July 12, 2012 7:00am PT by Eriq Gardner
TV's Top Showrunners Make a Play for Digital Ad Revenue and Hulu Profits (Exclusive)
This story first appeared in the July 20 issue of The Hollywood Reporter magazine.
The hottest new drama in the television industry this summer won't be seen on any flat-screen. Instead, it's happening in secret closed-door meetings where attorney Larry Stein is on a mission to convince TV studios that it's time to ensure that creators of hit TV shows participate in the growing success of streaming services like Hulu, Amazon and Netflix.
Stein has a long history of taking up big causes. The 67-year-old senior partner at Liner Grode initiated some of the first courtroom battles against big studios over long-term cast contracts, vertical integration and the protection of reality TV formats. Now, Stein has set his sights squarely on digital revenue and is making demands on behalf of some highly successful TV showrunners -- demands that are prompting some studio executives to wonder whether he's lost his mind.
Up until now, showrunners have never been participants in network ad money. But Stein is insisting they be given a piece of online ad revenue as well as a share of money generated by, say, Hulu Plus subscriptions, and wants profit-sharing contracts modified to address streaming revenue. And if he doesn't get deal-room satisfaction, Stein is prepared to launch a lawsuit that could rattle the industry. He wouldn't break the attorney-client trust and name the five showrunners he's representing, though he does claim they run the "very top shows on TV" and if he brings a suit, the decision could be worth "hundreds of million of dollars."
The profit pool is only getting bigger: The online viewing of TV shows is up more than 46 percent in the past year, says media buying firm Horizon Media, and according to comScore, more than 180 million U.S. users watch online video content.
The steady online migration has made some showrunners nervous. Asked at a 2010 conference if he sees money from the estimated 2 million people who watch Modern Family weekly on Hulu, creator Steve Levitan responded: "Nobody’s crying for us, but not yet. It's very confusing because we can't get any answers. It's not me saying [networks and studios] are cheating us or stealing from us. But I question the ultimate wisdom."
And so, the creators of some of TV's most successful shows have hired Stein to audit profit participation contracts, leading to conversations with TV studios about digital income. So far, the studios aren't budging.
One top TV studio executive says that anybody who suggests that showrunners aren't benefiting from digital exploitation of shows "doesn't really understand the business." For decades, studios have licensed the first run of episodes of a show to a network. Recently, studios and networks have made a bargain with each other. Studios gave networks the right to exhibit the most recent episodes of a given "in-season" show online, and in return, studios have gained a more expansive ability to license "out-of-season" episodes sooner. So now, a show like CBS' 2 Broke Girls doesn't have to wait years until being syndicated, and that money can be shared with showrunners.
Studios argue that profit participants are already benefiting from the rise of new licensing sources like Netflix, and that healthy TV networks are still the best way to finance new shows. To ask networks to give up digital ad revenue threatens to upset everything. "NBC has never said to us, 'Why don't we participate in your revenue when you sell to Netflix?' " says the studio executive.
Stein reacts by saying this traditional approach is shortsighted. What happens when online replaces network TV as the predominant forum for new shows? "It's like if musicians had only agreed to take income from vinyl upon the advent of CDs," he says.
Gaining a more direct line into digital revenue represents only part of the battle for showrunners. Stein’s clients are also looking to tighten contractual definitions on “net receipts” to ensure that studios don’t inflate distribution fees and costs associated with the online distribution of shows. It’s feared that studios will attempt to treat digital income as “home entertainment” and deduct the high costs traditionally associated with producing and distributing DVDs. (The issue is being analogized to the ongoing battles between record labels and musicians over whether downloads off of iTunes are “sales” or “licenses.”)
But perhaps most distressing to lawyers for showrunners is the close corporate relationship that studios and networks have with each other. Would 20th Century Fox Television go to the mat to gain revenue participation from Fox.com or Fox co-owned Hulu if it became necessary? "This is going to lead to a new frontier in profit participation lawsuits," says Chad Fitzgerald, an attorney at Kinsella Weitzman who is currently representing the creators of Smallville in their vertical integration case against Warner Bros. "Most showrunners have a contractual relationship with the studio and not the network, so to the extent that a corporate conglomerate can keep money in the network where participants don't share profits, they will."
If lawyers like Stein successfully gain ground in ongoing negotiations, it could lead to an entire re-evaluation of how advertising and subscription revenue is allocated on online platforms. Says Stein, "As the market changes from network-based exploitation of content to Internet-based exploitation of content, [studios] can't pretend the future doesn't exist."