In 1962, MCA, then the most powerful force in Hollywood as both a talent agency and producer of TV shows, was forced to spin off its talent agency after the Justice Department concluded that the combination gave it unfair advantage in both markets.
And in 1970, the Federal Communications Commission prohibited the broadcast networks — ABC, CBS and NBC — from owning or producing programming aired during prime time, ushering in a new golden era of independent production.
In recent decades, however, because of new technology and the government’s willful neglect of the antitrust laws, most of those prohibitions have fallen by the wayside. As a result, Hollywood is once again organizing itself around a handful of studios and talent agencies that use their control of distribution networks and access to superstar talent to dominate the entertainment business in ways that would make MGM’s Sam Goldwyn, MCA’s Lew Wasserman and CBS’s Bill Paley proud.
One group, however, has decided to take a stand against this new Hollywood oligopoly: the writers who create the scripts for movies and TV series.
Five months ago, more than 7,000 writers fired their agents, complaining that the agents too often are working harder for themselves and their investors than they are for their clients. The mass firings roiled Hollywood and has now divided the writers themselves, who will vote in the coming days on whether to stick with their union’s hard-line position or reopen talks in search of a compromise.
The practice of 'packaging'
It’s a fair guess that most members of the Writers Guild of America are unfamiliar with the intricacies of antitrust law. But what they do know is that at a time when the industry is taking in record profits producing record numbers of movies and TV series, and some of TV’s top writers are signing contracts valued at hundreds of millions of dollars, the incomes of rank-and-file writers aren’t even keeping up with inflation. And many of them blame their agents.
Five months ago, with the backing of 95 percent of its members, the Guild instructed writers to fire their agents unless they agreed to limit themselves to making money the old-fashioned way — taking a 10 percent commission for every contract they negotiate. Some of the small and midsize agencies agreed. But the Big Four — William Morris Endeavor, United Talent Agency, Creative Artists Agency and ICM Partners, which together negotiate 75 percent of the writers income — refused. The big bone of contention: a decades-old industry practice known as “packaging.”
These days, four of five TV shows and movies are said to be “packaged,” meaning that a talent agency has put together a group of its clients — actors, directors, writers and other talent — to participate in a project. For this, they earn a packaging fee that, in television, is almost always 3 percent of what a network pays the studio to produce the show, or somewhere between $15,000 to $30,000 per episode. Although these package fees are paid by the studios out of the production budget, they substitute for the traditional 10 percent commissions that writers, actors and directors would otherwise be required to pay their agents. The agencies claim that packaging is saving writers $49 million a year in commissions. The writers contend that whatever they are saving in commission is more than offset by the lower salaries they earn when production budgets are squeezed to pay packaging fees to their agents.
Additionally, if the show or movie turns out to be a hit, the agency typically gets between 7.5 and 10 percent of the “back-end” profits, known in Hollywood lingo as “points.” In television, less than 5 percent of series ever do well enough to turn a profit, but those that do can generate millions of dollars for the agencies, which in some cases wind up making more money than their writer clients who create the shows. (It’s worth noting here that new streaming studios — Netflix and Amazon — don’t share back-end profits with anyone, paying bigger fees upfront instead.)
Packaging, however, is not the only issue in the dispute between the writers and the agents. Three of the Big Four — WME, UTA and CAA — have also set up divisions to produce and finance some of the movies and TV series and arrange product sponsorships. Like packaging, having these affiliated companies puts the agencies in the position of being on multiple sides of the negotiating table — as agents trying to get the best deal for clients but also as producers, financiers and distributors trying to generate the most income for themselves.
The Guild contends that because of the inherent conflicts of interest in packaging and affiliated services, its members have been robbed of vigorous representation.
But for the Big Four, packaging and production have become so essential to their business models that they cannot — and will not — give them up. They are the reason private equity firms have recently invested hundreds of millions of dollars in the agencies and become their controlling shareholders. And they are the reason that top agents have become fabulously rich — and will become even richer if their firms are taken public, which the parent company of WME already has in the works.
To placate the writers, the Big Four have offered to share some of their packaging fees, but the Guild’s current leadership has refused to consider any compromises or reopen negotiations. Its strategy is to try to weaken the agencies’ resolve and unity by denying them revenue and taking them to court. Late last month, the Guild filed a sweeping complaint in federal court accusing the three biggest agencies with fraud, price-fixing, restraint of trade, racketeering and violating their fiduciary duty to clients. The suit asks the court to declare a variety of industry practices to be illegal and to award treble damages and attorneys’ fees. With appeals, it will take years for that legal battle to be resolved.
The dispute between the writers and the agents has been a rather nasty one by Hollywood standards. The executive director of the Guild, David Young, a onetime organizer for the garment workers union, has characterized the Big Four as a “ruthless oligopoly” interested only in “maximizing returns for Wall Street.”
Young’s bugbear is Ari Emanuel, the colorful, take-no-prisoners co-founder of WME (and the inspiration for the character Ari Gold in the hit TV series “Entourage”), who is quick to disparage the whole idea of agency conflicts of interest. “If you don’t have conflict, you don’t have a business,” he told Britain’s Daily Telegraph.
The five-month standoff has also caused a rift among the writers, some of whom are having second thoughts about the Guild’s hard-line strategy. With the quiet encouragement of the agencies, more than 500 guild members are backing a slate of dissidents running against the current leadership in an election that will be decided Sept. 16.
The dissidents — headed by top “showrunners” such as Greg Berlanti (“The Flash,” “Arrow”), Shonda Rhimes (“Scandal,” “Grey’s Anatomy”), Ryan Murphy (“Glee,” “American Horror Story”), Aaron Sorkin (“West Wing,” “Network”), John Wells (“ER,” “The West Wing”) and David Kelley (“Big Little Lies,” “Goliath”) propose to reopen talks in the hope of reaching a “reasonable” compromise with the agencies.
On Twitter, the dissidents have been called “scabs” and “shills,” while the current leadership is accused of waging a needless battle and weakening the Guild as it heads into more important negotiations next year on a new contract with the studios and networks.
Curiously silent through all this have been unions representing the actors and directors, who in the past have also complained about packaging and affiliated production but have barely mustered an occasional cheer from the sideline. And while studio and network executives quietly revel in the discord between writers and their agents, they have studiously avoided comment. Like everyone in Hollywood, it seems they, too, are afraid of the big agencies.
“I promise you, the only reason [packaging] fees are paid is out of fear that the agency will kill a deal if its agents don’t get to wet their beaks,” wrote Gavin Polone in a recent essay for the Hollywood Reporter. Polone ought to know: He was a founder of UTA who went on to produce movies and TV series, including Larry David’s hit series “Curb Your Enthusiasm.”
David Shore, the creator of “House,” told me that after he instructed his agency not to package his hit latest series, “The Good Doctor,” agents from another agency representing actors, writers and a director he wanted to hire called him up and threatened they would never let their clients work for him again if he didn’t allow his shows to be packaged.
“They were literally screaming at me,” Shore recalled. “It made me very uncomfortable and nervous about the future.”
Said another writer-producer: “The agencies’ power comes from the power to destroy — destroy your project, destroy your reputation.”
Good points on both sides
In truth, this is one of those disputes where both sides are right.
The Guild is certainly right that packaging has created unavoidable conflicts of interest for the big agencies, putting them in the position of negotiating on behalf of writers at the same time they are also negotiating their own fees and ownership participation on the same project.
There is not a showrunner I spoke with over the past several weeks who didn’t have a personal story of wanting to hire a writer, director or actor represented by another agency, only to run into the determined efforts by his own agent to get him to hire “in house” to avoid splitting the packaging fee. I also heard multiple stories of agents delaying or blowing up entire projects over packaging fees.
Most showrunners report they have never actually seen the written packaging agreement between an agency, while several — Shore, Craig Mazin (“Chernobyl”) and Meredith Stiehm (“Cold Case”) — have complained that their shows were packaged without their knowledge or consent.
And then there are the stories of agents who, having secured a handsome packaging fee for themselves, promise the budget-strapped showrunner that they will twist arms to get their other clients to accept less than their usual rates for the project.
Now that showrunners and writers are finding one another without the help of agents, some report being pleasantly surprised by the experience.
“I’ve spoken with producers who have told me they never had the access to writers they have now,” said writer and producer Chris Keyser (“Party of Five”), a member of the Guild negotiating team.
“I’m working with fresh younger writers right now . . . and none of them came through agencies,” writer-producer David Simon (“The Wire,” “The Deuce”) wrote on Twitter. “Agencies don’t call me fighting for young talent; they don’t” care.
The Guild is also right that the increased revenue that agents earn from packaging does not come primarily out of the profits of studios and networks, as the agencies contend. Much of the agencies’ gain has come indirectly out of the pocket of the mid- and lower-level writers and actors who, because of their lack of negotiating leverage, have been forced to accept lower fees and residuals than they would have otherwise received. And some has come from the big-name showrunners, directors and actors who have wound up with smaller shares of the back-end profits.
The agents, on the other hand, are right in pointing out that one reason they are making more is because, for many projects, they are doing more. In picking through the endless stream of screenplays and show concepts and in pulling together the creative teams to produce them, the big agencies now perform some of the tasks that were once done by the studios and networks.
In that respect, agents have become more like brokers, on the model of Wall Street’s top investment bankers and deal lawyers. As one agency executive put it to me: “We work for the project. We represent the deal.”
The agencies also are right in pointing out that by creating divisions that can produce, finance and distribute entertainment content, they have provided additional competition to the studios and the networks — a view shared by several showrunners I spoke with.
Given those realities, one way to resolve this dispute would be to acknowledge that it makes no sense for showrunners who manage multimillion-dollar budgets, own a sizable slice of the shows they create and, in some cases, have signed exclusive multiyear contracts with studios and networks worth up to $400 million, to be in the same union, and forced to abide by the same rules, as the writers they hire and whose pay they set. Indeed, it seems absurd that they are in a union at all.
Separating showrunners from the Guild would allow them to engage the Big Four as honest brokers who can participate in various ways in the projects that they put together with studios, networks, producers and the other top talent. The Big Four agencies could then negotiate their packaging fees openly with everyone who has an ownership stake or profit participation in the project, presumably on the basis of how much they actually contribute to the project instead of today’s standard 10 percent cut, which to a layman’s eye looks suspiciously like price-fixing.
The remaining Guild members, meanwhile, would be free to sign on with any of the dozens of other talent agencies that agree not to participate in packaging and affiliated services. These writers could never be included in packages and would pay commissions to their agents on the contracts they negotiate.
Under such a bifurcated arrangement, the business model of the Big Four firms would be largely preserved, along with most of their revenue and profit, even as many of their clients and agents move to other agencies, enhancing competition.
Writers, meanwhile, would get the vigorous and un-conflicted representation they say they need and deserve. Their Guild could claim a big victory for rank-and-file writers even as it loses some of its most prestigious and highest-dues-paying members.
A lack of federal action
While such a settlement would certainly help to rationalize and modernize what has clearly become an outdated and corrupt system, it would not fundamentally challenge a Hollywood oligopoly in which a handful of studios and networks, working with a handful of talent agencies, aims to dominate every facet of the industry.
The members of this oligopoly will continue to compete fiercely to tie up the best talent with extravagant long-term contracts. They will continue to compete fiercely to produce the best, or at least the highest-grossing, movies, TV series, video games and podcasts. And they will continue to try to distribute them, as much as possible, through their own cable channels, Internet portals and streaming services.
But as with any oligopoly, one way they won’t compete is on price. Instead, they will continue to follow one another’s lead to raise prices as high as customers will bear, with the stuff you want available only in high-priced bundles that include lots of other stuff you don’t want but will be forced to pay for anyway. They will continue to use widely accepted pricing formulas to deter price competition and rely on government licenses and copyrights to prevent new competitors from entering the market or distributing their products. And they will continue to consistently earn higher profit margins than other industries.
Yet despite these textbook indicators of oligopoly, neither the Justice Department nor the Federal Communications Commission has taken a serious look at the industry’s structure and practices. Indeed, by approving a number of recent acquisitions — Comcast/NBC, Disney/Fox, and, coming soon, CBS/Viacom and Disney/Hulu — they are making things even worse.
Executives of the Big Four talent agencies would have to believe that they are the last, best hope for challenging the power of these mega-studios and preventing further consolidation. But in reality, their role — and the reason they have attracted so much money from private equity investors — has been to reach a mutually beneficial accommodation with the networks and the studios in exchange for a generous share of the spoils for themselves and their superstar clients.
In 1948, in 1962 and again in 1970, the federal government took decisive steps to thwart Hollywood’s natural tendency toward oligopoly, assuring that it would remain vibrant and competitive and dominate the global market for entertainment for another generation. The moment is right for another sequel, if only there were someone left in Washington with the competence and courage to produce it.