And while the “film industry” has generally been all about an initial release of “films” in motion picture theaters (“exhibitors”) throughout most of its history – even though we have had “MOWs” (that “movie of the week” moment in time) or equivalent (television productions of feature-length motion pictures intended for initial release on television) – the emergence of subscription video-on-demand from rather large economic telecasters that we call “streamers” seems to have confused everyone from award-granting institutions (like the Motion Picture and Television Academies) to “filmmakers.” Feature films seem as likely to premiere on some form of television perhaps, accelerated by the COVID-19 pandemic, much more frequently than on a traditional big screen in a theater. From normal 35mm/70mm celluloid projection – mirrored in digital equivalents with aspect 2.35-to-1 and 185-to-1 ratios being the most common – to ultra-high-definition, large format IMAX projection systems in specialized theaters, with vastly higher resolution with 26% greater image coverage and a 1.9-to-1 aspect ratio.
Which brings me to the term “television,” which now seems to require constant definitional upgrades. Gone are those global terrestrial-transmission analog formats – NTSC in the North America and PAL or SEACAM in the rest of the world – long since replaced by high-definition digital formats (HDTV, 4K HDTV, etc.). In the United States, since June 13, 2009, full-power television stations nationwide have been required by the federal government to broadcast exclusively in a digital format.2 But the word “broadcast” defines the modern version of old-world television, and just about every signal, terrestrial, on cable, the Internet (however delivered), and on the new increasingly elegant mobile bandwidths (particularly the new version of 5G that is playing hob with some aircraft landings) is delivered digitally. However, in this article, it’s all within my generic definition of “network(s),” “television” and “telecasters.”3
The economics of early broadcast television began primarily with advertiser revenues as the driving force. Public television used government grants and donations, but generally, their relevance for an article on “upside” is marginal at best. As consumers struggled with foil-wrapped rabbit ears to roof-top antennae, the advent of cable and satellite signal delivery was initially all about getting a cleaner, more dependable signal… until a tsunami of cable channels flooded the universe with too many choices to be delivered over-the-air. The cost to the consumer rose exponentially. Most of that cable/satellite platform generated a hybrid stream of revenues: subscriber and advertiser supported.
The economics of motion picture exploitation, for the most part and until only recently, was based on ticket sales and an aftermarket of video (devices and then digitally delivered) and television. With “on demand” viewing, the line between home video (which is now “home media”) and television has blurred significantly, as will be discussed below. Ancillary revenues, mostly from merchandizing and music, are often added to the pot for popular content where appropriate.4
II. Revenue Sharing with Talent/Rights-Holders
a. Traditional Film Industry Upside Plus Growing Aftermarkets
Back in 1998, then USC Law/Business Professor, Mark Weinstein took a look at the history of paying non-financing creative contributors pieces of motion picture upside5. After a tumultuous beginning with lots of smaller companies producing motion pictures, the “studio system” as we know it really settled in by 1930. In that era, virtually all the major creative talent were contracted to one of those rising monoliths. Production, distribution and exhibition were vertically integrated… big time. But even during the silent era, “stars” recognized their value, a factor that led to the star-owned United Artists in 1919. As stars became increasingly essential “marketing hooks,” their demands for a participation in upside led to interesting changes.
But even in the 1930s, film was film. There was no aftermarket. There was no television. Most studios controlled the very theaters their films played in. But the modern version of revenue-sharing began back then. “There are a number of contracts that compute the contingent payment as a percentage of gross receipts. In most cases, the contingent payment does not begin until the movie’s gross revenues exceed some threshold, either a fixed-dollar amount or a multiple of production cost.
“As early as 1930 both John Barrymore and Al Jolson had contracts that paid a percentage of the gross revenues from their movies. Jolson’s was for a percentage of the excess over a fixed amount, while Barrymore’s was for 10 percent of the gross from the first dollar. In 1939 James Cagney signed a contract covering 11 movies for $150,000 per movie plus 10 percent of the gross receipts over $1.5 million.
“In 1941 Hal Wallis, who had been a high executive at Warner’s, contracted to produce four movies a year for a salary plus 10 percent of the gross once the gross reached 125 percent of the negative cost. While some expenses were to be deducted, there was no distribution fee nor a charge for prints and advertising. Overhead is specifically included in the negative cost [production cost, then described as the cost of producing a master celluloid “negative”], but it is to be an amount determined by Warner’s auditor, Price-Waterhouse. There is no mention of interest expense as a component of negative cost… Mae West had a contract at Universal in 1939 that provided for her to receive a percentage of the gross once the gross reached a multiple of the negative cost.”6
But that traditional studio system ended with a Department of Justice settlement with major studios in 1948 (the “Paramount Consent Decrees).7 Distribution and exhibition were separated. Gross receipts to the studios thereafter generally averaged half of ticket sales and excluded revenues from concession stands. Although nascent structures from 1923 had toyed with a definition, the notion of “net profits” – later to be relabeled “net” or “defined” receipts, because of the total lack of consistency with any GAAP notion of “profits” – soon arose to define breakeven, if and when upside were to be paid to talent/rights-holders. With production costs fairly contained and marketing costs a marginal cost add-on, that studios began charging a combination of “distribution fees” that averaged one third of that studio’s gross receipts was nasty but not yet confiscatory, plus artificially defined costs of distribution.8 Studios also charged an “overhead” percentage of budget that bore no relationship to any real calculation of overhead and assessed interest and financing charges well in excess of their actual cost of borrowing.9
As varying levels of television came into industry norms, distribution fees were also assessed, but that medium began to become the main mode of marketing films in movie theaters. Over time, marketing costs skyrocketed as a result, sometimes exceeding the cost of making the film itself. Since distribution fees were not capped, as marketing (plus other costs of distribution) and production costs began to escalate, that average distribution fee of one-third of gross received began to make “net profits” illusory, since the levels of gross needed to achieve “breakeven” became distant, to put it politely. Significant talent, most notably their agents and lawyers, grew deeply dissatisfied with this studio half-hearted effort to share revenues. The first dollar gross (often with minor off-the-top deductions) deal was born. That 50% average percentage of ticket sales remitted to studios (called “film rentals”) was the target of participants.
Definitions of when that percentage, ranging from 2.5% all the way up to 20% (often escalating in steps based on rising gross), would kick in were all over the map. Stars often saw their upfront cash as an advance against that share. Sometimes that percentage of gross kicked in when an artificial breakeven were achieved, either when gross covered costs with a low or no distribution fee or after the gross receipts hit a defined level of success (sometimes a flat number, but often a multiple of the production cost). To make life even more miserable, and clearly to make “net receipts” akin to attempting to scoop water with a net, these “gross” participants were often treated as if their payments were a part of the production cost, adding overhead and pushing that average one-third fee pushing the “net receipts” breakeven gross necessary to generate those huge star payments into a different solar system.10 But that was a condition that did not exist decades earlier.
Looking back, by the 1960s, internally produced feature films – movies of the week – joined recent theatrical releases as part of the weekly big three schedules. Even as theater owners protested, this new revenue stream was a welcome addition to film production companies, and by postponing the telecast of major theatrical releases, everybody was a winner. Also, as a major advertising medium for exhibitors, television found its righteous place in the revenue waterfall, and the syndication aftermarket poured additional gravy on the feast. Then came the next big shock wave, at first a reaction to poor signal quality reaching consumer television sets. But shortly, this innocent signal amplifier found a huge new role.
The 1970s witnessed the advent of “premium cable,” a pure subscription-based aggregation of motion picture titles licensed from major studios and other high level film owners. HBO went “national” in 1975, Showtime three years later. These disruptors, fighting for exhibition windows against terrestrial broadcast networks, grew so fast that they refused to disclose their subscriber growth, fearing studios would demand more and more. They still shelled out increasing licensing money, often based on a percentage of box office performance (25% was not uncommon), with an apparent assumption that their growth would continue, unabated, for many years.
Eventually, because that subscriber growth stopped exploding as hoped and Wall Street needed subscriber numbers to value these fat cats (HBO became an integral part of Time-Warner, Showtime was owned by Viacom), these premium cable networks released their subscriber numbers in what became a bragging norm and valuation necessity. Premium cable had usurped the motion picture mega-numbers that once belonged to the big three broadcast networks. Premium was king… until the next upstart medium crashed in.
As studios grappled with the then-new after-market medium of home video (initially video cassettes, then discs and much later, digital downloads), where expensive videotape cassettes were initially sold mostly to video rental houses (1980s), they struggled with how to include those revenues and deal with associated costs into accountable gross receipts. They turned to the music industry, where the normal of 20% of retail as the performers share of record (albums) sales was considered “generous.” The studio would eat the relevant costs out of its retained 80% share. That the cost of recording an album or a single was a tiny fraction of the cost of producing a movie, making the analogy completely insane, was irrelevant. As home video revenue soared… net profits further contracted. And even guild residuals bought in to that record industry model to define their home video generated residuals. The formula endured even as compact devices (cassettes and discs) became much cheaper… or were completely displaced by digital downloads.
Through these years, revenues from the international markets rose from 15% of the total to 50% (or more). Fractionalizing international distribution rights – what became know as the “presale business” – among foreign territories gave independent production companies a new means to finance films. They often also sold those overseas rights to a US distributor to round out their business structure. For those creatives participating in some post-breakeven upside percentage, the deals became a tad more complex… but the industry adapted. International distribution was no longer unique to US major studios. An independent US distributor or sales agent (charging typical fees of 10% to 20% depending on guarantees) could license the motion picture product to local international territorial distributors, and the proceeds of those sales (advances and guarantees with “elusive” overage potential) would be paid into accountable gross receipts.
“Net receipts,” however defined, were becoming increasingly rare regardless of the structure. By the 1990s, I made it a point to tell motion picture business affairs executives negotiating my talent’s/rights-holder’s deals not to waste paper on “net” receipts definitions. We substituted fixed bonuses at various negotiated levels of box office/film rentals performance or applied low or no distribution fee definitions of breakeven… where first dollar gross was not otherwise justified. It was frustrating, but the best of us just kept on pushing.
As a side note, there has always been one arena where studios with massive numbers of full-time animators (Pixar/Disney, DreamWorks Animation, Illumination/Universal, etc.) have consistently refused to give any form of overall percentage performance-driven upside: large-budget animated motion pictures. If you really want to know why, it comes down to the necessity to disclose and justify the carried overhead (the cost of maintaining legions of animators, idle between films), way beyond standard studio overhead.
Since these films generated the mainstay of their merchandising and theme park businesses, the associated allocations and accounting were something they almost always wanted to avoid. Box office bonuses, discretionary at first and then contractually defined, at clear and fixed levels of performance, were as close as these studios got to paying upside. That actors, the main upside beneficiaries of upside for these animated features, could complete their services quickly – voiceover only – made lack of percentage upside easier to sell.
b. Traditional Television Upside
If the studios were vertically integrated monoliths in the 1940s, television did not achieve that status until the mid-1950s. They produced most of their own programming, but by the 1960s, big programmers, mostly the same majors that produced motion pictures, cleverly signed contracts with major creators/showrunners and even potential TV stars, forcing the networks to cut them into the revenue flow and rights ownership. Lucrative television license fees paid by the networks allowed the studios to be in profits just by having their content absorbed by a major broadcast network (then, CBS, NBC and ABC… Fox only became a true major network in 1986 with the debut of the Joan Rivers’ late night talk show11). Many programs were also “syndicated” onto independent, locally owned networks in markets across the land, a market that embraced the cable networks years later.
But like the studios’ ownership of theaters until 1948, wherever they could, the big three networks ran roughshod over smaller program suppliers, sometimes even the studios themselves. By 1970, television content creators had had enough, convincing the Federal Communications Commission, at least when it came to prime time, those three networks should not own that scripted programming. The FCC then passed the “fin-syn rules” – more formally, the Financial Interest and Syndication Rules – which slammed CBS, NBC and ABC, preventing them from owning their prime-time creative entertainment slates (or locking them up contractually for excessive terms of exploitation).
Ah, that’s when the heyday of television upside really began. Limited to several runs, only in the United States and over a relatively short period (often two or three years), the big three networks simply parted with their once coveted international and aftermarkets. That programming, much of it with committed diehard fans destined to watch reruns for what seemed an eternity… with lovely, dubbed versions of American television gaining international popularity… became a most lucrative goldmine for those program suppliers with successful entertainment content that has been first telecast in prime time on a big three network. The suppliers owned the rest!
Everyone expected the major studios to clean up, now without any restriction on owning their major prime time series and movies. But a number of smaller companies, like Grant Tinker’s MTM Productions (he was luckily married to Mary Tyler Moore and produced her series and its spinoffs) or Carsey-Werner Productions (producing mega-hits like Roseanne, A Different World but most notably The Bill Cosby Show, to name a few). Between international and domestic post-network sales, these companies generated hundreds of millions of dollars just from their most successful series. Tom Werner went on to buy sports teams, including the Boston Red Sox and the Liverpool Football Club.
For participating talent, notably the creator/showrunners and the stars, their share of upside from those successful series made some of them wildly rich. New syndication companies arose to handle international and the aftermarkets for these network shows, and more mega-millionaires were born. The backend on television, during these halcyon years, began as a version of the motion picture industry’s definition of “net” receipts, but industry skepticism soon gave rise to a pretty standard upside calculation based on “buyouts” or “advances” against such receipts: the per episode payment that began to accrue, retroactive to the first episode, once a cherished number of episodes were produced (generally, at least 66 or 88). For top-of-the-line talent, those numbers could easily reach serious six figures per episode. But that was in the days of 39, then 26, then 22 episodes per full yearly cycle, a far cry from the 8 to 13 episodes per cycle we see from streamers today.
True to form, the production companies paying those numbers began to hedge their pledge to pay talent upside. By the late 1980s, a practice which accelerated after the repeal of the “fin-syn” rules described above, they were adding provisions that these per episode bonuses might accrue when the requisite floor of a number of episodes were produced, but they would not have to be paid until the program supplier achieved some form of breakeven, generally requiring positive cashflow over and above distribution costs, residuals, and any deficit in production costs not covered in the network license fee. This new breakeven was labeled “adjusted gross receipts.” Smart negotiators for creatives began to ask for pure, uncapped percentages of adjusted gross receipts, effectively telling the program supplier that a. they were now taking more risk and b. that the fixed sum bonus per episode was actually functioning as a cap. Upside continued… but the numbers dropped considerably.
Truly, the 1980s were seminal; networks were feeling the wave of “deregulation” efforts sweeping the nation, led by then President Ronald Reagan. The big three, noting the rise of cable networks and the prosperous first run syndication market, wrote to Reagan arguing that there was enough competition in the marketplace making the fin-syn rules an archaic encumbrance on their free market potential. By 1991, the FCC finally agreed, and fin-syn rules were officially ended as of 1993. Instantly, the big three began demanding a big piece of the upside from their prime-time program suppliers and began to produce massive entertainment programming themselves. Programs that they now owned and controlled completely. Each of the big three, while still buying product from outside suppliers with valuable talent under contract, also created significant owned and controlled production companies which they often forced unaffiliated talent to work for.
Indeed, this reconfigured television industry, producing tons of original programming for cable networks, viewed television production as much riskier than in pre-fin-syn days. Too many new original productions chasing the same aftermarket consumers. Program owners (often the networks) began to demand a distribution fee (sometimes not required for the initial network sale) – but less than the old one-third of gross average fee – in their definition of upside. These fees ranged from 10% to 20% or more, and the concept of “modified adjusted gross receipts” (MAGR) was born. Hollywood “accounting,” however, still plagued talent and rightsholders seeking full and accurate accountings, a situation that was only amplified as studio and network consolidation continued.12
Just before the streaming revolution, there were over 500 scripted series available on one form of television or another. Video games and social media, some of which were also producing original programming, also ate into the time that consumers used to spend watching television.
III. The Rise of Netflix, Consolidation in the Entertainment/Media Sector & the Steaming Wars
Streaming was clearly about to shake the entire entertainment industry. But it all started with a Scotts Valley, California start-up in 1997 that saw a future where “big box” home entertainment was an inconvenient bricks and mortar sales/rental store whose time had to be coming to an end. The Internet was becoming a normal part of everyday life, and entrepreneurs Reed Hastings and Marc Randolph wanted a better way to sell or rent home video content to consumers. Bandwidth was not sufficient, yet, to carry signals, but consumer could order content online to be delivered by mail. They soon focused on rentals, not sales. Their model provided that rentals would be implemented uniquely by a monthly subscription service. That mail-order version of Netflix grew at an alarming rate.
But a decade later, as technology had materially improved, Netflix, opened a huge door into what would transform the entire entertainment industry: subscription video on demand (SVOD) over the Internet – a/k/a streaming. In January 2007, the company launched streaming via the Internet with a mere 1,000 films available for streaming, compared to 70,000 available on videodiscs. Their acquisition group went on overdrive. They built their business mostly by licensing film and television titles from studios and other content owners.
And then it all changed. Again! With creative executive, Ted Sarandos, based in Los Angeles, Netflix decided to reinvent itself to rise above the technology clutter into the world of unique content creation. The stuff that builds consumer continuity and loyalty, well beyond mere convenient delivery. Content that would stay on Netflix, which would become its own aftermarket, eventually virtually worldwide. It began with a political series, House of Cards, a modest program with an estimated production cost of $3.9 million per episode that premiered in March of 2011. But the high-end content creators behind the series – writer-producer David Fincher and star Kevin Spacey working with Media Rights Capital (now MRC) – expected a backend for success. But by keeping the content and eliminating an external aftermarket, Netflix extinguished the possibility of that upside.
Netflix was increasingly governed by sophisticated internal metrics of success – a growing set of consumer/production value algorithms. Top secret. Netflix was loathe to reveal these numbers. So, they pioneered overpaying content suppliers and talent with large upfront payments to avoid upside based on measurable popularity. The “mark-up” was born. A percentage of the hard production cost added, upfront, to the total price Netflix would pay for a buyout of all future revenues from that content. Unions and guilds would later work out a structure for the payment of residuals, hardly based on that model.
The mark-up started at a whopping 50% but soon slid down to 30%, 20%, and finally 15% until that model faded, mostly to be replaced by alternatives, mostly easily applied to series. A success fee based on episodes ordered, supplemental market payments, negotiated as part of the original series production order, on a per episode (often six figures) basis, to be paid retroactive to the first episode but only starting on the second cycle order. Netflix also financed feature films, some with a theatrical release component.
This Netflix approach, supplemental fixed sum bonuses, was eventually adopted by Disney and Apple as they grew their online streaming services, at least for fare intended for initial or simultaneous release on their streamer. Amazon and Warner Media, held on to percentage upside definitions, but since Discovery is set to acquire Warner Media from AT&T (see below), we cannot be sure what their upside formulae will look like. The diminution of the theatrical marketplace, with an unclear future even as COVID subsides, has further eroded the calculation of upside even in that segment of the industry.
Nevertheless, feeling the pressure from major filmmakers craving the honor of a luscious, big screen, theatrical release, Netflix succumbed to allowing an occasional theatrical release (often supported by marketing money from the streamer) before SVOD availability, a practice that soon morphed into a simultaneous or near simultaneous release on both the big and small screen. This included the fall 2019 release of the Martin Scorsese epic, The Irishman, with a purported $159 million dollar production cost. Overall, the theatrical release revenues generated by such films generally fell well below expectations, hence that practice was severely limited even for big budget made for made-for-streamer features. Over time, lower budget fare, particularly independent, seriously themed features seem destined for an almost exclusive run as SVOD only productions. For streamer release, gone are the mega advertising budgets for theatrical films. Internal marketing and “recommending” software are the cheaper alternative.
Without a vibrant theatrical release, Netflix still was faced with frontloading its payments to make up for the loss of any participation in the aftermarkets, although the streamer did entertain partial pick-ups where other production entities handled rights in designated overseas markets. But as the COVID-19 pandemic expanded, Netflix (and other streamers) found that as consumers stayed home, the more they watched an amazing expansion of streaming content. As the virus exploded, theatrical attendance eroded. Filmgoing habits established over decades dropped even when theaters reopened. Those over 35, once a mainstay in routine film-in-theaters attendance and big consumers of seriously themed films, seemed to continue to avoid traveling to see a movie in a theater. Home viewership was apparently a more permanent replacement. As we shall see, popular “event” films, with big budgets and lots of effects, seemed to prosper still… but primarily for younger audiences.
Big networks and studios had watched how Netflix had risen from an also-ran competitor to Blockbuster video (now bankrupt) to garner a market valuation that exceeded that of any other major studio of network. Netflix did it slowly, eventually with their flood of original programming that found traction, more often than not. By the beginning of January 2022, Netflix enjoyed a market cap edging towards half a trillion dollars, eclipsing the values of any major studio or network. That was before a 22% stumble (Disney dropped about 7%13 ), due to disappointing subscribed growth, in late January 2022, discussed below.
The big studios figured that to compete with this relative neophyte in what appeared to be a must-participate SVOD market, they would need massive libraries, much larger than what they already had built… and the merger acquisition fever, accelerated by the massive corporate tax windfall of 2017, exploded in Hollywood. That, along with exceptionally low interest rates, fueled a massive consolidation among major film and television companies that would change the face of “Hollywood” forever. Those mergers and acquisitions are discussed in greater detail below.
However, unlike Netflix that never had to grapple with percentage upside to their creative talent and rightsholders, every other studio and network had some form of percentage upside revenue sharing – excepting large budget animation as noted above – all forms of theatrical, cable/satellite, terrestrial and comparable media. This form of revenue sharing continued for decades. Net receipts, adjusted gross receipts, modified adjusted gross receipts, first dollar gross, cash break definitions of breakeven, gross after rolling breakeven, etc., etc., etc. They even had box office bonuses.
They were used to dealing with multiple subsidiaries dealing among themselves. Disney’s array of wholly or partially-owned and controlled networks – such as ABC, the Disney Channel, FX, FX on Hulu, ESPN, A&E, etc. – was hardly unusual. WarnerMedia had its wholly or partially owned HBO, later HBO Max, the Turner Channels, Discovery, CNN, etc. Comcast/NBCUniversal had a litany of networks from NBC, MSNBC, CNBC, USA, Bravo, Oxygen to lots of dedicated sports networks (e.g., the Golf Channel). Viacom reacquired CBS and now had fully or partial ownership in Showtime, MTV Networks, the Comedy Channel, Pluto (which would change its name to Paramount+, joining with CBS All Access, and expand to be Viacom’s dedicated streamer in the future) with its share of specialty sports networks.
Their upside formulae were rife with “arm’s length” or more discretionary backend accounting language to allow their subsidiaries to make deals with each other. Litigation over the years had further honed these definitions. As noted, to compete in the exploding streaming universe, some studios and networks believed they needed more content, more than they were capable of generating within existing structures. But there was an accounting fly in the ointment; their going-forward business plans increasingly focused on retaining their content assets, most to feed new streaming efforts, without selling or licensing that content to unrelated entities. Having to share upside under any form of percentage accounting of success became an intolerable burden. The more they acquired “existing assets” with percentage backends, the worse the problem become. But they still needed more content!
With lax enforcement of the nation’s antitrust laws, with a wink and a nod to Rupert Murdoch’s close ties to then President Trump, Murdoch’s main Fox film and television assets were sold to a content starved Disney – its earlier acquisitions of Pixar, Marvel and Lucasfilm were not enough – and a bumbling AT&T acquired Time-Warner (later “Warner Media”).
The acquisition of Murdoch-controlled 21st Century Fox by Disney was implemented over a long period of preacquisition negotiation and diligence, from December 14, 2017 to March 20, 2019. Disney’s acquisition included the 20th Century Fox film and television studios, U.S. cable/satellite channels such as FX, Fox Networks Group, a 73% stake in National Geographic Partners, Indian television broadcaster Star India, and a 30% stake in Hulu. Murdoch continued to control his publications, the Fox Television Network (and its lucrative news operations) and some significant landholdings. From this massive amalgamation of assets, Disney’s family-oriented streamer, Disney+, was born, launching on November 12, 2019, in the United States, Canada, and the Netherlands, and expanded to Australia, New Zealand, and Puerto Rico a week later. Its global reach continued to expand, accelerated by a strategic license of cricket games in India.
On June 15, 2018, AT&T announced: “AT&T Inc. (NYSE:T) has completed its acquisition of Time Warner Inc., bringing together global media and entertainment leaders Warner Bros., HBO and Turner with AT&T’s leadership in technology and its video, mobile and broadband customer relationships.
“‘The content and creative talent at Warner Bros., HBO and Turner are first-rate. Combine all that with AT&T’s strengths in direct-to-consumer distribution, and we offer customers a differentiated, high-quality, mobile-first entertainment experience,’ said Randall Stephenson, chairman and CEO of AT&T Inc. ‘We’re going to bring a fresh approach to how the media and entertainment industry works for consumers, content creators, distributors and advertisers.’”
HBO Max, AT&T’s streamer, was launched in the United States on May 27, 2020, in Latin America and the Caribbean on June 29, 2021, and in Andorra, Spain, and the Nordic countries on October 26, 2021. But there was one tiny problem, HBO already existed with its content, so new product was required to entice consumers to sign with HBO Max. Since its mega-movies, including its DC-based franchises, were unable to find a clear and timely home in theatrical exhibition, Warner Media (the content side of AT&T then) released its entire film slate on HBO Max without a full theatrical run. Talent screamed that their backends were now decimated, and an embarrassed Warner Media wound up making reparation payments to major talent as a result. Still, simultaneous availability seems to be pretty normal in this reconfigured universe.
With the ABC Television Network owned by Disney from an earlier acquisition, the remaining two of the big three broadcast network families, NBCUniversal and ViacomCBS, realized that they needed to be in that streaming space with their own content. After all, post-fin-syn repeal, that had built up significant content library assets. NBCUni launched Peacock, and ViacomCBS moved all their streaming operations into a newly configured service, Paramount+ (formerly “CBS All Access”). Many on Wall Street believed that these two of the three big broadcast family networks were simply too small, with lower-level television libraries, to compete against the behemoths in the streaming space. Were these services facing the possibility of merging with others just to survive? Time will tell, but their subscriber growth has required a lot of promotional giveaways to date.
To support how difficult a road these “broadcast-born” streamers face, Peacock’s parent released the hard numbers and estimates: “Peacock’s parent reported numbers that reflect the streamers uphill battle: “Comcast, in reporting Q4 earnings [on January 27, 2022], revealed that Peacock generated $778 million in revenue for the full-year 2021, with an adjusted loss of $1.7 billion. That’s compared with $118 million of revenue and an adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) loss of $663 million in 2020… For 2022, Comcast expects Peacock losses to total about $2.5 billion as its investment in content doubles, CFO Mike Cavanagh said on the earnings call.
“At the end of 2021, Peacock had 9 million paid subscribers, Comcast CEO Brian Roberts told analysts on the call — the first time the company has disclosed paying customers for the streamer. That base is approaching average revenue per subscriber of $10/month, including ad revenue. ‘And that’s without much focus on paid subscriber growth, he said. In addition, Peacock has another 7 million monthly ‘highly engaged bundle subscribers’ via Comcast Xfinity and other distributors; those currently receive Peacock Premium at no extra cost.”14 A nice “spin,” but the numbers are anything but optimistic.
Amazon, a streaming service accorded to their Amazon Prime shoppers, was facing off against this new competition, but since they did not charge a separate subscription fee, they felt comfortable with an industry assumption that families would only pay for 2.5 streaming services. Amazon was free to their subscription shoppers (“Amazon Prime”), but just to make sure they had sufficient content volume, they agreed to acquire MGM/UA, which acquisition was in process as of this writing.
By 2022, Netflix and Disney+ sat atop the subscriber charts by a significant margin ahead of any other SVOD players. Amazon was safe. The other attempts at premium content streaming faced a harsh reality. Was streaming the excellent business it was touted to be? It consumed capital at an alarming rate. More on this later. But AT&T was so disenchanted with Warner Media, that they agreed to sell/merge that asset into the Discovery networks, a $43 billion deal that is expected to close in mid-2022. The film and television industry was being reinvented. Sound stages space and production facilities the world over were overtaxed, even as COVID variants played hob with the process.
Yet with all of this going on, one theatrical film, Spiderman: No Way Home, was released theatrically by Columbia Pictures, a major studio without its own streamer, to become one of the biggest blockbusters of all time, topping well over billion dollars in worldwide box office by the end of 2021 (and continuing beyond into 2022). Did this mean post-COVID normalcy was possible? Very few other films were finding traction at the box office, and the indie world seemed relegated to initial release on some form of television. The consensus was that big franchise films would dominate in a post-COVID world. Everything else remained in doubt. But the success of the Spiderman sequel just might amp up high-profile talent to negotiate contracts on big films to penalize studios that do not allow a full theatrical release on their franchise product.15
To put it mildly, the industry was singularly confused. What made matters so much worse was the movement of movies and television productions emanating in the pre-streaming era… now placed into that streaming universe under old, existing contracts that simply did not contemplate this new model.
The emergence of this new medium has created a cloud of consternation in how streaming revenues – subscription video on demand (SVOD) viewing – would be categorized under older definitions of gross receipts used in upside calculations. If they are accepted as a form of television, the distribution fees and the full inclusion of revenues generated to the distributor yield a vastly better result to creative participants than treating these under the 80%-20% home video structure discussed above. The streaming signal flows directly from the Internet (or mobile equivalent) onto the consumer’s television or smart phone; there is no intervening device (but perhaps a comparable digital download?). SVOD content is literally played when the consumer directs.
Just this kind of dispute found its way to a Los Angeles Superior Court16 when Bill Nye, the Science Guy, challenged Disney’s upside interpretation of a 1993 contract, a time when SVOD simply did not exist. Disney claimed the home video (in this case an electronic sell-through – EST – off the Internet) formula applied. “Under Nye’s view, the parties’ agreement required the full 100% of EST/SVOD revenue, after deductions, to be split between them… The court ruled that Nye could not present his argument to a jury because, even if a jury were to find his position valid, it was inconsistent with other terms of the 1993 agreement—and therefore was not a reading of the agreement to which it was reasonably susceptible.
“Of particular importance to the court was language in the agreement stating that Buena Vista Television’s rights to exploit the series applied not just to technology then existing but also to any future technology still to be developed... The Nye court found that California law is ‘seemingly silent’ on the point, but ‘new use cases’ in other jurisdictions found that extrinsic evidence was rarely useful. The court, for example, cited the Second Circuit’s holding in Boosey & Hawkes v. Music Publishers, Ltd. v. Walt Disney Co., 145 F.3d 481 (2d Cir. 1998), that ‘intent is not likely to be helpful when the subject of the inquiry is something the parties were not thinking about.’… What mattered was the language of the agreement, which expressly contemplated future types of distribution. According to the Nye court, it could not reach a conclusion that rendered that language ‘superfluous.’…
“The long-term impact of the ruling will be worth watching. Some have read it broadly to mean that the court equated streaming with home video, and have questioned how a digital file streamed over the internet could be a ‘video device’ like a physical VHS tape or disc. That is not what the court held. Rather, the court concluded that the similarity between SVOD/EST and a video cassette or video disc was ‘debatable,’ and ruled that it ‘cannot hold as a matter of law that SVOD and EST are sufficiently similar to a video cassette or disc that they are a ‘video device.’
“That is not to say that the court believed a jury would agree with Nye’s view that SVOD and EST are outside the 1993 agreement’s definition of a video device. It noted, for example, that [Disney’s] Buena Vista Television ‘put on evidence to suggest that even with internet distribution there were still physical devices like a Roku or Apple TV box – thereby undercutting Nye’s argument that SVOD/EST do not also have a similar physical component to make them operable.’ In turn, the court acknowledged, Buena Vista Television ‘might still argue that the software that would be inside a smart tv screen is in some sense still a physical device – even if not a separate device.’ In short, SVOD/EST might be an evolution of, and similar to, home video, even without the clunky plastic case.
“In a vacuum, the dispute about similarity could have been a jury question. But the court concluded that the disputed issue was immaterial, and that Nye could not reach a jury, for two primary reasons: (1) the 1993 agreement had a ‘by any means or methods now or hereafter known’ clause, and (2) Nye argued that all streaming and download revenue should be allocated to gross receipts, with no distribution fee or royalty going to the Disney companies. The language in these agreements will differ, particularly when they pre-date the advent of streaming by years or decades. But the lasting impact of the Nye ruling is more likely to be in elevating the importance of these two issues than in deciding whether SVOD/EST revenue is derived from a ‘video device.’”17
Talent and rights-holders were frustrated with the disappearance of upside. Were they the only doubters? COVID had clearly changed content consumption patterns, perhaps permanently. But all the streamers were doing “just fine” according to their public face. The vast hordes of reported subscribers were impressive, particularly for the biggest streamers.
HBO Max always released its subscriber numbers as a combination of that streaming service and traditional HBO (about 74 million combined). Disney+ is around 120 million subscribers including its international operations. Netflix is over 220 million subscribers worldwide. But high-profile content is expensive. Netflix went on a spending spree shortly after their initial success with creating original scripted series, paying tens of millions, even hundreds, to attract top series creators under overall deals. The numbers had to be big since those players would be giving up some alarming upside numbers that were still being paid to top scripted series creators in the non-streamer universe. Was all well in this paradigm shift of the film and television world?
Even before the late January stock collapse at Netflix noted above, Wall Street was beginning to ask if this massive entertainment industry shift toward streaming as the supreme revenue generator was actually a good business. The subject was a hot topic in business journals, but an article in the Los Angeles Times seems to ask all the right questions.18 What financial analysts were noting is the horrific cost of creating all that bandwidth that streaming seemed to demand. More than the annual demand for big budget features from the old days. More series choices that big three network programming schedules in the days of yore.
“Yet as fun as it is to imagine Walt Disney Co. CEO Bob Chapek, Netflix co-CEO Ted Sarandos and Discovery [and future Warner Media] boss David Zaslav in a corporate cage match for the streaming championship belt, the question of winners and losers may be the wrong one to ask.
“The better line of discussion is the one that some analysts have been getting at for a while: Are we sure streaming is a good business?
“That’s the main question media analyst Michael Nathanson of MoffettNathanson pondered in a recent in-depth research report on the state of streaming going into the new year. Wall Street’s fixation on quarterly streaming subscriber numbers has come with ‘a distressing lack of focus on streaming economics,’ Nathanson argues.
“One of the major points Nathanson offers is that it’s really, really expensive to stay competitive in streaming. Keeping viewers’ attention means constantly putting out fresh shows and movies. A hit series will debut with a big surge in viewership and quickly taper off. The binge-and-burn nature of online viewing, coupled with the growing rivalries between the major streamers, is driving companies to spend even more on content.
“Disney has said it will spend $33 billion in fiscal 2022, an annual increase of $8 billion, as it tries to boost Disney+, Hulu and ESPN+. Nathanson estimates the combined Warner Bros. Discovery (assuming regulators approve the merger) will deploy $26.7 billion on content this year, including sports programming. He projects that the content spending of media companies will account for 50% to 70% of revenues in 2022.
“‘The truth about content spending for media companies looking to make [direct-to-consumer] pivots is there is no real end in sight,’ Nathanson wrote. ‘Whereas media companies before could only program around limited linear time slots during the day as well as their own studios’ release strategies, thanks to the unlimited, endless potential of content on streaming services, this level of spending should continue to ramp for any company that can afford to compete.’
“The big expenditures put pressure on profits, even among those with the strongest subscriber numbers. Increased spending by Netflix, which is expected to deploy $19 billion on content in 2022 (up 10% from the prior year), will continue to weigh on cash flow. Nathanson estimates that Netflix’s free cash flow margin will shrink to 2% in its current fiscal year, though it should steadily rise in the future.”19 HBO Max has experienced modest growth, but there were dark clouds gathering over the sector.
In later January 2022, the bottom fell out of Netflix shares, a fall of over 20% in one day, suggesting that there are aggregate limits to how many potential subscribers can actually be accessed. The January 25, 2022 Los Angeles Times explained: “Netflix’s stock tanked 22%... after the Los Gatos streamer reported disappointing subscriber numbers and projections, wiping out almost $50 billion in market value. It continued to slide Monday, dropping $10.35, or about 3%, to $387.15… This, of course, happened after the company said it expects to add just 2.5 million subscribers worldwide in the first quarter in of 2022. During the fourth quarter, Netflix grew by 8.28 million subscribers, slightly shy of the 8.4 million analysts had expected.
“One quarter doesn’t usually mean all that much, but the numbers are the latest sign that Netflix’s growth is tamping down. This probably shouldn’t be surprising. Netflix and other streaming services enjoyed a big boost in signups during the pandemic, and that effect was bound to wear off at some point, even with the recent COVID-19 surge.
“But there might be reasons for the slowdown other than the waning effects of the pandemic — and that has investors skittish… First, Netflix is facing a lot more competition, with Disney+ and HBO Max trying to grow their subscriber counts and spending billions of dollars to do it. Analysts have long said that people will only be willing to pay so many monthly fees for entertainment, and the industry may be hitting that wall.
“Netflix executives tend to say that their biggest rivals are video games and sleep, rather than other streamers. They’ve previously cited Nielsen data showing streaming’s relatively low share of total U.S. TV viewing — 28% compared to cable’s 37% — as evidence that the business has room to grow.
“Executives actually acknowledged the increased competition this time when discussing the firm’s earnings, while still kind of downplaying it. ‘There’s more competition than there’s ever been,’ said co-Chief Executive Reed Hastings in a prerecorded video interview. ‘But we’ve had Hulu and Amazon for 14 years. So it doesn’t feel like any qualitative change there.’”20 Or is there? The Netflix slide continued further downwards, albeit in smaller increments. At the tail end of January 2022, according to a filing with the Securities and Exchange Commission, Netflix CEO Reed Hastings bought $20 million of his streaming company’s stock in an apparent vote of confidence after that share price tumble, and the streamer made a modest partial recovery. But while analysts suggested some growth did remain for Netflix, their overall projection was for slower growth. Steaming was maturing. Other entertainment entities with streaming components also felt that downward market pricing momentum. With interest rates threatening to rise to meet current inflationary trends, mistakes would cost so much more in the future.
Of course, all businesses face a wall as their operations mature and they run out of significant pools of additional consumers.21 There is a streaming wall as well, and perhaps Netflix isn’t there yet, but the signs are increasingly clear. Exactly how far can you push consumers to add more subscriptions to their budgets? Is Netflix video gaming add-in a solution? As noted above, the pressure to spend large sums for standout content is hardly dissipating. And that addiction to spending has a serious impact on share value. But why are streamers so compelled to spend money at that absurdly high level?
“‘Roughly half of U.S. viewers who joined right after ‘Hamilton’ and ‘Wonder Woman 1984’ were gone in six months, data show… Streaming-video services get a surge of subscribers when they launch a hotly anticipated show or movie. But many of these new customers unsubscribe within a few months, according to new data, a challenge even for the industry’s deep-pocketed giants.
“The data, which subscriber-measurement company Antenna provided to The Wall Street Journal, illustrate the extent to which the streaming wars require all players to consistently churn out popular and often expensive programming to keep fickle subscribers satisfied… ‘You constantly need new content,’ said Michael Nathanson, an analyst for MoffettNathanson. Streaming services not only have to build vast libraries of old shows and movies, he said, they also ‘need a couple big, nice theatrical movies every quarter to make it feel like it’s really valuable.’”22
When the old-world broadcast and cable networks faced this cost wall (but, they’re still with us!), we witnessed an explosion of cheaper-to-produce “reality” programming – competitions, game shows, docuseries, celebrity “whatever” productions and lifestyle programs. While streamers have reached into this genre, perhaps realizing that expensive sports have even greater value, they also know that high profile scripted content remains their main calling card. But this cannot be all doom and gloom for what has become a cornerstone of filmed entertainment.
Through this all, one small streaming service from one huge company endured and grew. As Netflix stumbles, a much less expensive SVOD service from what is often the largest private company on earth, Apple, Apple TV+ trundles along with its own original programming and around 20 million US subscribers: “Apple has been aggressively investing in Apple TV+, its own streaming platform with original movies and TV shows. While Apple TV+ market share grew in 2021, the platform is still far behind its competitors with only 5% market share in the United States.
“According to a report by JustWatch seen by 9to5Mac, the Apple TV+ market share grew by 1% in the United States during Q4 2021. While Apple’s streaming platform has more subscribers than Paramount+ (formerly known as CBS All Access), the gap between it and competitors like HBO Max and Disney+ is huge.” Was Apple too small to feel the pain? Was its iPhone and iPad loyal consumer base that the other streamers did not have?
Is this an industry that is maturing entirely too quickly, hitting walls while still committed to spending massive growth investment dollars? Is the heroin addiction of production costs impossible to kick, particularly since these entertainment behemoths have so altered their businesses, reconfigured their entire workforce, to worship the monotheistic streaming God? But as representatives, lawyers in this industry dedicated to representing talent/rights-holders, on one side, and the mechanisms of production on the other, we have to ask ourselves what these cracks in the concrete mean… and how these may change our negotiating strategies.
IV. How Will Deal Terms Change in the Next Phase of the Streaming Wars?23
No one can predict exactly how this industry will evolve, not just the streamers at the center of change, but all the other aspects of film and television production and distribution. We don’t even have a handle on how new COVID variants might arise and slam headlong into our economy. Partisan divides and external international pressures, the rise of cryptocurrencies only amplify instability. So, I am going to make my suggested predictions within a general disclaimer that any or all of these variables, external to the entertainment industry and well beyond our control, may materially alter what follows.
Let me start with a little historical look-back. Keeping internal numbers secret, refusing to share sufficient information on success, seem to be losing propositions. In the 1970s, HBO tried to keep their subscriber numbers under wraps. So, the studios kept jacking up their license fee demands. Experts, including Nielsen, were looking… and numbers were released based on speculation. When it was clear that without transparency, content providers were assuming secrecy was a cover-up for success that would give rise to even higher numbers.
Eventually, HBO cracked. It revealed the numbers; it was the only way to stop the escalation of license fees. And soon, competition from home video gave cable television another huge reason for concern. Today, cable disconnects are exceptionally common, particularly among younger, more tech savvy consumers who have moved almost entirely to web-based content delivery, including streamers. That sounds great for streamers… but then, they are paying big dollar numbers to attract quality content creation without any requirement of success.
This cost-of-content reality suggests that streamers’ blindly jacking up front money to make for lost potential upside is simply not a prudent business practice. What’s worse, metrics from sophisticated tracking companies, combined with old world Nielsen analytics, are nailing some very predictive and accurate assessments of what success in the streaming world looks like, on a program-by-program basis.
Thus, there is an economic model that seems to beckon, although it is going to take a lot of data analysis to assign specific numbers to the concept. Streamers are probably going to have to moderate if not eliminate those big, frontloaded payments, but when those benefits are removed as costs spiral out of control, an angry “here we go again” program supplier, talent and rightsholder base is likely to demand, in screaming unison, a meaningful back end measured in success. Agents and lawyers unite.
What is that success metric? With data instantly available in real time today, particularly for Internet and mobile delivery, the answer is very clear: viewing hours per program. That metric needs to assign a set dollar number per viewing hour per consumer, an analytic based on a function of specific programming costs and subscriber fees. Easily calculated, especially with publicly traded companies with certified financials. Gross subscriber revenues allocated among gross viewing hours yields a value for per viewing hour for that streamer. Once you have the aggregate number of viewing hours for a specific program, the rest is a function of negotiation. Add revenues from ancillaries and you have the theatrical equivalent of gross film rentals and the television version of gross license fees. … what this article has been all about. What are production costs? Over and interest included? Recouped from 100% attributable gross? Less than 100%? Is that a distribution fee equivalent?
What remains is open game to be split: a portion retained by the streamer and the balance to be accorded to program suppliers, talent and rights holders. Breakeven is clearly measurable. A small percentage of gross theatrical revenues, for those simultaneous or near simultaneous releases, might also be added to the pot from which creative participations are paid.
It all sounds too complicated? We’ve been doing it in a slightly different form for years. With modern computer processing power, adding in artificial intelligence, industry standard metrics are quick and easy today. And there is no greater measure of success than the time consumers spend viewing their favorite programming. The fact remains that arbitrary supplemental bonuses are wild approximations – under the theory that the streamer would not order additional programs without some measure of success – which have “some validity.” Just not enough.
Streamers argue that they may pay less than the old-world formulae, but getting to upside sooner, even if less, is well worth the sacrifice. This “democratizing” of upside is interesting. But not to those who are responsible for the mega-hits, the ones that dominate social media and media coverage. Yet streamers are not saddled with out-of-control marketing and distribution costs, which without a theatrical release component, are marginal at best.
Streamers also correctly argue that they are giving niche opportunities to content that would otherwise never have access to an audience. OK. I’ll buy that… but so what? A viewing hour metric is self-correcting, rewarding what works and leaving behind that which does not. And exactly what is the benefit of streamers knowingly overpaying for content, when a meaningful share of upside, based on transparent reporting of viewing house attached to specific programs, might actually cost them less? Paying someone on success should not be a concept that generates massive resistance. Sure, sponsorship has worked in other digital formats – like podcasting24 – but that old-world model is precisely why many consumers migrated to SVOD providers in the first place. Viewing hour metrics are the most natural choice.
Some form of streamer upside seems almost irresistibly inevitable. It’s time for big agencies, unions and guilds and experienced data trackers to unite. This is a change that just might be good for everyone.
Endnotes
1. A graduate of Yale University and the UCLA School of Law, Mr. Dekom has been honored by the Beverly Hills Bar Assn. and the Century City Bar Assn. as the entertainment lawyer of the year, as well as receiving the ABA Entertainment and Sports Forum’s highest entertainment lawyer honor, the Ed Rubin Award.
2. The Digital Transition and Public Safety Act of 2005
3. Although these terms may be defined again later, for clarity, it is important to understand the main terms and acronyms that define content delivery to consumers. “Terrestrial” embraces over the air digital signals that can reach the consumer by antennae, cable, satellite, or other comparable system other than mobile. This is the replacement for the old analog “broadcast” model of yore. While “IP” generally means “intellectual property” to film and TV lawyers, it can also mean “internet protocol” to more technologically oriented users. “VOD,” however, means a digital “video on demand” service, often further refined with a letter at the front: “SVOD” adds “subscription” to the acronym, although VOD services with high-profile original content and higher standalone subscription fees may use “P” (for “premium” – “PVOD”) instead of S. “A” denotes “advertiser-supported,” while “H” means “hybrid” (a combination of subscriber and advertiser-supported). In all of these services, which I often refer to as “networks” or “streamers,” the content is maintained on the supplier network’s servers (or cloud) and usually not the personal hard drive/cloud space belonging to the consumer. Where the consumer receives personal control of a copy of the content, whether as a compact device (e.g., video disc or cassette or some digital equivalent) for permanent accessibility, that download service falls under the general notion of “home video” with “EST” (“electronic sell-through”) as the primary commercial transaction. While most entertainment lawyers believe that VOD services should be treated as “television” within a “network” and not “home video” – the ramifications of that descriptive confusion can wreak havoc on backend percentage definitions, as will be illustrated later – courts and sophisticated arbitrators do not always follow that practice. Today, “home video” is called “home media.”
4. The discussion of such ancillary revenues – including soundtrack, music publishing, video game, theme park, naming rights, licensing, merchandizing, non-fungible tokens (NFTs), etc. – is beyond the scope of this article. Such revenues can be included in the overall performance pot or separated in “non-collateralized” slices of revenues, paid before or after overall breakeven. While important, a detailed discussion would require more pages than this writing by far.
5. Weinstein, Profit-Sharing Contracts In Hollywood: Evolution And Analysis, The Journal of Legal Studies, Vol. 27, No. 1 (January 1998), pp. 67-112 (46 pages), Published By: The University of Chicago Press
6. Id. at page 81.
7. Resulting from United States v. Paramount Pictures, Inc., 334 U.S. 131 (1948). Studios divested their ownership of theaters under this antitrust settlement.
8. The applicable discounts and rebates were hardly inclusive (and distribution costs were often charged at full retail, which no one paid), studios would not stop accruing interest until monies they had actually received were “earned and forfeited” (which could take years), make-goods were not credited, etc.
9. In Buchwald v. Paramount Pictures Corp. 13 U.S.P.Q.2d 1497 (Cal. Super. 1990), among other issues, the trial court was so disgusted with the studio’s claim, on a clearly profitable motion picture (Coming to America starring Eddie Murphy), that not only were there no “net profits” to be paid, but under the studio definition the film was millions of dollars in deficit. Because Murphy was a first dollar gross actor, the more successful the film, the more upside the actor was paid, the more deeply in deficit the studio accounting was reflected in their “net profits” definition. Ignoring this “unconscionable” “Hollywood accounting,” the court reconfigured the contractual language to reflect a more accountant-standard definition of “profits,” awarding Art Buchwald substantial damages. Studios promptly revamped their “net” definitions, eliminating the reference to “profits” and adding new language to retain their definitions.
10. By adding payments of “first dollar gross” to negative cost, the costs across the board rose. Overhead and interest would thus be charged against these percentage payments, and since a greater gross was required (by reason of their studio’s distribution fee to everyone else) to achieve breakeven, this often created a vicious circle of ever-escalating gross, well beyond the actual cost to the studio of payment these “first dollar gross,” usually to movie stars and top-of-the-line directors and producers.
11. A deal that I negotiated with Fox Broadcasting on behalf of Joan and her executive producer husband, Edgar Rosenberg
12. Indeed, the studios’ definitions of percentage upside in television seemed to follow the same “Hollywood accounting” practices that had typified their historical efforts in the theatrical motion picture sector. In 2015, the stars, for example, series creator and producers/executive producers filed suit against Twentieth Century Fox in connection with the calculation of upside (under a definition of modified adjusted gross receipts) from the successful Bones television series. In February of 2019, after a Los Angeles Superior Court referred the litigation, in material part, to contractually mandated arbitration, arbitrator and former Los Angeles Superior Court Judge Lichtman found Fox’s accounting practices “fraudulent,” even suggesting that several Fox executives were less than truthful in their testimony. Wark Entertainment, Inc. et. al. vs Twentieth Century Fox Film Corp, JAMS Arbitration Case Reference Number 1220052735. Facing an award of $179 million against the studio, Fox finally entered into a confidential settlement agreement with the relevant parties.
13. Disney’s initial 2022 fiscal quarterly earnings reversed the downturn, at least temporarily. On February 9, 2022,
- Walt Disney (NYSE:DIS) has jumped 6.5% after blowing out its fiscal first-quarter earnings expectations, topping consensus on top and bottom lines and reporting more Disney+ subscribers than forecast.
- Earnings per share were 68% better than expected, and the company beat revenue forecasts for just under $21 billion by nearly $900 million.
- That came largely due to upside in parks and products, where revenues of $7.23 billion were more than a billion dollars better than expected. Disney Media and Entertainment Distribution revenue was in line with expectations at $14.59 billion.
SeekingAlpha.com, February 9, 2022. I suspect the market enjoyed the non-Disney+ revenues, but the concern over streaming costs remains.
14. Variety.com, January 27, 2022
15. As supported by the argument her upside was devastated that actress Scarlett Johansson made in Periwinkle Entertainment, Inc. vs The Walt Disney Company, Los Angeles Superior Court (LASC 31, July 29, 2021), where Disney released her Marvel film, Black Widow, before a full, standalone theatrical release. The case settled well before the Spiderman sequel was released.
But wait, there’s more. Talent and rightsholders aren’t the only players who believe that a hybrid, day-and-date theatrical/streamer release erodes potential upside. Investors have also objected to the practice. For example, on February 7, 2022, in Village Roadshow Films (BVI) Ltd and affiliated companies filed suit in Los Angeles Superior Court against its long-time co-financing partner Warner Bros. Entertainment, Inc. over the latter’s hybrid release of the franchise theatrical sequel, The Matrix Resurrections. In a 50-page complaint including 12 pages of exhibits, Village Roadshow claimed that this form of simultaneous release decimated not only the profit potential of this particular film but of the entire franchise, while building the audience for Warner’s streamer, HBO Max, and accelerating piracy, all at Village Roadshow’s expense. With box office numbers from BoxOfficeMojo.com as of filing: The Matrix sequel produced a paltry $37.5 million in domestic box office. Comparisons based on the performance history of the franchise and the ability of such event motion pictures to general massive upside – Spiderman, No Way Home generated almost $800 million in domestic box office revenues during the pandemic in a standalone theatrical release – formed the basis of the litigation. Expect a big settlement.
16. Nye v. The Walt Disney Co. et al., L.A. County Superior Court, Case No. BC 673736, (February, 2021)
17. A March 18, 2021 online summary from law firm Gibson Dunn’s Media, Entertainment and Technology Practice Group
18. Ryan Faughnder, HBO Max is doing fine. But is streaming actually a good business, Los Angeles Times (online), January 11, 2022.
19. Id.
20. Ryan Faughnder, Netflix’s bad week shows the challenges of the streaming business, Los Angeles Times (online), January 25, 2022.
21. Facebook/Meta, after a report of stalled subscriber growth, faced a comparable share price drop on February 2, 2022. Zuckerberg then announced a revival of a short subject video services that hardly allayed market fears. Walls were rising everywhere. With pressure focused on Meta in the Europe Union under its strict General Data Protection Regulation (GDPR), Meta was even making noises about shutting down Facebook and Instagram in the EU. Shades of “My Space”? Probably not, but the world has changed for maturing Internet companies.
22. Benjamin Mullin and David Marcelis, Disney+, HBO Max and Other Streamers Get Waves of Subscribers From Must-See Content. Keeping Them Is Hard, Wall Street Journal, January 31, 2022
23. The focus of this section is on premium content streaming which is almost entirely driven by subscriptions. Advertising driven streaming – AVOD services like YouTube and Crackle+ – tend to focus on lower cost niche programming, user-generated content, library fare (often non-exclusive) and product that failed to find a home on more lucrative sites. Most major AVOD sites have developed ad-revenue-sharing models for their creative providers along standard formats. However, there can be issues concerning which ads are those that generate shareable ad revenues (program-related vs general network advertising). But in this section, I am drilling down on that reluctance of SVOD/PVOD subscription services that so far have elected not to provide subscriber-based upside (or even the underlying information necessary to understand the clear performance metrics of successful content).
24. The radio equivalent of streaming is podcasting: the preparation and distribution of audio files to the various digital devices (computers, smartphones, etc.) of subscribed users. When listeners subscribe to a podcast, their RSS feed automatically updates their device with new podcast episodes. Authors use selected platforms to distribute their files, often music, blogs, designated subject matter, attractive host/speakers, etc. Revenues are often generated by sponsorships, and for a select few, the revenues can be staggering. Controversial interviewer and talk show host, Joe Rogen, the most successful podcaster in the United States, is purported to earn over $100 million a year through his exclusive distribution arrangement with Spotify. Ad rates range from $18 to $50 CPM (cost per thousand listeners) or more.