As serious contract negotiations get underway in Hollywood this year (the WGA is up first, to be followed by S.A.G. next year) there is no better place to spend some time than reviewing the excellent work of Edward Jay Epstein here: hollywood economist
As Epstein makes clear, the deck is stacked against all but a handful of superstars in Hollywood. Why? In part, of course, it is because of the sure thing marketability of certain stars like Tom and Arnold and Julia. That is certainly how the studio bosses see the issue. And there is a certain amount of truth to that. Of course, while those stars may be expensive it is also less costly to produce movies around a small number of bankable names. But that opens up a different can of worms.
The point I want to make today is to focus on the key formula in modern Hollywood economics: the 80/20 split. Where does that come from? Well, as Epstein makes clear, the 80 percent is taken off the top by the distribution arms of the large studios. The 20 percent is what they leave on the table for producers, actors, writers, directors and crew to fight over. Unless, of course, you are Tom, Arnold or Julia and rep’d by Ari Emanuel and Bert Fields – well, then you might be able to break into first dollar gross for a piece of that 80%.
(Of course, this is a partial simplification of a very complex legal and financial structure. An experienced entertainment lawyer together with the film industry accountant who rep’d Art Buchwald has posted a useful summary with greater detail for those who might be interested: Less than zero)
Now, how did the Hollywood bosses accomplish such a feat? No other employer in America has such a sweet deal. Not even in other talent centered businesses like professional sports – while I have criticized the huge salary paid to the football players head Gene Upshaw and am very concerned that the football players of today are doing too little too late to help the pioneers of the game – there is no arguing with the deal they have cut with the league – something like 60% of the revenues earned by football are shared among all the current players.
But in Hollywood it is far different.
The secret to unraveling this is to understand the fork in the road taken by the industry in the 1970s and 1980s. What seemed like an inconsequential decision then has now, with the advent of new technology and finance, morphed into a monstrous inequity in power and money. And unless the guilds tackle this head on – 80/20 or bust – then the danger is that this round of bargaining will lock talent into second class citizenship for another generation.
Yes, folks, imho, the upcoming round of contract talks is that important.
But back to the story: distribution is now where the action is and that is currently in the firm grip of management – a grip as tight as that of Charlton Heston around that rifle! When the VCR came along 25 years ago, the studios thought it was an uncertain arm of their operations and were willing to just accept a 20% royalty – a kind of standard when a new technology emerges – from the then-independent distribution companies. As one retired film exec explained to me recently, “we were just happy to get anything at all out of after market sales of videotapes.”
But when the DVD came along that changed dramatically – DVD sales became the most important profit center in the film business and studios took the formerly independent distribution companies in house! Now that 80% was going to them but they continued to pay their “production” arms the old 20% rate!
As Epstein puts it:
“studios sought to increase their leverage, or throw weight, by buying up independent distributors (and later ‘mini-majors’) to get more titles. As a result, six companies Time Warner, Sony, Fox, Viacom, Disney and Universal – came to dominate not only all the major releases but the entire universe of so-called indie releases.”
So as billions of dollars started flowing into studio coffers in the late ’90s and early ’00s there was a ring fence around that money, leaving only one dollar out of five available for formal collective bargaining and contract negotiations for most talent. And yet it is the talent that makes distribution so profitable! Without the quality and hard work of creative and skilled workers there would be nothing to distribute.
Fast forward to 2007 and now things get really interesting: two forces are converging on the industry – new forms of finance and a literal revolution in distribution itself. The DVD gravy train is still huge but like any technology it is reaching maturity. A company like Netflix has been able to squeeze some more profit out of the distribution side but growth has slowed considerably. While new formats like BluRay may help, the truth is that online distribution in some combination with landline, cable or satellite technology is the future. This will mean on demand film distribution to a range of available platforms. For the latest example, see this article on a new Silicon Valley company that appeared in the NY Times yesterday: Vudu casts its spell on Hollywood.
Some people may think that watching a movie on an iPod makes no sense – and sure if you want the full effect of a great score or of visual effects nothing replaces a great theatrical experience, but try sitting in an airplane for seven hours with only the on board film to watch (over and over and over). That iPod – particularly when the quality is as good as it can get these days – comes in handy.
So billions of dollars are now flowing into three key channels: telecommunications companies (broadly defined to include cable, landline, satellite), digital delivery devices (iPhone, etc.) and content creation. Hedge funds, venture funds and private equity funds are the key channels through which the money is flowing to seek out the winners in these sectors. (Public markets like the NYSE and Nasdaq are far too clumsy for this process – a story I leave for another day – but check out my latest paper on the NYSE if you are interested in some of the arguments: Ringing the Bell on the NYSE)
Back in Hollywood, the game is simple – keep that 80% off the table no matter how big it gets. And this is where, of course, the ongoing negotiations between the S.A.G. and the talent agents come in. The agency business is changing rapidly. The lead agencies know the big money is in distribution. By breaking away from the agreement with the Guild, the agents are now free to try to get in on that big money through production deals. And they can now offer some small layer of talent the opportunity to participate. In other words, the breakaway agencies try to lure talent away from a collective (i.e., union) approach to solving the problems of the industry into an individual deal making approach.
And for the vast majority that way lies disaster. Only a tiny number of stars will have any real chance of breaking into the 80% through individual bargaining. It is only by bargaining collectively that there is any hope for the working actor (and crew, and writers, producers and directors!) In fact, for all but a handful of agents the same thing applies to the agents (and managers and lawyers and accountants that represent talent). In other words, this round of contract negotiations must become a collective effort to restructure the 80/20 rule for the benefit of the vast majority of the industry. If the guilds accept the gambit of the producers (to postpone the whole problem) or go the route taken in Canada recently (where a much smaller union agreed to only incremental increases in their share of the 20%) they risk setting a formula in place as damaging as the original 80/20 deal made more than two decades ago.
Given the monumental technological, financial and organizational changes underway in the industry it makes sense to define “good faith” bargaining today to mean an obligation to place the entire financial structure of the industry on the table, out in the open, for all parties to see, to understand and to negotiate over.