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Talent Agencies Face Conflicts of Interest as Parent Companies Storm Into Production Arena

Steve Harvey was not happy.

The comedian and talk-show host was coming to the end of his five-season deal in 2016 on “The Steve Harvey Show,” the syndicated daytime TV series launched by NBCUniversal and Endemol Shine North America four years earlier.

In reviewing his renewal options, Harvey was annoyed to learn that Endemol Shine was taking an estimated 25%-30% of his show’s earnings, even though NBCUniversal Domestic TV was the lead producer, in his view. Then he got a compelling proposal from his representatives at WME/IMG, the powerhouse talent agency whose parent company, Endeavor, has been rapidly diversifying into content ownership and distribution.

He was offered the chance to partner with the growing IMG Original Content production unit and part ways with NBCUniversal and Endemol Shine as producers of his show. IMG guaranteed Harvey a larger ownership stake, lower overhead costs, more creative control and a big salary boost. It was an easy call for the host.

CREDIT: Ryan Johnson for Variety

Inside NBC, there was disbelief bordering on outrage. Nobody foresaw IMG entering the picture, even as executives realized Harvey’s desire for change. There was shock that an affiliate of a talent agency would make such a play against NBCUniversal, a huge source of employment for WME clients. There was talk of lawsuits and questions about the legality of an agency producing a client’s series.

The notion that Hollywood’s two largest agencies — WME and CAA — are aggressively moving into production is fraught with the potential for conflicts of interest that arise when the same company represents the creative talent on one side of the table and is the employer on the other. The practice, known in industry jargon as double-dipping, was expressly banned by the Screen Actors Guild for nearly 60 years.

The level of conflicts can range from questions about how compensation and commission terms are set to how inevitable creative troubles will be handled. Then there’s the issue of which clients get offered the hottest properties — although that’s nothing new for agencies the size of WME and CAA.

“On every show and every movie, there’s always a problem where the producer has to call and yell at somebody’s agent,” says a veteran producer. “What are you going to do in this case — call and yell at yourself?”

Discussions around potential conflicts of interest are such a volatile, thorny issue for agents that the heads of major agencies declined to be interviewed for this story.

Industry insiders are keeping a close watch on the expansion from packagers to producers and how it impacts the fierce rivalry between the industry’s two superpowers. Moreover, tensions with studios and networks are sure to intensify in the cutthroat chase for talent, as the agencies move into the realm of production rivals. Of course, the push into production has ratcheted up the already bitter animus between WME and CAA.

“There is cause for some concern. You have to ask, ‘Who gets advantaged and which show gets hurt by this,’” says Daniel Green, head of the Heinz College entertainment industry management program at Carnegie Mellon University. “You have to wonder if the client is getting the best deal, or does now the company get the best deal?”

“There is cause for some concern. You have to wonder if the client is getting the best deal, or does the company get the best deal?”
Daniel Green, Carnegie Mellon University

All eyes are also on how dealmaking unfolds at Endeavor, the parent company of WME, IMG and the newly launched Endeavor Content division. The agency, sources say, is keenly aware of the scrutiny and is diligent about being transparent with managers and lawyers who are key to reviewing client deals. Multiple talent representatives outside WME contend that IMG and Endeavor Content’s contract terms are generally more lucrative for talent than most studio deals, particularly on backend definitions. They also point out that Endeavor Content is structured as a separate business from WME, though clearly there is common ownership and collaboration at times.

“Those guys are hyperaware that people are paying attention,” says a rival agency leader. Competitors acknowledge that the entertainment business landscape has changed dramatically, prompting the operations of the largest agencies to evolve from the industry standards established in the 1930s.

UTA has also dipped its toe into production, recently taking a small stake in Core Media Group, a producer of “American Idol” and “So You Think You Can Dance.” UTA CEO Jeremy Zimmer and David Spingarn, the agency’s head of strategy and corporate development, have joined Core Media’s board of directors.

“UTA saw a compelling opportunity to help bring creative and strategic value to a great company with marquee franchises and a strong development and production pipeline,” Spingarn says.

Meanwhile, other major agencies — such as ICM and Paradigm — hope to capitalize on concerns that some creatives might have by emphasizing that their sole focus remains on booking their clients on TV shows, movies and other endeavors.

To varying degrees, the owners of Hollywood’s biggest agencies are looking to leverage their access to talent and source material into businesses that have the potential to be more profitable than the traditional commissions of agenting. At a time when demand for content delivered on multiple platforms seems insatiable, agencies see openings to work with clients and non-clients alike on productions that can offer more favorable terms to creative talent.

For WME and CAA, the proximity to talent and the expertise in packaging projects is an asset that should be better exploited for the benefit of both clients and agencies. The TV industry in particular is expanding — with new channels and streaming platforms seeking high-end content — and contracting through consolidation (exhibit A: Disney buying 21st Century Fox). The thinking goes: Why shouldn’t creatives with clout (à la Harvey) take a more lucrative deal from the same company that’s helped build their careers?

The impetus for agencies to expand is a response to both good and bad times. On the one hand, there are more outlets seeking content and avenues for talent to reach consumers than ever. On the other, the traditional sources of big paydays for agencies — TV and film packaging fees — have been severely squeezed by structural changes in the industry. There is no longer the syndication windfall for agencies to share in a show produced for Netflix (which typically retains worldwide rights for many years). Nor are traditional network series generating the kind of off-network fees that made “Friends” and “Seinfeld” billion-dollar properties in the 1990s. “The Big Bang Theory” and “Modern Family” are seen as properties that are closing the book on that chapter of the business. Today, the production side is about volume and commanding the highest upfront fees that the market will bear — skills that are the lifeblood of any good agent.

CAA and its parent company, TPG, have been seeding investments in TV and film production, if not as forcefully or publicly as Endeavor. These are growth strategies for companies with grand ambitions coupled with the need to deliver for private investors that have poured hundreds of millions of dollars into both firms. A bustling production business would also be a big selling point to investors if Endeavor were to proceed with an IPO (which is not on the near-term horizon, insiders assert).

IMG’s unscripted production arm has grown exponentially during the past three years under Endeavor’s ownership and the leadership of IMG co-president Mark Shapiro. IMG Original Content productions include: Model Squad, First Team: Juventus, The Ashley Graham Project and The Terms of My Surrender.
model squad: Bryan Bedder/Getty Images for IMG; first team: IMG/Netflix; graham: Matt Baron/REX/Shutterstock; moore: joan marcus

The growth of IMG Original Content and the big swings taken by Endeavor Content in the past few weeks have caught the town’s attention.

By many accounts, building up IMG and Endeavor’s original content units has become a key mission for Ari Emanuel, CEO of the holding company Endeavor.

The Harvey talk-show switch was an early sign of the voracious appetite at Endeavor to expand its activity as a producer and distributor of all manner of content.

IMG Original Content has exploded over the past three years with the production of more than 50 unscripted series and specials for platforms ranging from HBO, Netflix, Fox and ABC to Verizon’s Go90 to Michael Moore’s one-man Broadway show “The Terms of My Surrender.” Most of the projects, but not all, are built around WME or IMG clients or subsidiaries.

When WME bought IMG, the latter had a creaky production unit that produced mostly sports-themed specials.

IMG co-president Mark Shapiro, an alum of ESPN and Dick Clark Prods., has built the bustling production unit since he signed on in 2014. The production infrastructure is integral to growing the value of Endeavor assets, which range from the Professional Bull Riders league to Miss Universe to the UFC, in addition to IMG’s strength in sports and fashion and WME’s formidable talent roster. For WME and IMG clients, the home run has been to turn talent into business partners.

“We want the artists to have a real hand in the creative process and to have a transparent path to upside on the backend,” Shapiro says. “That’s one of the major differentiators that our companies offer.”

There is great sensitivity to ensuring that WME and IMG clients are aware of any internal relationships on productions. Deals with IMG Original Content are always reviewed by outside managers and lawyers, Shapiro says.

“It’s an arm’s-length deal, and it’s extremely transparent,” he says. “The talent knows all the offers that are on the table. We have to bid and give and take just like everybody else, as any talent would try to get the best deal.”

Endeavor Content launched in October to focus on scripted TV shows and narrative films. It made a splash early on by signing an overall TV deal with Chernin Entertainment. Last month it nabbed the rights to Michael Wolff’s best-selling Trump administration tell-all “Fire and Fury.” It secured a two-season order from Amazon for a new take on “Conan the Barbarian” from WME clients Ryan Condal, Miguel Sapochnik (a directing Emmy winner for “Game of Thrones”) and Warren Littlefield. Endeavor Content has also attracted projects for production or international distribution from clients of other agencies, including the Apple sci-fi drama “See,” from CAA clients Steven Knight and Francis Lawrence; Hulu’s “The First,” from CAA’s Beau Willimon; and Apple drama “Are You Sleeping,” produced by one of CAA’s brightest stars, Reese Witherspoon.

“The talent knows all the offers on the table. We have to bid and give and take just like everybody else.”
Mark Shapiro, IMG co-president

Littlefield, who is red-hot as a producer with “The Handmaid’s Tale” and “Fargo,” had no reservations when the opportunity to work with Endeavor Content on “Conan” came up. Endeavor Content handled the licensing of the Robert E. Howard novels and paid for writer Condal to pen a script to make the pitching process easier.

“I was impressed by their willingness to invest in the IP and in Ryan Condal writing a script that we could take out to show people his vision of ‘Conan,’” says Littlefield. “It’s early days, but I feel like they are making a big commitment to building a production business, and I wanted to be a part of it.”

Endeavor sees transparency and delivering tangible results to clients as the safeguards to avert conflict-of-interest concerns. Littlefield noted that he was impressed at how Endeavor in 2015 handled the international sales of the independently produced AMC/BBC drama “The Night Manager” on behalf of WME client Ink Factory. Creatives have long groused about how studio output deals in international markets shortchange the value of specific projects by selling them as part of bulk packages.

“Night Manager” was also an important test case for Endeavor because it was the first effort to retrofit IMG’s existing international sales infrastructure to distribute a scripted series. IMG Media had been focused on selling sports rights and sports-themed programming. The growth of IMG Original Content and Endeavor Content promises to rev up the unit as a profit center. This in turn will go a long way to helping Endeavor realize a return on its $2.4 billion purchase price for IMG.

CAA, meanwhile, has been more hesitant about taking a deep dive into the content production arena. But the agency has made strategic shifts in recent months with the sale of its CAA Marketing business and some of its sports operations. Content that can travel the world is a likely avenue to explore to produce a new stream of returns for TPG and other investors.

CAA parent TPG last summer helped launch the Platform One production venture in partnership with Liberty Global, with assistance from CAA and TPG’s Evolution Media investment arm. CAA and TPG are expected to move forward soon with a production venture led by former ABC Entertainment Group chief Paul Lee that has been in the works for more than a year. Evolution Media has stakes in TV production entities Gaumont and Matador, while TPG also has an interest in STX Entertainment.

In reality, agencies have been laying the groundwork to venture into production for years.

From the 1930s through 2002, the Screen Actors Guild maintained a franchise agreement with talent agencies that included a strict provision stating that “an agent or an owner of an interest in an agent shall not be an active motion picture producer,” nor were franchised agents allowed to own “any interest in a motion picture producing or distributing company.” SAG members were barred from representation by agents who did not sign on to the guild’s franchise agreement.

The SAG rule effectively kept talent agencies out of the business of production, with one famous exception: Lew Wasserman’s mighty MCA. In the early 1950s, MCA ventured into the fledgling arena of television with its Revue Prods. unit. To do so, MCA sought waivers from SAG of the production rule on a case-by-case basis. By 1952, Revue was growing so fast that MCA sought — and received — a blanket waiver from SAG to continue in TV production. At the time, Hollywood’s largest movie studios were hurting from the twin blows of competition from television and the 1948 Supreme Court decision that forced them to divest their interests in theater chains. Revue was seen as an important source of employment, especially for rank-and-file SAG members. It didn’t hurt Wasserman’s cause that the SAG president at the time was one of MCA’s big clients, Ronald Reagan.

Endeavor Content: The division was created in October to focus on scripted programming, film financing and international TV sales efforts. WME veterans Chris Rice and Graham Taylor are co-presidents. Endeavor Content and IMG handled international sales for the John le Carré limited-series franchise “The Night Manager.”

Revue’s success with television series ranging from “The Jack Benny Show” and “Alfred Hitchcock Presents” to “Leave It to Beaver” transformed MCA. By 1958, the agency had acquired the Universal Studios lot in order to provide a central production hub for Revue. Four years later, it reached an agreement to acquire Universal Pictures and its parent company, Decca Records. That deal caught the attention of the Justice Department and then-Attorney General Robert F. Kennedy, who filed suit to block the acquisition on antitrust grounds, arguing that MCA would have too much control over the marketplace for talent and production. Faced with the choice of retaining the agency or expanding as a studio, Wasserman chose the studio. In the 1962 settlement with the Justice Department, MCA surrendered its agency franchise agreements and turned its full-time focus to production.

Nearly 40 years later, the Assn. of Talent Agents trade group, representing the most prominent Hollywood agencies, sought to renegotiate the terms of the SAG franchise agreement as its 2001 expiration date approached. The ATA argued that the SAG contract had been little changed since the 1930s and did not reflect the modern realities of the industry.

The ATA’s revised terms proposed a provision to ease SAG’s long-standing ownership restrictions by allowing up to 20% of an agency to be owned by a company involved in movie and TV production or advertising. This push was fueled in part by agent angst over the rising number of personal managers who were becoming successful as producers of projects with clients. Managers do not face the same restrictions on production or the 10% limitation on client commissions as agents have under the SAG franchise agreement and California’s labor code.

The agency ownership issue became a flash point for many SAG members, who worried about it setting the stage for conflicts of interest. The discord among SAG leadership on the issue was so strong that the franchise agreement was sent out as a referendum for voting by the 120,000 members of the guild in April 2002. It was rejected by a 54% to 45% margin.

The failure of the referendum led to an impasse between the ATA and SAG that continues to the present day. In the absence of a formal franchise agreement, ATA member companies committed to abide by the terms of a General Services Agreement template that was approved by California’s labor commissioner.

The California Labor Code, which also strictly regulates the operations of talent agents, is fuzzy on this topic. The Labor Code states: “No talent agency may refer an artist to any person, firm, or corporation in which the talent agency has a direct or indirect financial interest for other services to be rendered to the artist, including, but not limited to, photography, audition tapes, demonstration reels or similar materials, business management, personal management, coaching, dramatic school, casting or talent brochures, agency-client directories, or other printing.”

Labor law experts say this clause is open to interpretation in a way that could pose problems for agency-affiliated productions.

“That language is broad enough to arguably say to a talent agent that you can’t direct your clients into projects in which you have an ownership or other financial interest,” says Hollywood labor veteran Howard Fabrick, an attorney with Barnes and Thornburg.

But even those who have their antennae up about the diversification into production by agency owners recognize that the seismic shifts in the industry are forcing a rethink of the status quo. Certainly, Steve Harvey isn’t complaining about his many ventures with IMG.

“Hollywood is a game,” Harvey says. “You’ve got an agent, a manager and a lawyer, and all those people get a percentage. That’s a lot of people eating off the pie. If I combine the manager and the production company and I get a larger share of the show ownership — that’s a better business move for me. And I knew I’d be in business with guys who had a vested interest in making this show work.”

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