A collision of recent events promises to change the way Hollywood gets paid for toiling in TV. The traditional concept of profit participation is being redefined to reflect the new realities of the content marketplace.
Industry dealmakers are engrossed in studying a plan circulated by Disney to overhaul the compensation structure for top creatives on TV series. Disney wants to shift the formula from incorporating back-end profit-participation stakes that are held in perpetuity to guaranteed payments made after a show achieves predetermined milestones — such as viewership targets, number of seasons and awards recognition — on an accelerated timetable. In a nutshell, the studio aims to be more generous with talent on the front end in exchange for fewer headaches over the long haul in calculating and carving up back-end profits.
Disney is not the only one of Hollywood’s majors advocating for big changes in the way creative talent is compensated. Netflix, Amazon and to some degree HBO have implemented an alternative to traditional profit-participation stakes because they typically retain all rights to their shows, so there’s no chance for syndication riches down the road.
Representatives on the talent side say the new formulas have attractive elements for creatives on shows that are less than smash hits. But they are wary of any effort to eliminate the chance of talent making a fortune with a massive success. Exhibits A and B in this argument are the windfalls that will be coming to profit participants in “Friends” and “The Office” now that both shows have set rich new streaming licensing pacts in recent weeks.
Disney and other studios want to shift the profit-participation paradigm in order to have more flexibility to license shows to internal and external outlets. Dealing with profit participants means the studio has to maintain strict accounting and other evidence to prove that it has lived up to its fiduciary obligation to the participants to maximize profits. Because of the consolidation of media ownership, studios are increasingly selling content to outlets that are under the same corporate roof. Lawsuits and audits are commonplace when participants suspect that license fees on internal transactions are set at less than fair market value for the good of the corporate bottom line.
Disney’s plan would offer top creatives a negotiable number of points in a show, but those points would be assigned a predetermined value before the first frame is shot. Escalators and incentives are built in for shows that perform well in key predetermined metrics. Under the profit-participation model, the value of those points is determined as a percentage of a show’s overall profits — although the battles over defining the profit pool that participants carve up are the stuff that keeps law firms in the black. The rancor that erupts over profit definitions and accusations of self-dealing were on display in the arbitration battle between 20th Century Fox TV (now part of Disney Television Studios) and participants on the Fox drama “Bones.”
The push by Disney and others also reflects the seismic shift in the foundation of the scripted television arena away from the traditional 22-episode season. The so-called short-order series favored by premium cable and streaming outlets has become the norm, not the exception. But the financial structure of employment for creatives is still rooted in the old school. Studios are struggling to generate syndication value from series that rack up 50 to 75 episodes after as many as five or six seasons. Yet the compensation structure for writers, actors and directors is still based on per-episode rates built for a 22-episode world. That’s not the case for the array of episodic content now produced for cable, streaming and broadcast. The change has become a significant challenge for the Writers Guild of America and other unions.
The other problem for Disney in sticking with the traditional profit-participation system is the valuation conundrum. As it shifts the focus of its television content business to feeding its direct-to-consumer streaming platforms, Disney intends to produce a boatload of content for its walled garden of services, including the nascent Disney Plus (set to launch in November) and Hulu, which Disney now controls. Under the current system, Disney has to come up with a fair market value price tag for each licensing event in order to determine the eventual cut for profit participants. But that number is much harder to come by today than in the past, when syndication coin could be more easily predicted by looking at comparable deals and advertising revenue. How do you put a realistic value on an eight-episode limited series that will be licensed to a subscription platform?
Disney TV executives made the rounds of talent agencies and law firms to present the new formula and solicit feedback. That approach has been appreciated. “They didn’t release it and say that it’s now set in stone,” a veteran lawyer says. “There’s still some give and take.”
As anyone who’s ever wrestled with a profit-participant statement can attest, the devil is in the details of the give and the take.