But the writers aren't necessarily mad at the agents themselves. Instead, they're directing their ire at the agencies' private equity owners, which have instituted the use of "packaging fees." The WGA, a labor union representing television, radio and film writers, argues that the practice is cutting into writer pay and represents a conflict of interest, and the battle over the fees is heating up.
Last week, the WGA sued Silver Lake-backed William Morris Endeavor (WME), TPG Capital-backed Creative Artists Agency (CAA) and United Talent Agency, which received a roughly $200 million investment from Investcorp and Canadian pension manager PSP Investments last August. In the lawsuit, the WGA argues that the use of packaging fees violates state and federal law. The union implemented a new code of conduct earlier this month that essentially banned the fees, but so far, the agencies have refused to sign, leading to the suit and the mass firings. And the WGA is blaming PE.
"The top three agencies now operate under the pressure of private-equity-level profit expectations," the WGA said in a report released in March. "This has caused a seismic shift away from an agency's core mission of serving clients over all else, fulfilling its fiduciary obligation to always act solely in the best interests of clients and to avoid conflicts of interest."
What are packaging fees? Put simply, it's the amount an agency makes when it negotiates its own compensation with the studio that's producing its client's television show or movie. In other words, agents are forced to negotiate for their own pay rather receive a flat fee, which to some extent puts them in the position of lobbying for themselves instead of the clients they represent. In the past, agents instead received a 10% commission from their clients' pay.
Here's how packaging fees break down, per the WGA's report:
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 ten percent—for the life of the show. 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. According to WGA research, almost 90 percent of scripted series in the 2016–2017 television season were packaged, with WME or CAA involved in 80 percent of those packaged series.
WME, the talent agency run by Ari Emanuel, earned $138 million in TV packaging fees in 2013, per the WGA report. And that money apparently isn't trickling down, as median weekly pay for television writers and producers fell 23% from 2014 to 2016.
Meanwhile, private equity firms have banked significant profits while expanding each business. Take TPG Capital, which invested $165 million for a 35% stake in CAA in 2010, then upped its stake to 53% four years later for an additional $225 million. In the ensuing years, the firm has divested almost $100 million via minority transactions, earning part of that back. All while the business continued to grow. WGA research indicates that TPG's stake in CAA was worth more than 3x its original investment by the middle of 2017, when it authorized a $160 million dividend recap. And CAA execs also have benefited, with more than $250 million in combined payouts from 2010 to 2014.
In the meantime, TPG has launched a $150 million film fund with a Chinese film company, established a studio that makes scripted content for Facebook and Apple, and set up an investment bank that funds content. All in all, the strategy appears to be working.
Silver Lake has seen similar payoff. The firm backed WME with a $200 million investment in 2012, then invested another $500 million two years later when WME purchased IMG, the sports and marketing conglomerate, for some $2.4 billion. And that's been just part of the agency's buying spree, as it purchased MMA league UFC for $4 billion, the Miss Universe Organization, the PBR (Professional Bull Riders) and more. By 3Q 2018, WME's annual revenue had jumped to some $3.2 billion, a dramatic increase from the $513 million it produced in 2014 prior to buying IMG.
While the uproar over private equity's influence has been significant, there aren't any current plans for a labor stoppage. But don't be surprised if TPG and Silver Lake stand their ground, given the profits they've made thus far.
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