Just hours before resuming negotiations with the Association of Talent Agents for a new franchise agreement, the WGA released a 16-page report this morning that accuses the major agencies of running a vertically integrated “cartel” that has cornered the market on Hollywood’s talent.
The Writers Guild and agencies will return to the bargaining table at 3:30 p.m. today for the first time since February 19, with a deadline for a deal set for April 6. If a deal isn’t reached, the guild could order its members to walk away from their agents en masse.
“Talent agencies have represented Hollywood actors, writers, and directors for almost a century,” the report states (read it here). “But what began as a service to artists in their negotiations with film studios has become a cartel dominated by a few powerful agencies that use their control of talent primarily to enrich themselves.”
During a phone-in press conference today, former WGA West president Chris Keyser, co-chair of the guild’s negotiating committee, said that the report “lays out in detail why we are at long last making changes to the agency agreement.” It hasn’t been renegotiated since 1976.
“Packaging fees and agents’ production arms,” he said, “make a mockery of the fiduciary duty we are owed by our representatives. Yes, we have taken too long to demand these practices end. But the persistence of a corrupt system does not make it right. While the changes are not small, they are what is required for the right to represent us.”
Much of the report is a rehash of the WGA’s previous positions on the twin evils of packaging fees and corporate ties between the big agencies and their production affiliates, which the guild says are “conflicts of interest” that violate agents’ fiduciary duties to their clients. But the report also provides new arguments and documents – including internal CAA emails and a CAA profit-participation statement – that the WGA agues makes its case for a total realignment of the agency business.
The report, titled “No Conflict, No Interest,” paints a particularly dire picture of agency involvement with affiliated entities that are in the business of content production, as WME is with Endeavor Content, CAA with Wiip and UTA with Civic Center Media.
“Fueled by billions of dollars from private equity and other investors, the three largest talent agencies – WME, CAA, and UTA – have recently expanded into producing and owning content,” the report states. “No longer satisfied with collecting lucrative packaging fees, these agencies now intend to develop, finance, and produce series for television networks and digital platforms like Netflix and Amazon.
“With these agencies increasingly representing companies that employ clients, and even becoming the employer themselves, conflicts of interest are at the heart of the dominant agencies’ business model,” the report says. “This fact is not in dispute, as co-CEO of WME Ari Emanuel said in 2015 of his agency’s operations, ‘No conflict, no interest.’ More recently, Emanuel was quoted in The Telegraph stating, ‘If you don’t have a conflict, you don’t have a business.’”
ATA executive director Karen Stuart has said that the guild’s claim that agents are becoming the employers of writers is “patently false” — that “no ATA member agency employs writers. None. Rather, some agencies have affiliates – legally separate businesses with separate management and separate operations, housed in separate offices and with separate employees – who perform content-related services. These entities are legally and operationally separate businesses from agencies. Agencies disclose these relationships, and they negotiate with affiliates at arm’s length to ensure offers and deals are as good, if not meaningfully better, than others in the marketplace.”
She noted, however, that the “ATA has repeatedly told WGA that agencies are willing to listen to concerns and discuss formalizing some rules of the road to assure clients that their interests will never be compromised.”
But the WGA report makes a strong case – which it intends to pursue in court if it doesn’t get its way at the bargaining table – that these vertically integrated arrangements are anything but “arm’s length” deals.
“An agency that produces content can use the leverage it gains from this vertical integration to harm both agency and producing competitors,” the report says. “For instance, talent represented by competing agencies may be foreclosed from access to employment at the agency-produced projects. As a result, talent may leave competing agencies for fear of losing job opportunities, further increasing the power of these dominant agencies.”
Studios and production companies, the report says, “could find themselves in direct competition with the entities that control access to the talent needed to make film and television projects. Agency-producers have a strong incentive to withhold talent from competing employers because it will benefit their own production business.”
To show just how powerful the Big Four agencies have become, the report notes that although there are more than 100 agencies licensed to represent WGA members, consolidation “over the past two decades has created an oligopoly of four agencies that control the representation business in Hollywood. Together, WME, CAA, UTA and ICM Partners account for more than 75% of WGA member earnings.
“Talent agencies launching production companies that employ their own clients creates an indefensible conflict of interest,” the report adds. “Acting as an employer and representing a client in salary negotiations are fundamentally at odds: an employer’s incentive is to maximize its profits and keep labor costs low, while the agency is duty-bound to get the best deal it can for its client.”
The report also maintains that “talent agency expansion into production raises a number of unfair competition concerns, the very concerns that lay at the heart of the Justice Department’s 1962 antitrust case against MCA, the largest agency-producer of its day.” In that anti-trust case, the Justice Department forced MCA to split from Universal Pictures.
Laura Blum-Smith, the guild’s director of research and public policy, said during the press conference that WME, CAA and UTA “are positioning themselves to become the next MCA.”
The report notes that WME’s 2014 acquisition of IMG, a global sports and entertainment company, “marked WME’s entry into content production and distribution.” Three years later, WME announced the creation of a new division, Endeavor Content, which finances and produces content. That same year, WME acquired a majority stake in Bloom, a film production, finance, and sales company and announced a partnership with Chernin Entertainment to finance, develop, and produce scripted series. Endeavor Content, the WGA says, “is set to be the producer or co-producer at least 10 scripted television and online series such as Are You Sleeping on Apple and Half Empty on Amazon, and has produced or financed films such as Book Club and Icebox.”
CAA and its private equity owner, TPG, “are similarly expanding into content production. In 2017, CAA launched a $150 million film fund with Chinese company Bona Film Group and established a studio called Wiip, which is producing several scripted series for Facebook and Apple. TPG is invested in a TV studio called Platform One Media, digital media company Vice, and STX Entertainment, a film and TV finance and distribution company.
More from the report:
“UTA is the most recent entrant into content production following private equity investment in August 2018. In October 2018, UTA announced a joint venture with independent studio Media Rights Capital (the producer of House of Cards) called Civic Center Media, which will develop, produce, and finance television series.
“It is also the case that the largest talent agencies are no longer primarily owned by their agent-partners. Their control of the representation business, their access to key film and television talent, and the lucrative revenue stream of packaging fees have attracted outside investors. As a result, the largest outside shareholders of the top three agencies are now private equity firms that expect strong returns on their investments. This trend began in 2010, when private equity firm Texas Pacific Group Capital (TPG) purchased a 35% stake in CAA for $165 million. TPG then invested an additional $175 million, with $50 million more committed for further acquisitions, increasing its stake to over 50%. Foreign investors added more than $100 million, for a total of over $440 million invested to date in CAA.
“WME has followed a similar path. In 2012, private equity firm Silver Lake Partners acquired 31% of WME for $250 million, and has subsequently invested approximately $500 million more. WME has also received approximately $1.8 billion in investments from pension funds, institutional investors, and sovereign wealth funds, including a $400 million investment from Saudi Arabia that WME announced it would return following the murder of Washington Post journalist Jamal Khashoggi. In total, roughly $3 billion in outside capital has been invested into WME and CAA.”
More recently, UTA announced in August that the Investcorp and Public Sector Pension Investment Board, a private equity firm, had invested $200 million into the agency.
“Using this new cash,” the guild says, “the two largest agencies have accelerated expansion and diversification, transforming themselves from businesses focused on client representation into global media and entertainment conglomerates. WME and CAA now own or have stakes in investment banks, consulting firms, venture capital firms, marketing and advertising agencies, production companies, and sports leagues and tournaments. They negotiate licensing agreements in sports, sell feature films, and work with corporations and celebrities to manage and license their brands across various platforms.”
The capital from all this private equity and other investors “has also facilitated WME’s and CAA’s expansion into content production and ownership,” the guild says. “Both CAA and WME are now financing and producing feature films and scripted series for television and online platforms, either through direct investment or partnerships with traditional content producers. UTA is the latest entrant, announcing a joint venture to finance and produce TV series with Valence Media and its subsidiary, Media Rights Capital, in October 2018. As a result of this expansion, three of the four biggest agencies have now become content producers, in effect employers of their own clients.
“The result of this outside investment and expansion is a representation business dominated by talent agencies that are focused on increasing agency and affiliated operations’ revenue and profit for the benefit of private equity owners, a pursuit that is far afield from the fiduciary duty owed to agency clients.”
The WGA’s complaints haven’t fallen on deaf ears at the uber agencies. WME president Ari Greenburg, after holding town hall meetings with hundreds of writer-clients, told them in a March 2 email that the mega-agency is aware of their concerns and intends to address them with the WGA.
“We heard that you want continued transparency and choice,” he wrote. “We will put additional business practices in place to ensure that you have all of the information needed to make the right decision for you, especially when it comes to packaging and working with our affiliated companies.
“We heard that there is fear, anxiety, and uncertainty about the future. Despite 1,000 television shows, and the megadeals we read about in the trades, this is a challenging time for some writers having to adjust to new economics created by market forces including massive media consolidation and changing television models.
“We are aligned with you and your guild in finding solutions to this issue. However, we do not believe the answer is getting rid of packaging fees and affiliate production, which brings jobs and opportunities to writers. We believe the answers can be found when we have the ability to engage in a real dialogue with guild leadership.”
In an email to his writer clients Monday, UTA CEO Jeremy Zimmer wrote: “We aren’t saints. The solution to the problems that our clients have with their agents is not to eliminate the choices they have around packaging or affiliate agencies. It is not to fire their agents and hope that the guild, or a yet unidentified agency, is the right partner to help them navigate the world of media consolidation, streaming, and globalization.”
“What I think is true is that the top agencies have gotten much bigger,” he wrote. “We have developed many more capabilities and it’s not clear to many of our writer clients how, or if, those capabilities serve them.”
The ongoing conflict with the WGA, Zimmer wrote, “will also require that the agencies discuss in detail the why, and the why now, of affiliated companies: What are the benefits? Have there been abuses of duty? How much do agencies own? Is a smaller ownership a significant differentiator, or is a conflict a conflict regardless of the ownership?”
To bolster its case against packaging, the WGA report found that “agency consolidation and the increased market power of the oligopoly agencies has led to the packaging of nearly all television and online series.” According to WGA research, almost 90% of scripted series in the 2016-2017 television season were packaged, with WME or CAA involved in 80% of those packaged series.
The report also presents internal CAA emails from former The Walking Dead showrunner and CAA client Frank Darabont’s ongoing lawsuit against AMC that the guild says “puts the lie to the notion that packaging is done for the benefit of agency clients. Instead, it confirms that packaging allows the major agencies to use demand for their clients for their own financial benefit.” Those emails, the report says, show that “CAA’s share of profits reduces the pool of profit available to its client. Further, CAA’s client receives no benefit if the agency negotiates a packaging fee on a spinoff of the series.”
The guild also obtained a Warner Bros. profit-participation statement that shows that CAA received “more than clients in profit participation” from the 1986-91 TV series Head of the Class. That statement, from June 2009, “reveals that the agency received over $12 million, including $8.8 million in profit compared to the $8 million received by the creators,” according to the guild’s report.
“Through packaging, an agency can collect tens of millions of dollars from a successful series it played little to no role in creating or producing,” the report says. “The agency collects its packaging fee regardless of how much its clients make, and even collects higher profits if the series’ costs – including its own clients’ compensation – are lower. This practice leaves the agency with significantly less incentive to increase any individual client’s compensation or otherwise advocate on their behalf. Writers have felt the consequences of this conflict through declining compensation. WGA surveys have found that the median weekly compensation for writer-producers declined 23% between 2014 and 2016. The surveys have also revealed declines in the per-episode fees that agents negotiate for television writer-producers. According to WGA data, these per-episode fees are barely higher than they were in the late 1990s, and have actually declined when adjusted for inflation.”
Even so, the WGA West’s latest records show that its members’ earnings hit an all-time record of $1.4 billion in 2017 – up nearly 3% from 2016. Earnings from feature films broke through the $400 million barrier for the first time since 2010, while TV earnings are fast approaching $1 billion a year.
In conclusion, the WGA report says: “This system of conflicted representation is no longer acceptable. Under federal labor law, the WGA has the exclusive right to delegate representation of writers to talent agencies, meaning the union has the right to regulate how agencies represent its members.
“The WGA has proposed terms of a new agency agreement that would restore the proper fiduciary relationship between talent agencies and their writer-clients by tying agency compensation to client compensation through a 10% commission structure, and by prohibiting the conflicted agency practices of packaging and producing. The current authorization for WME and CAA and other franchised agencies to represent WGA members expires in April 2019. The talent agencies will soon have to choose between their conflicted practices and representing talent for the proper 10% commission.”
WGA members will be voting at the end of the month on a new Code of Conduct that would ban packaging fees and force agencies to sever their ties with affiliated production entities. And if a new deal isn’t reached with the ATA by April 6, the WGA could disenfranchise any agent or agency that refuses to sign up.