, PBS, FX, NFL Network, SundanceTV, USA Network, NBCSN, A&E Disney+ 2019 28.6 million Disney, Marvel, Star Wars, Pixar, National Geographic, 20th Century Studios ESPN+ 2018 3.5 million ESPN Programming, UFC ViacomCBS CBS All 2014 10 million CBS, Paramount Studios, (National Access Showtime Amusements) WarnerMedia HBO Now/ 2015 8 million HBO Originals, 20th Century (AT&T) HBO Go Studios, Universal Pictures, Warner Bros. Pictures HBO Max 2020 N/A TBD NBCUniversal Peacock 2020 N/A NBC, Universal, Focus (Comcast) Features, DreamWorks Animation, Illumination, Telemundo Google YouTube 2014 20 million YouTube Originals Premium Apple Apple TV 2019 10 million Apple Originals
Figure 10. Top SVOD services in the U.S., 2019
Obviously, the composition of each DTC service varies by company and constantly evolves. Some SVOD platforms are a hybrid blend of streaming and live programming (CBS All
Access); others offer a bundle of services with different target audiences at a lower price (Hulu,
ESPN+, Disney+). In general, most DTC services are re-aggregating channels, pay-television bundles, and a la carte subscriptions to boost subscription value.159
159 Ball, Matthew. “Netflix Isn’t Being Reckless, It’s Just Playing A Game No One Else Dares.” Media Original, 8 Jul. 2018. https://redef.com/original/netflix-isnt-being-reckless-its-just-playing-a-game-no-one-else-dares-netflix- misunderstandings-pt-3 Liu 54
Focus on content ownership
As a result of the surge in distribution platforms, both media and technology companies have recognized the value of content ownership. As global consumer appetite for OTT video is projected to increase at a 13.8% CAGR to $72.8 billion in 2023,160 industry executives admit that content has “the potential to be a high-engagement, high-frequency, high-usage application that keeps users across all demographics and devices engaged and enables the provider to build relationships with them.”161
For vertically integrated parent corporations, the myriad of digital and international distribution outlets means increased profits from content-licensing fees. In traditional television, the steady decline in advertising revenue has made revenues from content licensing and digital distribution even more indispensable, as evidenced by Figure 11.
Figure 11. Broadcast TV advertising revenue, 2013-2022162
Over the past decade, the most established companies from Big Tech have been gradually evolving toward content ownership. When Netflix and Hulu first launched, neither had any original content and both libraries were limited to reruns of previously released movies and
160 PwC. Perspectives from the Global Entertainment and Media Outlook 2019-2023. 2019. 161 Id. at p.8. 162 Id. Liu 55 television shows.163 As time passed, Netflix began to license original content from third-party studios; its early signature shows include House of Cards from Media Rights Capital and Orange
Is the New Black from Lionsgate Television. This business model allowed the relatively young company to offer “exclusive” content without incurring the costs of an actual studio. As more competitors joined the streaming space and pulled out content, Netflix moved to a mix of licensing from third-party studios and financing in-house productions.
Unlike Netflix, Hulu outsourced original content from affiliate studios but never built its own proprietary studio. Its corporate cousins (ABC, NBC, and FOX) consistently provide a pipeline of content under the common ownership of Disney. Amazon Prime Video has had its in- house studios from the start and continues to offer a mix of licensed and proprietary content.
For traditional media companies, amassing content ownership means pressuring their subsidiary networks to pick up content from commonly-owned studios and distributing that content into proprietary DTC services. By 2016, ABC and NBC owned more than 80% of their programming while CBS and NBC owned more than 60%.164 More recently, NBCUniversal infamously pulled out The Office and WarnerMedia pulled out Friends from Netflix’s library in an attempt to boost their own DTC services. This aggressive competition for top content has led to an industry-wide battle for original productions.
Implications on original production
For television, the race for content among streaming services is causing an unprecedented boom in production. Between 2010 to 2017, the volume of original scripted television series
163 Basin. The Business of Television. p.31. 164 Andreeva, Nellie. “The Vertically Integrated Upfronts: Nets’ Big Push for Program Ownership and Its Impact on Independent Studios, Viewers.” Deadline, 14 May. 2015. https://deadline.com/2015/05/vertically-integrated- upfronts-network-program-ownership-impact-studios-viewers-1201425404/ Liu 56 increased by 125%.165 Last year, that number hit an all-time high at 532 scripted shows and more than 1,000 unscripted shows.166 The age of “Peak TV” is undeniably driven by a surge in spending from media and technology companies.
Compared to television, film production increased at a much more gradual rate. Between
2010 to 2017, the number of released movies steadily rose from 538 to 740. Similar to television, it is difficult to estimate how much future spending the major players will allocate to theatrically released film due to the ongoing coronavirus pandemic. Regardless, the streaming arms race has dramatically elevated the average bidding price of independent films. In 2014, the top sale at
Sundance Festival was $3.5 million for The Skeleton Twins; three years later, Amazon bought
The Big Sick for $12 million and Netflix bought To the Bone for $8 million.
Figure 12. Original content spending estimates, 2019167
165 Basin, The Business of Television. p.xxi. 166 Koblin, John. “Peak TV Hits a New Peak, With 532 Scripted Shows.” The New York Times, 9 Jan. 2020. https://www.nytimes.com/2020/01/09/business/media/tv-shows-2020.html 167 Id. Liu 57
According to Variety Intelligence Platform, the U.S. media sector (including legacy and
Big Tech companies) collectively spent over $120 billion on original content production. Almost all major competitors have increased spending estimates on film and television: HBO raised its budget by 50%; Disney by 56% (for ESPN+, Disney+ and Hulu); and Netflix by 25%.168 As can be seen in Figure 12 above, the Big Five legacy companies constituted 73% of the total spending, further reinforcing the idea that they’re desperately trying to catch up to streaming pioneers like
Amazon and Netflix.
168 Bridge, Gavin. “Entertainment Companies Spend $21 Billion on Original Content in 2019.” Variety, 6 Jan. 2020. https://variety.com/2020/biz/news/2019-original-content-spend-121-billion-1203457940/ Liu 58
Conclusion
The ownership landscape of filmed entertainment arrived at its complex state after numerous waves of convergence and divergence from the 20th century into the present. The motion picture industry underwent the first wave of vertical integration which led to the formation of the studio system. Under antitrust interventions from the government, film production-distribution were separated from exhibition; they later became enveloped by conglomerates who didn’t specialize in media. In the 1980s, a second wave of integrations reunited film producer-distributers with their exhibition units; industries boundaries also started to blur between film, broadcast television, and cable companies. After the Fin-Syn rules’ repeal in 1995, television networks moved into content production, effectively merging with film operations. Finally, the Telecommunications Act of 1996 merged telecommunication conglomerates with film and television operations. Within the past two decades, technology companies disrupted the filmed entertainment industry most notably by opening up the market for online video distribution.
In response to the expanding market created by the “supercompetitors” including Disney,
Comcast, and AT&T, many smaller players in filmed entertainment industry have capitalized on the opportunity to become conglomerates themselves. With the aid of private equity investors, talent agencies (CAA, WME, UTA) acquired affiliate studios and generated handsome packaging fees, essentially shifting their roles to employers rather than representatives. The
Writers Guild of America responded with a boycott but the least experienced writers remain vulnerable to unemployment without an agency.
Lastly, the entrance of Big Tech into the filmed entertainment industry in the 2000s created a new business model based on streaming—SVOD. The aggressive competition between Liu 59 traditional media and those backed by Big Tech has led to an arms race for content ownership and an era of peak television production. Although the evolution of the ownership landscape has many implications on the filmed entertainment industry, two of the most prominent impacts have been on labor relations and the growth of streaming.
To future readers who need to isolate film and television from the complex web of
“media-telecom-tech” conglomeration, this paper hopes to provide a clear picture of ownership structures. In addition, this paper’s discussion of ownership offers an understanding of why certain trends are occurring in the modern filmed entertainment industry. For instance, the huge influx of capital and rising market opportunities brought by media and technology giants have led to the expansion of smaller players like the talent agencies. Likewise, the SVOD arms race has largely been a defensive move from the legacy companies to prevent Big Tech from completely dominating the streaming space. The intricate links between ownership and industry movement remain essential in media studies. Only by truly understanding an industry’s ownership structures can we hope to untangle its source of power and influence.
Liu 60
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Biography
Ashley Liu was born on July 18, 1998 and grew up in Houston, Texas. She enrolled in the Plan II Honors program at the University of Texas at Austin in 2016 and also studied finance as a second major. In college, she wrote articles and editorials for the news section of The Daily
Texan. She also joined the Universities Securities Investment Team and earned a lifeguard certificate. Ms. Liu interned at the Houston Investment Banking Division of Goldman Sachs last summer and will return there for full-time employment.