Further Agency Consolidation Could Be in the Works

Aug 7, 2006  •  Post A Comment

Talent agency International Creative Management’s July 27 announcement that it was acquiring the smaller Broder Webb Chervin Silbermann Agency was just the beginning of a significant wave of consolidation that insiders expect to hit among Hollywood representation firms in the next few years.

One veteran agent went as far as to predict that soon there will be just two major talent agencies.

If there are more mergers, however, it is likely the change will take place among the largest players, particularly firms looking to defend themselves against the strength of market leader Creative Arts Agency, said Lee Dinstman, executive VP and partner at the Agency for the Performing Arts.

“The big five are going to be the big two in a few years, because of the economies,” Mr. Dintsman told TelevisionWeek in an interview last week.

While consolidation on the studio, station group and network sides have been rampant over the past decade, similar mergers on the agency side have been more speculative, at least until last month.

The agency business has been dominated by the five majors—CAA, The William Morris Agency, Endeavor, United Talent Agency and ICM, with CAA considered the most dominant in terms of size and leverage.

In the current business climate, the dozen or so mid-size Hollywood firms with sizable TV businesses are under pressure from changes in the business, since consolidation has made for less competition among content buyers. And vertical integration has created a world in which studios and networks owned by the same corporate parent are also driving down fees and royalties paid to creatives. One solution would be to join forces with other agencies.

Agents at some mid-size Hollywood talent agencies said they understand why ICM and BWCS hooked up. BWCS, with 27 heavy-hitting agents mostly focused on the TV writer and director business, was a natural complement to the 140-strong ICM, which had seen its TV department lose leverage in recent years. Last November, ICM Chairman and CEO Jeffrey Berg secured a recapitalization deal to expand the company, money that apparently was used to acquire BWCS for what reports said was a $70 million deal.

Even with the pressure to use size for leverage and potentially attractive offers, many of the agents interviewed for this report said they don’t see their businesses going down the same path to consolidation.

“We’ve been approached many times in the past; in the past we always felt it didn’t make sense,” said Bob Gersh, president of The Gersh Agency, a 70-agent firm with offices in Beverly Hills and New York.

Mr. Gersh declined to give a figure for his agency’s worth.

The Gersh Agency, which has a TV literary department but is best known for its stable of acting clients, will “become a distinct alternative” in a world of larger firms, Mr. Gersh said.

Any additional mergers mean his firm can become even better known for boutique service, he said.

“You can spend a lot more time and give a lot more effort into each individual client,” Mr. Gersh said. “You can be in the outgoing phone call business and not just the incoming.”

The reasons for BWCS—a profitable agency that has no acting clients but a major TV writer and director business—accepting ICM’s offer are not unique to those two agencies. By law, agents cannot garner executive producing fees from their client’s TV work, but agencies can leverage profit participation, or packaging fees, from successful shows if their clients are key creative elements in the production.

In fact, television packaging fees are what drive the business of the biggest representation shops.

“Without television packages you can turn off the lights at the five largest agencies in town, with maybe the exception of CAA,” Mr. Dinstman said.

As the Hollywood studios and the TV networks have aligned with each other, they’ve increased their leverage in the creative community. The big media companies are the gatekeepers, and in many cases it’s their way or no way, which puts “more and more pressure on the agencies’ ability to maximize the revenue from packages in the same ways they are using their leverage to make more and more difficult artist deals,” he added.

Agencies used to expect a 5 percent cut from a show’s earnings as a package fee, but 3 percent is now the norm, Mr. Dinstman said. That’s because the big media companies are facing their own economic challenges with increased competition for viewers and ad dollars from new media. And those big companies have the power to say no to 5 percent.

The ability to renegotiate license fees once a show becomes successful has also been cut back.

“The days of an agency earning $50 million from a ‘Home Improvement’ are gone,” Mr. Dintsman said.

But Mr. Dinstman’s almost 50-agent firm, which recently bought office space in Beverly Hills and Nashville, also has no interest in merging. Like Mr. Gersh, he would not give an estimate of his agency’s value.

“I’m not sure every artist in the world wants to be repped by giant amalgamations of talent,” he said. “That’s good for some people, not necessarily good for everybody.”

For Bob Gumer, a partner at the seven-agent TV literary firm Kaplan Stahler Gumer Braun Agency, smaller firms like his can get around the issue of media conglomerate intimidation if they have the clients to back them up.

“With a strong piece of talent we can still get a package, or at the very least a half package,” he said. “It’s easier for us to partner with other agencies because we’re not looking to sign their acting talent.”

Agency mergers also have a mixed track record, ICM’s being a prime example. In 1992 the agency merged with the firm InterTalent. A clash of working styles forced a series of agent defections three years later that culminated in the creation of Endeavor.

“Any time you have a merger, you have the problem of assimilating two corporate cultures,” Mr. Gumer said.

The 90-agent talent firm Paradigm went through mergers of its own in 2004, when it acquired three other agencies. Those kinds of acquisitions “provide companies with the capacity to restructure existing cultures and business models, as well as the potential to improve bottom lines by eliminating overhead,” said Sam Gores, Paradigm’s president and CEO. Paradigm also declined to divulge its estimated value.

Paradigm’s mergers have been “practically flawless,” Mr. Gores said, noting that “sometimes you just get lucky.”