At An Industry Tipping Point, The Art Of Negotiating Will Be Key

Mary Collins

Several years ago, I participated in a class led by professors from a highly respected Chicago-area university. They broke us into teams, asking each to negotiate what it believed to be the best solution to a sports programming carriage dispute. The academics were using our group of about 30 people to test a program they were preparing for an industry seminar.

The lesson I learned that day was invaluable. The best answer, one which my team did not get to, was one in which both sides gave on a negotiating point (or points) resulting in an increase to the total shared benefit. By implementing this solution, both sides were net better off.

I was first reminded of this experience when I read a report about Barry Diller’s podcast discussion with journalist Kara Swisher. At one point, they talked about the joint WGA (Writer’s Guild of America) and SAG-AFTRA (Screen Actors Guild–American Federation of Television and Radio Artists) strikes in Hollywood. The lesson came back to me with the news about a carriage fee dispute resulting in Disney’s services being blacked out on Charter’s Spectrum cable service.

Regarding the strikes, Diller said he thinks the Hollywood studios should break away from their negotiating group — the AMPTP (Alliance of Motion Picture and Television Producers) — to hammer out their own agreement with the striking writers and performers. Diller’s reasoning is that AMPTP streaming service members Amazon, Apple and Netflix are in a different business than that of traditional studios. He’s right.

Generally speaking, those three streamers have been operating direct-to-consumer (DTC) businesses much longer than any of the domestic studios. The value of that DTC experience and the custom intellectual property solutions to support it should not be underestimated; they had a big head start.

Additionally, Netflix launched its North American streaming service in January 2007, a time when investor exuberance rewarded growth above all else. For Amazon, which debuted its Prime Video in September 2006, and Apple, whose Apple TV became available in March 2007, consumer video subscriptions are only a small portion of overall company businesses now valued in the multiples of a trillion dollars (Apple = $2.8 trillion; Amazon = $1.4 trillion). For the sake of comparison, consider that the highest valued traditional studio player is Comcast, the parent of NBCUniversal, at $189 billion.

Further, it is the traditional studio businesses that will be the hardest hit by a prolonged strike. They need content and the revenue it produces to support established lines of business and to build out their nascent streaming services. Custom user interfaces, content management solutions and direct-to-consumer marketing efforts all come with a hefty price tag.

At the same time, they are scrambling to prop up traditional distribution channels, all of which are experiencing declines. A drop in linear viewership — below 50% for the first time — and an aging, less desirable viewer demographic are putting downward pressure on payments for content and advertising revenue. The news from the box office isn’t great either. The increase in total ticket receipts seems to be more a factor of higher admission prices than the result of larger audiences. On top of that, strike delays mean that studios’ new content for theaters and home screens cannot be ready before January 2024 at the earliest.

If the studios decide to break away from AMPTP and negotiate a separate deal, there is precedent. In 1975, Universal quit what was then the Association of Motion Picture and Television Producers and formed a separate organization, the Alliance. Two other studios then notified the Association that they would be leaving. On the artists’ side, SAG-AFTRA has been negotiating interim contracts with non-AMPTP studios, like the one it signed for Ferrari, which is being distributed by Neon and STX International. If the traditional studios and the guilds can come together as, in Diller’s words, “natural allies, not your enemies,” both the producers and the creative talent should benefit.

Another piece of this puzzle is the networks’ relationship with their MVPD (multichannel video programming distributor) customers. It also seems to be fraying. That is a problem if they are counting on revenue from television viewers to help support their new lines of business. In the same podcast referenced above, Diller suggests that going it alone isn’t a strong position, that media “companies should instead ‘reorient’ themselves in an effort to revive the bundle.”

The carriage dispute between Disney and Charter Communications became news after Diller’s conversation with Swisher. Still, something like this had to have been part of what was on his mind when he mentioned bundles. If the MVPD business is going to move forward, such disputes must be resolved in a way that makes sense for both parties.

Hollywood strike negotiations and the carriage dispute issues are clearly intertwined. An article in last week’s Wall Street Journal points out that “profits of the cable TV industry haven’t just gone to programmers and distributors, but have also flowed down to talent.” The authors go on to say that streaming “has been less kind to a lot of writers and actors.”

One of the reasons for MVPD’s success was their ability to offer consumers a package of services at what was perceived to be a reasonable price. No household would watch every channel in the package, but each watched enough to justify the cost. The distributor (another business with deep direct-to-consumer expertise) would pay the programming providers a fee for each channel in a household’s package. It was an arrangement that benefited the programming companies and the distributors.

Programming companies’ moves to launch streaming channels, often sharing popular video content between the traditional channels and those available on demand, are reducing linear channels’ value to MVPDs. Knowing that they can stream content of interest, households are cutting both their payments to MVPDs for programming packages and their time spent viewing linear content. The combination of increases in content fees and ongoing subscriber losses is making the programming subscription service a less attractive business. It becomes even less appealing when senior MVPD executives consider that their companies are “effectively subsidizing a new business, streaming, that is eating cable TV.”

Fortunately, the Disney-Charter dispute was resolved before too much damage could be inflicted upon either party. Charter’s response to Disney’s request for an increase in content payments was to ask that the new fee also include access to the Disney’s ad-supported streaming channels and its yet-to-be-launched ESPN streaming service. If Disney did not agree, the MVPD said it would stop selling video packages.

Despite its initial position that Charter was asking to be given “services [that] now have a host of programming that’s totally distinct from cable TV,” Disney ultimately agreed to the distributor’s proposal. It’s a mutually beneficial solution. Disney gets the price terms it wanted along with the opportunity to grow streaming channel distribution. More viewers should also translate to more ad revenue. Charter gets to increase the value of its pay-TV packages, which it hopes will slow the rate of subscriber losses.

It’s indisputable that the video content business is at a tipping point. Not only are there two unresolved strikes in Hollywood, but there are also many other carriage agreements that need to be renegotiated.

Disney is already on record that it doesn’t consider the Charter agreement “a blueprint.” Other content providers, such as Warner Bros. Discovery or Paramount, may feel the same way. Still, there must be solutions that can benefit all concerned. I just hope that those at the bargaining tables can do a better job than my negotiating team did when faced with the challenge.

For us, it was a simulation and an opportunity to learn. In these cases, the final decisions will shape the future of the video entertainment industry, for better or for worse.

Former president and CEO of the Media Financial Management Association and its BCCA subsidiary, Mary M. Collins is a change agent, entrepreneur and senior management executive. She can be reached at [email protected].