Disney TV Studios Eyes New Profit Participation Model As Industry Continues To Pull Away From Traditional Backend Deals

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Six years ago, 20th Century Fox TV made a giant off-network deal with FX for The Simpsons. Shortly after Disney’s March acquisition of major Fox assets, including 20th TV and FX, the studio — now part of Disney Television Studios — made a new deal so the comedy could be announced as a cornerstone of the new Disney+ streaming platform, and another agreement for repeats of the show to also air on Disney’s Freeform.

A new deal template, which is being floated by the recently formed Disney TV Studios as well as sibling FX Prods., will eliminate all that. I hear Disney TV studio executives have been informing agencies and producers of a new compensation model they are looking to employ across the board for broadcast, cable and digital series. It would replace the current profit participation blueprint and would aid the company’s flexibility to distribute content within its ecosystem of networks and digital platforms.

Disney likely won’t be alone. Warner Bros TV has already been experimenting with a similar setup, I hear. It is part of an industrywide push among studios to move beyond backend. It is a push that could raise legal issues, by shifting from paying talent a percentage of a show’s profits to fixed cash amounts so studios can put series wherever they want without having to report to profit participants. It is a major paradigm shift that some observers tout as being even more significant in its ramifications for the industry than the ongoing WGA-ATA standoff over agency packaging and affiliated production. (The move away from backend has been diminishing agencies’ packaging revenues.)

Referred to as “per-point,” the model currently being pursued by Disney simplifies the way profit participation fees are paid off. Each point of an upcoming series’ backend is assigned a numerical value that is uniform across the portfolio of shows. The payments to creators/producers start right away, and the value goes up the longer a series runs. It varies based on on the show’s ratings performance and awards recognition.

Fox

In exchange, the studio gets the right to exploit the show on any platform without having to make a separate deal for profit participants. The proposed model streamlines dealmaking in a multi-platform universe, especially in one like Disney that includes multiple streaming and cable networks in addition to broadcast. It also would prevent profit participation-related lawsuits like the one 20th TV has been embroiled in over Bones.

While the template is not breaking new ground for streaming series, it would be a game-changer for a broadcast business steeped in the decades-old tradition of deficit financing which, in success, leads to a profit participant financial windfall of tens of millions of dollars from off-network, streaming and international sales starting 4-5 years into the show’s run.

Amazon Studios

Amazon Studios is believed to have been the first company to introduce a per-point model for its shows a couple of years ago. I hear its version of the model involves escalators for multiple seasons and the payoff of the points’ value after a threshold is reached — for example a fourth season — somewhat similar to the traditional broadcast setup in which profit participants start to get backend payments once a series amasses a significant number of episodes (usually after four seasons) and is sold in off-network syndication.

Netflix
Netflix

Netflix’s cost-plus model bypasses backend altogether as the platform takes on all worldwide rights exclusively. It involves the streaming platform effectively “buying out” series auspices’ backend at the outset, in exchange for paying a full license fee plus a premium (typically in the 125%-130% range). It allows studios to start making profit from Day 1 vs. incurring deficits for years under the traditional broadcast/cable model, and creators and producers seeing “backend” payments also from the start. (Netflix’s deals include bump/bonuses after each season that are getting progressively bigger, though few shows get to take full advantage as many of the platform’s series tend to get canceled after 2-3 seasons.)

With Netflix changing the TV business paradigm, the per-point compensation model proposed by Disney TV Studios — which encompasses 20th TV, Fox 21 TV Studios and ABC Studios/ABC Signature — will also offer payoffs that starts early in a show’s run compared with down the road, I hear.

The backend point rates for new series are still being fine-tuned as the studio had been seeking feedback from agents and other industry types. The initial reaction to the plan by reps and producers has been mixed. Some fear the new model would reduce potential payoff for profit participants on very successful shows. But most people I spoke with agree that this likely is the way of the future, and a switch to a fee-based model for creators and talent in a multi-platform world dominated by content streaming seems inevitable.

Disney

In fact, I hear Disney’s upcoming streaming platform Disney+ began experimenting with the per-point model at the end of last year before it was embraced by Disney TV Studios. Similarly, Warner Bros TV also has started to use elements of this structure in some deals across the board, a move I hear has been driven by streaming pacts.

As models that upend traditional backend paradigms have been made industry standard for streaming series by the likes of Netflix and Amazon, ‘”old media” studios like Disney and WarnerMedia whose parent companies are launching streaming platforms may feel competitive pressure to adopt a similar template. The sensible thing to do is apply that template to their entire slates. In the case of Disney, sources said, the push for the new model is less about streaming and more about seamless content movement within the company’s ecosystem of studios, networks and streamers.

The new model is expected to benefit middling/mildly successful series that go on for a couple of seasons to respectable/modest ratings and would not normally be able to generate a meaningful backend under the traditional mechanism. They will be rewarded under the new arrangement.

On the flip side, the new deal structure would likely cap the financial windfall for profit participants on blockbuster hits like The Big Bang Theory or Modern Family, way below what they would get under the traditional model. However, these outsized hits are few and far between, and industry insiders expect the auspices for such mega-hits would likely be able to renegotiate their terms at some point. That already is the case on a streaming platform like Netflix that does not offer backend. Following the blockbuster breakout success of Stranger Things’ creators the Duffer Brothers were reportedly able to renegotiate their deals.

The industry consensus at the moment is that junior writers will likely come out ahead in the new model, which protects downside, while heavy hitters may get shortchanged because the model limits upside. We will have to wait and see what numerical value points are ultimately assigned. I hear that in informal conversations with the creative community, Disney TV toppers have indicated that the proposed new template would be lucrative for talent and that the formula could potentially be comparable to the payout in a traditional setup.

The Office
NBC

Coming up with a fair backend valuation during a series’ original run is tricky, because there are late bloomers. For instance, while Friends has been a blockbuster hit on broadcast, in off-network syndication and now in streaming, The Office was a respectable success on broadcast and a modest performer in off-network syndication. It wasn’t until its streaming run that the series became a giant hit that is believed to be the most popular acquired series on Netflix, and on par and possibly even outrating Friends. Even NBCUniversal executives have acknowledged they did not expect such a ratings success, a decade after the show’s airing on NBC. Netflix is paying a hefty license fee for The Office, which profit participants share, and NBCU recently outbid the SVOD giant to move the series to its own streaming platform, providing an even bigger financial windfall for producers.

Since in the per-point model the value of the backend points is assigned at the outset, some wonder whether there will be a mechanism to correct undervaluation, years after the initial run. While I hear there are no plans for such point-value reassignment later on in the Disney proposal, series that over-perform following inauspicious starts are expected to be rewarded with incremental payments for downstream success.

In pursuing the new template, the biggest driver for Disney ls to make the exploitation of content across the company’s multiple networks and streaming platforms simple and hassle-free, with no danger of accusations by creators and talent of self-dealing and potential litigation. Some suspect that the ongoing big Bones lawsuit, which thrust profit-participation issues and vertical integration back into the spotlight, was an impetus to implement the new model that boosts distribution flexibility.

With the exception of Warner Bros, I hear the other major TV studios have no immediate plans to change their profit-participation structure, but that could change: several are evaluating their options.

“This could change how business is done as it turns the backend model on its head,” one studio executive said.

This article was printed from https://deadline.com/2019/07/hollywood-profit-participation-tv-deals-changes-disney-streaming-services-1202641423/