Synergy in Middle-Earth
We tend to be skeptics about the value of oft-claimed synergy of media giants. But recent events have shown that synergy can exist, though it might well be illegal.
Peter Jackson, the director of the fantastically successful film trilogy, The Lord of the Rings, had a deal with his studio, New Line Cinema, for a 20% take of the gross profits. As the films were so successful, that added up to $200 million, his return for making the studio, and its Time-Warner parent, over a billion dollars worth of profits off of over four billion dollars in sales. But Jackson says he is owed $100 million more.
Hollywood accountants are notorious for more creativity than most of the directors and screenwriters in the industry, making even the most popular movies look like money-losers, when a profit sharing deal is reached. The profits are assigned away to various expenses, and a number stars have had to sue to recover the money. For Jackson, the contract appears to be written to avoid the most typical kinds of fraudulent expenses and undercounts.
But Jackson claims it was in the profitable derivate rights that he was cheated. New Line sols the rights to make DVDs, games, and books to brother divisions of Time-Warner. The argument is that New Line sold the rights for an extremely low price, by closing the bidding process to outsiders. Such non-competitive pre-emptive bidding, it is claimed, cut the overall gross for the pictures at New Line, while keeping all the profits elsewhere within the parent company. The set up is called "vertical integration", and it's the equivalent of companies trading with their foreign divisions - it's often a way to shift profits around and keep them hidden.
A New York Times story ("Dueling lawyers in sequel to 'Rings'", 6/28/05) discusses the implications for large media oligopolies:
According to people on both sides of Jackson's lawsuit, the charge strikes at the heart of the modern, vertically integrated media company. One of the apparent, but largely unproven, benefits of media integration is the ability of conglomerates like Time Warner, News Corp., Viacom, Sony and General Electric to sell subsidiary rights to the many divisions within the company.
By painting this corporate synergy as "self-dealing," Jackson's lawsuit and similar suits filed in the past few years, called "vertical integration lawsuits," contend that the idea of the media conglomerate is at odds with the interests of the creative minds behind the content.
The expectation is that the studio will settle out of court, lest the company be forced to reveal under oath its accounting secrets. That's been the history in the past in similar cases.
