Tuesday, June 28, 2005

Peter Jackson vs synergy, vertical integration

Here's a story that caught my attention because it involves one of my favorite directors (New Zealand's Peter Jackson of Lord of the Rings film trilogy fame) and the system of vertical integration that lies at the heart of Jackson's professional relationship with New Line Cinema, a component of the Time Warner media empire.

The New York Times reports that Jackson is suing New Line, claiming that New Line has "committed fraud in its handling of the revenues generated by" the LOTR trilogy; as a result, Jackson claims, he was underpaid by up to $100 million. (Jackson's hardly starving, though: his lawyer notes that he has to date "received almost $200 million to date from New Line for the trilogy.") Still, this is a law suit with a difference, because of its implications for the industry. The Times article notes that the concern emerges from "one specific allegation about New Line's behavior."

The suit accuses New Line and Time Warner of using pre-emptive bidding (a process closed to external parties - external to Time Warner's media empire, that is), "rather than open bidding for subsidiary rights to such things as Lord of the Rings books, DVD's and merchandise. Therefore, New Line received far less than market value for these rights, the suit says."

So it all has to do with "synergies" supposedly created by Time Warner's extensive vertical integration of its media production-distribution-exhibition empire. Time Warner was using its own extensive media holdings to deal out subsidiary rights to its internal companies - at rates allegedly far below what would be expected in a competitive bidding process. "Most of those rights went to other companies in the New Line family or under the Time Warner corporate umbrella, like Warner Brothers International, Warner Records and Warner Books. So while the deals would not hurt Time Warner's bottom line, they would lower the overall gross revenues related to the film, which is the figure Mr. Jackson's percentage is based on." As the Times states:
    According to people on both sides of Mr. Jackson's lawsuit, the claim strikes at the heart of the modern vertically integrated media company. One of the apparent - though largely unproven - benefits of media integration is the ability of conglomerates like the Walt Disney Company, Time Warner, the News Corporation, Viacom, Sony and General Electric to sell subsidiary rights to the many divisions within the company.

So in the case of the Rings trilogy, the overall New Line/Time Warner pie - in terms of gross revenues - appears smaller than it really should be. Profits for the trilogy are estimated at more than $1 billion, out of total revenues for Time Warner standing at some $4 billion. But the total revenue figure should be higher than that - allegedly, it has been artificially depressed by the insider bidding for these lucrative subsidiary rights. And remember, Peter Jackson gets a percentage of the revenues, not the profits. Very sneaky. But now, by "painting this corporate synergy as 'self-dealing,' Mr. Jackson's lawsuit and similar suits filed in the last few years, called vertical integration lawsuits, argue that the idea of the media conglomerate is at odds with the interests of the creative minds behind the content." The article goes on:
    If that idea was not enough to make studio heads very nervous, Mr. Jackson's status in the business could encourage other directors and stars who take a percentage of gross revenues to look more carefully at the accounting on their films. And because deals between corporate siblings are approved at the highest levels, vertical integration lawsuits often focus on senior division executives and their sales chiefs.

The article notes that "Since no studio head or corporate executive wants to be subpoenaed in a lawsuit over accounting, vertical integration lawsuits are almost always settled before reaching open court." But this time, with the stakes so high, who knows what will happen.


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