There’s a storm brewing in Hollywood’s creative community, just as the largest unions and employers are preparing to wrestle anew at the contract bargaining table.
The industry is bracing for the prospect of bitter labor strife in the 2023 round of negotiations with the Writers Guild of America, the Directors Guild of America and SAG-AFTRA. The discussions are sure to be more charged than usual because of the tectonic shifts across TV and film that were accelerated by pandemic conditions in 2020 and ’21.
Hollywood’s famously Byzantine formulas for compensating creative talent have become outmoded in the process, and that has many industry insiders feeling as though they’re working a lot harder just to keep pace with pre-pandemic paychecks. The growing income gap between richly rewarded A-listers and everyone else on the set is fueling indignation among rank-and-file union members — as evidenced last year by IATSE’s near miss with a strike.
But the looming labor talks aren’t the only explosive issue on the horizon. In recent months, the sentiment has spread in the creative community like a California wildfire that the deal-making structures implemented over the past decade by the streaming giants are costing them the chance to build precious ownership stakes in the TV shows and movies they make.
Like everything about Hollywood deal-making, the reasons why are extremely complicated — more on that below — but the emotion that this heavy mood is provoking in the grassroots is not hard to interpret. It’s raw, unfiltered resentment that is a source of generational friction among established actors, writers, producers and directors. Meanwhile, the town’s top talent representatives are trying to impose a reality check for why the era of massive windfalls from “Friends”-, “Big Bang Theory”- and “ER”-level syndication sales is never coming back.
For starters, the highly fragmented TV ecosystem of today simply isn’t built to support long-running series that rack up 200-plus episodes — which is another reason the guild contracts for TV series need a major overhaul.
At a time when everything is under scrutiny by cost-conscious conglomerates, veteran deal-makers say the marketplace for streaming-content licensing deals is actually starting to open up in interesting ways. But getting to the next evolution of the digital economic paradigm over the next 12 months — amid economic uncertainty, belt-tightening, M&A and significant new developments such as Disney and Netflix expanding with ad-supported options — won’t be easy.
“The explosion in production and now the tumult in distribution economics has led to a much more dynamic business environment than a year ago, where ownership, licensing terms and the overall financial risks and rewards are open for discussion between studios/producers and many streamers and networks,” says Craig Hunegs, operating partner at private equity firm ZMC and a former senior business executive for Warner Bros. TV and Disney TV.
In short, the town is in a prickly mood that will only be inflamed by the inevitable saber rattling of labor negotiations.The WGA’s most recent three-year contract covering most high-level TV and film work expires May 1. The DGA and SAG-AFTRA pacts run through June 30. The DGA will undoubtedly be the first to engage in talks with the Alliance of Motion Picture andTelevision, possibly before year’s end.
“We need to move to a world where clients and talent representatives have access to the data around how projects are performing on the various platforms so that we have insight into what’s working and what’s not,” says Dan Limerick, WME’s chief operating officer and head of business affairs. “We need to get adequate value for shows that are performing. That’s the next frontier.”
The younger end of the spectrum feels “ripped off,” in the exaggerated-for-effect words of a 40-something showrunner. Part of the lure of working in the showbiz big leagues has been the promise that big commercial success would be followed by beaucoup bucks. Not just a one- or two-time fat paycheck but, in a home-run scenario, profit participation points — a 1% to 5% (or more) share of profits delivered by the property for the rest of time. Achieving backend signaled a level of status and financial security in the form of an annuity that could someday benefit your grandchildren’s grandchildren, so long as the title was still making money somewhere in the world.
Generous profit participation definitions are the closest thing that even the most successful showrunners — Dick Wolf, Shonda Rhimes, Chuck Lorre, Ryan Murphy — have when it comes to owning the content they produce for studios and platforms. Also known as “backend,” the agreements are notoriously contentious and the stuff of a thousand lawsuits accusing studios of self-dealing and breach of fiduciary duty. Nonetheless, size matters, and the size of a megastar’s share of a project’s all-important Modified Adjusted Gross Receipts revenue line has long been a measure of accomplishment and a source of bragging rights.
The A-list of today is now a full generation (or more) removed from the 1970s-’80s heyday of successful writer-producer entrepreneurs such as Norman Lear, Aaron Spelling and Stephen J. Cannell. Those legendary multi-hyphenates flourished during the golden age of independent production that was ushered in by regulatory changes at the Federal Communications Commission in 1970. The winds shifted toward consolidation and vertical integration of networks and studios in 1993 after a federal judge struck down the rules that limited how much content ABC, CBS and NBC could actually own.
Fast-forward to 2022, and the younger cohort that has hustled to establish itself in the frenetic Peak TV era can often feel like the rules and the prizes have been changed in the middle of the game. The level of frustration has also spiked as producers say there has been a swift pull-back of spending in recent months. Netflix, after jolting Wall Street with its forecast of subscriber losses to come this year, unleashed a slew of cancellations, and HBO and HBO Max jettisoned some pricey and risky projects.
The sense of urgency that some feel to respond to the behind-the-scenes changes in entertainment were voiced bluntly and publicly last month by Jeff Sagansky, the former CBS Entertainment and Sony Pictures Entertainment president, who is an investor in media and related businesses.
“The TV industry is at an inflection point with this new delivery paradigm,” Sagansky tells Variety. “There has never been so much work, and for brand-name talent, their compensation has never been as good. But for everyone else — the guilds, talent agencies and creative talent are going to have to decide if the new way of compensating talent is a problem or not.”
Discussion of the alarm sounded by Sagansky in his June 1 appearance at the NATPE Hollywood conference has been in the ether for creatives just as the guilds are starting to focus with members on key issues of importance for the 2023 contracts. He questioned why creatives don’t press harder for streamers to reveal data on how their shows perform. “We are in a golden age of content production and the dark age of creative profit sharing,” Sagansky said at the time.
The fight over the future of seven- and eight-figure contracts with profit participation terms won’t be settled by collective bargaining. But anger over the perception that rights are being lost will be channeled into clenched fists for the guilds to achieve big gains in union-covered residuals and royalty rates.
A veteran network executive-turned-producer says the harsh business reality is there is no going back to the way things were. In reality, pay scales for above-the-line creatives in the U.S. are coming down to “middle-class levels” because the changing economic structure of streaming won’t support the old jackpot-hit model. It’s no accident that Netflix, Disney+, HBO Max and other streamers are talking up the appeal of local-language series such as “Squid Game” and “Money Heist,” produced at a fraction of the cost and usually outside Hollywood union jurisdiction. The advent of U.S.- based platforms with global reach is challenging every baked-in convention of the content business.
“We all got used to streamers paying out fat money,” says a top industry dealmaker. “Now that they’re maturing as businesses, we have to adjust. But they’re still paying people a lot of money to make great shows that would not get made anywhere else.”
During his time at Disney TV, Hunegs led the charge to implement a massive overhaul of Disney’s dealmaking protocols with creative talent. As the company shifted its focus to supplying TV series to Disney+ and Hulu, the company needed to address the challenges of valuing content and monitoring profit participation pools when there were no plans for after-market sales of the shows. The Disney TV plan, which put the emphasis on performance-based bonuses rather than formal backend points, was hammered out with representatives from major talent agencies and law firms.
Hunegs, who exited Disney in 2021, declined to elaborate on that process. A prominent entertainment attorney who was involved in those discussions gave Disney credit for transparency and willingness to listen to the concerns on the other side of the table. The source said there is broad acceptance that things need to change for a new era of television. But getting there won’t be easy or fast. “Disney’s definition makes it tough … but Disney has always been tough,” the veteran rep said. “Where we are now is an interim step.”
For decades, studios and producers made most of their money not on the initial primetime run of a series, but through later opportunities to sell the show in syndication and through international licensing. The sweet spot for studios and producers was a scripted series that ran for 22 or 24 episodes per season for at least five seasons. The WGA’s two-inch-thick Minimum Basic Agreement contract is built around formulas that pay writers per episode on a season-long basis. For profit participants, syndication and international sales were the welcome events that created a pool of profits to share.
But streaming has upended that decades-old continuum. Streaming platforms, like HBO and Showtime before them, generally prefer scripted series that run from six to 12 episodes per season. The production cycle on streaming series typically occupies a longer period, and there is more downtime between seasons before renewal decisions are made. Moreover, streamers rely on having a voluminous library of shows on demand to keep their paying subscribers engaged. Netflix, Amazon, HBO Max and others require initial license terms of 15 years or more on high-end shows, without the windows that would allow producers to sell rerun packages to outside outlets.With no outside sales opportunities, it’s much harder to put a hard dollar value on a show.
To account for that lost profit-making opportunity, Netflix and others developed the “cost-plus” template of buying TV series. Streamers agreed to a license fee that covered a show’s production costs and had a premium of profit built in for the studio. In the early days, when Netflix had to incentivize major studios to produce for the platform, the streamer paid premiums of 30% to 40% of a series production budget. Lionsgate Television made an estimated $3 million per episode in its premium for the early Netflix hit “Orange Is the New Black,” which ran for seven seasons and 91 episodes from 2013 to 2019.
But over time, terms have tightened all over town, not just at Netflix. The producers’ premium nowadays is more likely a negotiated flat fee — a shift that came amid suspicion that production budgets had begun to rise across the board in order to boost premiums. Now, some producers are complaining that Netflix is taking a harder line on costs such as COVID-related precautions and production overages, eating into producers’ profit margin. With predetermined premiums, the downside of having a show that flops is protected, but the upside of fielding a runaway hit is limited.
For junior- and mid-level writers, the new series math is tough no matter how you tally it. Even at higher per-episode rates, writers earn less for an eight-episode series produced within an 18-month cycle than they would have a decade ago for 22 episodes produced within a 12-month cycle.
Yet top talent representatives are not uniformly up in arms to preserve the profit participation paradigm of old. Some argue the old system had plenty of pitfalls and benefited only the top tier of talent. “There are about 14,000 members of the Writers Guild, and maybe 150 of them have ever seen any real backend,” says a veteran industry deal-maker. Reps also argue that the “present value” of guaranteed cash upfront is worth more than the potential of a piece of future profit streams.
This reflects the realpolitik that profit participation deals have been fraught with problems for creatives. Most of the nuances in Hollywood accounting come into play when calculating these profit stakes. Negotiations over the MAGR (or Modified Adjusted Gross Receipts), in industry jargon, refer to the contractual profit definition, meaning that it is baked into the deal that the production entity takes overhead, distribution and other fees off the top before the final pool of profit distributions is calculated. The definition (and definitions within that definition) have been the subject of business-affairs brawls in setting movie and TV contracts with high-level creators for decades.
Profit participation disputes have also been the spark for countless self-dealing lawsuits between platforms/studios and profit participants. AMC Networks last year reached a $200 million settlement with the executive producer of “The Walking Dead” in a lawsuit that ran for seven years; AMC is still in litigation over a separate suit with other “Walking Dead” participants that was filed in 2017.
The litigation boils down to creatives accusing the studio of taking undue steps to dampen the value of their participations. In early 1997, the creators of ABC comedy “Home Improvement” filed a milestone suit against Disney, accusing the Mouse and ABC of conspiring to a pay a below-market license fee for the sitcom, produced by Walt Disney Television.
The “Home Improvement” lawsuit also led to a blizzard of paperwork at vulnerable companies in their effort to document deal decisions undertaken on an arm’s-length basis. Talent and agents scoff at the idea that employees of the same large firm would not wink at each other on price and other financial terms. But industry veterans say that deal-making between sibling networks and studio divisions has often been some of the toughest, as both sides have every motivation to dig in on terms to keep their respective profit and loss statements as strong as possible.
In a nutshell, TV shows produced for Disney or Netflix are no longer treated as individual businesses with their own income statements and profit and loss reports. The paperwork designed to ward off profit participation lawsuits doesn’t happen because the shows are accounted for in a central content-spending budget. There are no syndication sales or international deals to track, so there’s no pool of discrete profits created to fight over in the life of a show, at least not for some time.
These dynamics help explain the sky-high production pacts in recent years for megastar showrunners. Top players à la Rhimes and Murphy are savvy enough to command money upfront through high fees and generous overhead and development funds. That’s because the days of waiting on a big check after the studio completes a round of aftermarket sales are fast disappearing.
The solution for the end of the backend era is a newly imagined model of deal-making. The greatest hurdle in the coming years is access to data, so that talent representatives can assess the performance and value of a property. The cutting edge of making new deals includes a series of elaborately constructed performance bonuses that kick in over a period of years, plus longevity and award bonuses. Industry sources note that in this system, cancellation of a show after two or three seasons is the cruelest cut because bonus payments typically become significant from Season 4 on.
The twists and turns of the marketplace may also work in talent’s favor in bringing more gradations to monetize opportunities for streaming series. Industry insiders, from union officials to talent agents, managers and lawyers, are watching closely as Netflix adds an advertising tier to its service. In a previous era, such a move would be seen as creating discrete rights for existing Netflix series and movies that will be featured on the ad-supported platform.
But the harder fight will be the war at home as the creative community gets used to a new normal. Privately, industry insiders recognize that Hollywood’s traditionally lofty pay scales and legacy of perks is fading for all but the 1%.
“People grew up reading about Aaron Spelling’s big house,” says a longtime executive-turned-producer. “They see an older generation of writers that have Malibu beach houses. But there aren’t going to be as many writers with Malibu beach houses in the future.”