These days, 10 percent is not enough.
In purchasing the Ultimate Fighting Championship (UFC) for a reported $4 billion, WME-IMG (and their investment partners) increased their reach as major content creators and distributors in the world of sports and entertainment. It’s not their first such acquisition, but it certainly is the most prominent — they already own New York Fashion Week, the Professional Bull Riders League and the Miss Universe Organization. In January, WME/IMG announced a partnership with Turner Broadcasting to launch “ELeague TV” to televise competitive videogaming.
As shown by the UFC purchase, there’s a significant change happening in the talent agency business. Companies like CAA, WME, UTA, and ICM Partners (disclosure: I was an SVP at the latter and founded ICM’s New Media Group), historically known for representing actors, directors, writers, and producers, are moving into the production and distribution of entertainment content.
But talent representation has always been a business where your key assets — your clients — can walk out the door.
The challenges to commission-based revenues brought by a sluggish global economy and rapid technological changes have incentivized the bigger industry players to look into alternative revenue streams. Increasingly, agencies are securing those streams by making investments and strategic acquisitions outside of their traditional role as talent deal makers.
Commission-based revenue is trending lower because the profits generated by Hollywood content are lower. Film studios, TV networks, and music companies have been paying their talent less — so agency commissions are smaller — and spending more on marketing. Let’s look at some of the contributing factors:
- Despite rising ticket prices, theatrical film revenue is flat year to date, and fees paid to the top tier of stars and directors have been decreasing. The number of actors earning $20 million-plus per film and a share of “first dollar gross” (a share of the gross receipts that studios get from theaters and distributors without deductions from distribution fees, marketing costs, or even any budget recoupment) have dwindled to only a few names. Every studio is doing tougher deals with talent and (except for Dwayne Johnson) paying fewer people at the high end.
- The TV advertising revenue that fuels network license fees is being siphoned off by digital platforms, which is affecting TV show budgets. According to a recent report by Price Waterhouse Cooper, by 2017, internet advertising will reach $75.3 billion and, for the first time ever, overtake U.S. broadcast television advertising ($70.4 billion).
- Overall, music revenue is drastically down as consumers move toward subscription-based models through platforms like Spotify. The real money in music these days isn’t from album sales — it’s concerts, festivals, and “merch.”
- Free online video, digital apps, social media, and videogames are increasingly taking consumer dollars and mindshare. Traditional Hollywood talent isn’t participating in these revenue streams (unless you’re Kim Kardashian, release your own app, and make $45 million).
So representing talent isn’t the money-making enterprise it once was.
Talent agencies are forced to look for revenue opportunities outside of their core business to make up for shrinking commissions.
The major agencies have business development and technology investment teams evaluating and investing in emerging business opportunities:
- Last year, ICM Partners hired a VP from Buzzfeed to “devise new business models for ICM clients, whether it be in developing new online content, direct-to-consumer technologies, to expanding their social imprint as well as seeking out new clients in the digital realm.”
- Crunchbase lists 45 investments by CAA in 35 companies, including crowdfunding site Patreon, animated GIF resource Giphy, and this very platform, Medium.
- WME is participating in seed and Series A investments between $775,000 and $15 million in new tech companies like Forge, a game footage capture service for the fast growing e-sports and Twitch.TV communities.
- UTA famously invested in, and then helped sell, YouTube network Awesomeness TV to Dreamworks Animation for $33 million in 2013. UTA remains proactive, with 17 investments listed in Crunchbase, including a significant one in Woven — “a millennial focused digital media company, producing and distributing relevant pop culture content to nearly 5 million users per day.”
Conveniently, investment in tech companies and digital platforms evades the inherent conflict of interest a talent agency would have in owning traditional media production companies. That scenario would make talent agents the bosses of their own clients, and the Hollywood guilds like SAG, the WGA, and the DGA would balk.
Investment outside of the core representation business in technology and entertainment-related properties helps talent representation companies offset shrinking margins in traditional talent deals and expands their influence and revenue opportunities from an ever-growing list of consumer entertainment choices. WME-IMG’s purchase of the UFC will end up being seen as a smart long-term investment that increases the company’s reach in entertainment, but also blurs the line between the representation and content creation businesses. The UFC isn’t just a popular sports franchise — the purchase includes merchandising, TV rights, live events, digital media, videogames, and an incredibly passionate fanbase. WME-IMG’s business expertise and client roster across many media and athletic fields will grow the UFC’s brand and, in turn, create greater opportunities for it and the agency’s sports and entertainment clients.
Expect to see a lot more deals like this in the near future.