Investment in Hollywood's agencies and their conflict of interest
The two dominant Hollywood talent agencies, William Morris Endeavor (WME) and Creative Artists Agency (CAA), have recently transformed themselves from partner-controlled businesses to conglomerates owned by private equity funds, sovereign wealth funds, and other institutional investors. As a consequence, these agencies now operate under the pressure of private-equity-level profit expectations. This has led to a fundamental shift away from the agency’s core mission of serving their clients above all else, fulfilling its fiduciary obligation to always act solely in the best interest of clients and to avoid conflicts of interest.
The investment in these agencies is driven by their exclusive access to television and film talent, investors being drawn into a business model in which the agencies’ own income becomes divorced from what clients earn. These agencies now earn much of their money through packaging fees, which are unrelated to their client’s compensation. This is a clear conflict of interest because they introduce direct negotiations between the agency and its client’s employer over how much the agency will be paid. Agency success is severed from client income.
PE takeover of agencies
This issue began to arise following the investment by private equity firms in two of the industry’s behemoths, CAA and WME.
TPG Capital (TPG), a diversified private equity manager acquired a 35% stake in CAA in 2010 for $165 million. It raised its stake to approximate 53% in 2014 investing a further $175 million with $50 million more committed for further acquisitions. Most recently sold further minority stakes totalling nearly $100 million to Chinese, Singaporean and Taiwanese investors.
WME followed in 2012 with a $250 million investment from PE firm Silver Lake partners (Silver Lake). In 2014, as part of WME’s $2.4 billion acquisition of IMG, Silver Lake followed with a second round of investment totalling $500 million. WME has also sold minority equity stakes totalling approximately $1.8 billion to institutional investors.
In all, roughly $3 billion in outside capital has been invested into WME and CAA.
A third, smaller agency United talent Agency (UTA) has also recently gone down this route selling 40% of its equity to Investcorp, a private equity firm, and PSP Investments, a Canadian pension fund investment manager in 2018 for $200 million.
The intervention of these investors has changed the focus of agencies from commissioning their client’s earnings to the practice of collecting ‘packaging’ fees directly from the studio employing their clients.
When a writer creates a television series, instead of the agency commissioning ten percent of the writer’s pay, the agency negotiates its own compensation directly from the studio producing the series through what is known as a ‘package’ or ‘packaging fee’. The standard packaging fee consists of three parts: an upfront fee of approximately $30,000 to $75,000 per episode that is paid out of the production budget; an additional $30,000 to $75,000 per episode that is deferred until the series achieves ‘net’ profits, if any and a percentage of the TV series’ ‘modified gross profits’ – usually 10% - for the life of the show. Through packaging, an agency can collect tens of millions of dollars from a successful series it played little or no role in creating or producing. According to Writers Guild of America (WGA) research, almost 90% of scripted series in 2016-17 US television season were packaged, with CAA or WME involved in 80% of those packaged series.
Conflict of interest
Under the law, Hollywood talent agencies exist to help clients procure employment and negotiate an individual client’s compensation package. The recent switch away from commission compensation to the practice of collecting ‘packaging’ fees directly from the studio employing their clients is generating a damaging (for their clients) conflict of interest. With the agencies due fees based on profitability of the shows, it is in their interest to keep down talent costs – a direct contravention of their original raison d’etre.
This has culminated with writer David Simon, along with seven other writers and two big unions issuing a lawsuit against his agent. He claims talent agencies like his have an oligopoly on Hollywood talent, enabling them to further their own interests ahead of their clients. His agent, CAA, have not responded fully but have tried to play down the issue as being that of just a small number of writers and not representative of the wider industry.
Whilst, comment cannot be made on this specific case, surveys by WGA show that whilst television writer-producers median weekly earnings declined 23% between 2014 and 2016, demand for their work has increased and the entertainment industry enjoys record profits.
The agencies themselves have stated that their production ventures are managed separately and have offered more transparency and a revenue sharing arrangement that would set aside a fraction of its members’ share of television show’s profits to fund junior writers. They deny any conflict of interest and blame writers’ discontent on broader economic trends and the market place where the output of TV shows far exceeds growth in advertising expenditures.