Disney’s New “Socialism”

Bob Iger Rings Opening Bell At NY Stock Exchange
Drew Angerer/Getty Images
Matthew Belloni
July 8, 2021

Back when I was a young lawyer, I’d often get assigned to Hollywood accounting cases. Some big talent—David Duchovny on The X-FilesPeter Jackson with The Lord of the Rings, the showrunners of Home Improvement, to name a few—would make something that earned a ton of money, their backend checks wouldn’t be as big as they’d hoped (or wouldn’t arrive at all), so they’d request an audit and discover the studio was stiffing them on profit participation—their cut of the revenue based on the negotiated definition in their contracts. 

These were interesting cases because they taught me all the ways vertically integrated entertainment companies make money on a film or TV series—the “waterfall,” in studio parlance. But at their core the disputes were all the same: Studios set the table via complicated profit definitions (some are dozens of pages long), then gorged on self-serving calculations and phantom “fees,” and often the talent was left with relative scraps. Or at least that was the view of the clients, all of whom came to my firm because they were really pissed off. 

Most cases settled for dimes on the studio dollars, but a couple I worked on actually went to trial—and one, alleging Disney cheated the producers of ABC’s Who Wants to Be a Millionaire?, ended with a stunning $319 million jury verdict that led to an embarrassing write-down. Unfortunately for my own efforts to become a millionaire, I had left for journalism before my old firm could cash those contingency fee checks.

It’s because of this background that I’ve become concerned about the recent dramatic changes in how talent is compensated in Hollywood. Most insiders are familiar with the general shift: Amazon and Netflix started “overpaying” people in exchange for a “buyout” of their backend. Why? Global digital distribution and a membership model largely suck the water out of the waterfall, and calculating an accurate backend requires basic transparency in ratings and revenue, which streamers abhor. Of course, eliminating traditional backends also meant killing the so-called “home runs,” where stars and creators could make hundreds of millions of dollars off a major hit. Instead, the streamers would capture all of that value for themselves.

Why would big stars ever agree to this? Ted Sarandos started waving around those upfront checks at the same time traditional TV viewership declined and the home runs became fewer and fewer. Agents salivated—they could make their annual numbers while explaining to clients that they can go ahead and buy that Bird Streets property now and sacrifice only a small chance of a potential windfall. Cash money in hand is better than cash money in theory—especially if you might have to audit or sue to get it. And in many cases, the agents were right. 

But now the streaming model has effectively eaten the entire television business, allowing the traditional studios to “update” their own form deals and realign who makes what, sometimes to the detriment of top talent. The base floor might be slightly higher, but the ceiling is much lower, and, like in the rest of this country, the healthy middle class is disappearing. “If you are a socialist, this is a good outcome,” snarks one agent. Well, it’s socialism for millionaires, something another rep more diplomatically calls the “democratization” of TV, but it’s still a huge change with profound implications. Hollywood has always lured the most creative people with the promise of striking it rich. Most fail, but for decades the hit television show has been the most consistent and direct path to extreme wealth for talented writers. That dream still exists, but it’s been diminished significantly. 

This is happening everywhere, but I’ll use Disney as the example because it’s the company that I hear the most complaints about when this topic is broached, and as the largest of the pure-entertainment companies, the others follow its lead. Plus, one of its former executives, Craig Hunegs, played a key role in hashing out these influential new deal templates with the Ziffren Brittenham law firm (in consultation with the major agencies) during a quiet, previously unreported nine-month negotiation ending in January 2020. After eighteen months of these new deals, we’re now seeing how they are changing the TV compensation hierarchy.

Disney has largely shifted from backend profit definitions to something called a “Series Bonus Exhibit,” a made-up term that creates a pool of S.B.E. points (usually 50 or 35) valued mostly by objective markers like number of episodes and season renewals, and, to a lesser extent, library rankings against other similar shows using internal metrics or Nielsen, if available, and on awards like Emmys and Golden Globes. S.B.E. points can be awarded to various participants in a series or hoarded and doled out by one lead producer, and separate pots of money exist for “transactional V.O.D.” (like purchases on Amazon or AppleTV) and merchandise, if the show isn’t based on Disney I.P. It’s complicated, but the main difference is the shift to a largely fixed compensation arrangement, rather than a sliding profit participation based on the consumption—or “hit” status—of a show.

This better reflects the new streaming economy—“we aren’t fighting over formulas; now we’re just fighting over money,” one lawyer explains—but it also has major implications for talent. For a top creator, who might have negotiated for 10 or 15 participation points on a series in the old days, this new S.B.E. calculation would be worth a fraction of those points. On a mid-range hit, that translates to someone who once made $40 million now making $10 million, according to top agents. On a big hit, a $150 million payday becomes something like $25 million. And it’s worse at the very top: If you create Modern Family, you might make $30 million now on an S.B.E. formula instead of $200 million or more on a traditional backend.

Agents often make up this discrepancy by negotiating separate overall deals for top writer-producers to stay with their creations. And those can be huge, hence the Shonda Rhimeses and Ryan Murphys of the world. Using the Modern Family example, creators Steve Levitan and Chris Lloyd might be able to extract nine figures to continue with their show for all 10 seasons. But that’s service-based compensation rather than a passive windfall for creating a megahit, and while it often makes sense to keep creators around, that’s far from guaranteed. The incentive for the studio is actually the opposite, at a certain point. Eric and Kim Tannenbaum famously made nine figures as non-writing producers of all 259 episodes of Two and a Half Men, a situation that the S.B.E. prevents from happening. 

The new S.B.E. formula does benefit the lower-end of creators by treating them basically the same as the hitmakers, as long as their shows stick around. Got a series that lasts five seasons? It doesn’t really matter if it’s This Is Us or a perpetual bubble show like American Housewife, you’ll make similar S.B.E. money if they each go five or six seasons. 

But is that really the right outcome? Dan Fogelman should make more from This Is Us because This Is Us means a lot more to Disney (via its 20th Television studio) and NBC. Thankfully, his deal is pre-S.B.E., so he does. And writer-producers on big hits can still renegotiate in success. But top lawyers and agents are often frustrated by the new system, which allows Disney to benefit from smaller and more predictable payouts, plus platform flexibility, meaning the ability to take a Disney+ show like the upcoming Beauty and the Beast and preview it on ABC without worrying that profit participants will claim it’s being undersold. Importantly, with an S.B.E. relationship, there’s very little Hollywood accounting to sue over, which gets to the heart of the main benefit here.

At its core, the S.B.E. is Disney’s way to avoid lawsuits like that Millionaire case I worked on. It’s not just the risk of jury awards; it’s the years of litigation costs and the humiliating headlines. Remember back in 2019, when an arbitrator absolutely scorched Disney’s incoming TV leaders Peter Rice and Dana Walden for “false testimony in an attempt to conceal their wrongful acts”? He awarded $179 million to the cast and creators of Bones, which was made by Fox’s TV studio, aired on the Fox network and was licensed at an artificially low price to Hulu, in which Fox had a stake. It was a classic case of vertical integration harming talent. And even though the $128 million in punitive damages was later overturned, the fallout was so bad for Rice and Walden that Disney C.E.O. Bob Iger had to put out a statement declaring “confidence in their character and integrity.” Ouch.

Disney quickly settled the case, and less than a year later, the S.B.E. was born. 

Now when Disney makes a show and charges its affiliated distributor a below-market license fee, the show’s creator has waived a lawsuit if he or she has forsaken a traditional profit participation for an S.B.E. formula. There’s no need to audit, and indeed I’m told many of the Hollywood auditing firms are hurting these days for lack of business. Disney typically won’t move forward on a show unless that S.B.E. waiver is signed, of course.

Disney’s film side is run separately, but it’s similarly frugal. Disney+ and Hulu now enforce a cap on producing fees of $1.5 million. That’s for all the producers. No backends or buyouts on Disney+ and Hulu movies. “It’s totally noncompetitive when compared to the other streamers,” one lawyer griped to me last week. “Apple and Amazon and Netflix all do buyouts.”

Disney declined to comment on this or any of the financial arrangements I’m revealing here. But Disney+ is mostly making movies and shows based on its own existing I.P., so the stinginess there is justified, a company source insists. If the streamer loses out on an original project to a higher bidder, who cares? (Cut to Disney execs laughing hysterically at the phrase “original project.”) Disney’s Lucasfilm and Marvel shows are run out of the film division and thus aren’t using the S.B.E., but unless you’re Jon Favreau, you’re probably resigned to the fact that you’re a hired hand working for one-off fees.

The justification for all this pressure on creators is the decline of the big home run in traditional TV. Broadcast is basically over, unless you’re Dick Wolf or Chuck Lorre or Greg Berlanti, who enjoy massive deals and can usually negotiate for lucrative approval rights when a show is sold to an affiliated streamer. But even their home runs barely clear the fence these days, rather than the upper-deckers of the past three decades. Cable networks increasingly can’t afford high-end scripted series, unless they are attached to streamers, like FX and Hulu. Syndication is dying, except for independent stations, which will still buy off-network shows but at dramatically lower prices. And when a series—even a major series—is sold to streaming, the buyer isn’t usually interested in 200 episodes, unless it’s Friends or The Office. Streamers want a few seasons, enough to keep people engaged, but not a full library. Netflix rarely lets a show go beyond a few seasons, and Disney+ seems to be following that model. 

So the talent was essentially backed into this situation. And now the ecosystem is adapting. Creators are benefiting from non-exclusive buying, which is why you see big shows like Law & Order: SVU on Peacock and Prime Video and Hulu, and it’s huge on all of them. And for new shows, in addition to those large overall deals, Netflix generally is guaranteeing basic profitability, meaning it agrees to a payout even if the show is canceled after one season. That’s a nice carrot because under the old model, if you’re canceled, you get nothing. But Disney isn’t doing this. I.P. has its privileges.

And if you don’t like the Disney deal, go see what HBO Max or Paramount+ or NBCU will do for you. Increasingly, it’s not much better, especially for a mid-level player, who doesn’t benefit from the raised floor and often isn’t a candidate for the overall deals that make headlines. The fact is unless creators take a stand and the guilds decide to grow a spine, Hollywood is moving toward a compensation system of upfront money plus bonuses, at the expense of the massive payoffs that have made talented writers fantastically wealthy. You’ll get that Bird Streets house, but not the second home on Broad Beach, the one next door to Steve Levitan. And, unlike the old days at my law firm, there will be nothing to sue over.