Studios Sold Wall Street on Cost-Cutting. But Unions Are a Tougher Task

Hollywood has been cornered into a new period of fiscal austerity, with top studios adjusting to the sobering realities of streaming and the larger economic environment — even as entertainment labor unions are applying significant pressure to boost labor costs. This economizing ethos has forced adjustments big and small: Features are filming less in Los Angeles or New York; some crews are working shorter days and longer weeks; mid-budget affairs are becoming tougher to greenlight. 

Meanwhile, studios and streamers alike are facing down a series of union talks this spring and summer where above-the-line talent are seeking major raises — which is sure to increase entertainment companies’ operating expenses on film and TV projects. The Alliance of Motion Picture and Television Producers (AMPTP), representing the studios and streamers in labor talks, is locked in negotiations with the Writers Guild of America before the latter’s contract expires May 1. The writers are seeking higher wage floors and a restructuring of so-called “mini rooms” (which, they argue, tend to hire writers at a discount), among other attempts to amplify overall compensation. The directors are next, with talks beginning May 10 that will be focused on streaming residuals and overall remuneration, followed by the actors on June 7. 

Related Stories

“There’s going to be a lot of tension” at the bargaining table in 2023 because of these conflicting agendas, says Joshua Edwards, a partner at Fox Rothschild’s entertainment and sports law department who represents both talent and indie production companies. “The producers and the studios want to keep control of those costs as much as possible, to try and protect their margins.” 

The industrywide belt-tightening started last year as part of Warner Bros. Discovery’s chase for $3.5 billion in cost savings after saddling itself with $50 billion in debt to finance its merger. Netflix’s dramatic stock fall in April 2022, tied to its first subscriber loss in over a decade, escalated the effort. Disney and Paramount Global, among others, felt Wall Street’s ensuing reevaluation of the streaming business and announced sprees of layoffs and cost-cutting efforts in pushes toward profitability. Production executives are already feeling the pressure. “Budgets continue to get tighter, while creative expectations soar,” says Kevin Berg, senior executive vp production at CBS Network Television Entertainment. “We are all facing the same challenge: How do you produce quality content for a price?”

Mitchell Bell, vice president of physical production for Marvel Studios, echoes the sentiment: “Many of the studios are starting to cut back on the number of productions as well as the size of budgets.”

During its current talks, the WGA — the first major union to negotiate with top companies this year, in discussions that will likely set a precedent for other unions — has argued that the entertainment industry has, over the long term, been on an upswing, increasing its total revenue from $155 billion to $220 billion in the past decade. While the industry’s investment in streaming has “had a short-term impact on company profits” and Wall Street has recently penalized burgeoning streamers that don’t turn a profit, “the companies have demonstrated time and time again that they can and will capture that value [created by writers],” the guild wrote in a recent report. 

The union, meanwhile, has been positioning its 2023 negotiations as critical for members who are finding it increasingly difficult to make a living in the business. Companies “look at the business on a quarter-by-quarter basis, but writers are in this business for decades, and what we negotiate will impact writers for a very long time,” says Laura Blum-Smith, the WGA West’s director of research and public policy. 

This round of cost-cutting pressure at these entertainment companies has been in motion for a least a year. In 2022, production executives said inflation and impossible-to-meet demand nationwide for the same materials, equipment and parts amid the production of a historic backlog of content stalled by the COVID-19 pandemic impacted set-building, with a few decision-makers explaining that entire scenes were cut to accommodate the increased costs in some instances. Some now say that those added expenses, which tack on at least an extra 20 percent in costs, and supply chain pain on top of industry-wide budget cuts to content have forced studios to scrutinize budgets more than ever before. “Sometimes the ‘where’ is decided first and sometimes the ‘who’ is first,” said Janet Graham-Borba, executive vice president of production for HBO, at a recent industry panel. “Now, the ‘How much is it going to cost’ is talked about first.”

For some highbrow productions, budgets have decreased alongside expectations for the quality of projects to improve. A major company’s top production executive notes that a network used to spend $10 million to $11 million per episode but now wants to make the same show for $7 million to $8 million per episode. This production executive has been experimenting with shortening days to save on costs, even if it means adding a few more workdays. Instead of shooting for 16 hours, which requires studios to pay overtime, crews under this exec’s purview are now shooting for 10 to 12 hours most days. And by adding a sixth shooting day to the week, studios take advantage of expenses that are paid per week or month, like trucks, lighting grip packages and stages. Producers have typically resisted this practice since it requires talent to lock into longer schedules but they can save up to $100,000 to shoot per day on big-budget projects if it can be done with some advanced planning.

The optimization of shooting schedules has similarly led to the addition of more tandem days, which involves running multiple sets instead of just one or two at stages that are close to one another. By shooting two episodes concurrently, the hair and makeup team, for example, can work on both episodes for the cost of a single day. If a show costs $200,000 to shoot per day, a tandem unit can be added for half that price, and a day can be taken off the shooting schedule. “I have shows where I basically have a full time second unit and we’re tandeming something everyday,” says the production executive. “On another, we’ll have 10 to 15 tandem days over the course of the season.”

Massive savings on the cost of labor and most other expenses can also be found in film and TV tax breaks, which have taken on a new degree of significance due to strained budgets. Depending on the jurisdiction, productions can save between 20 to 45 percent on qualified expenditures. “I don’t know if I’d be able to persuade my leadership in [filming] in a place that didn’t offer robust incentives,” Graham-Borba said at the panel.

But amid the proliferation of tax incentive programs subsidizing productions across the globe, a handful of historically major productions hubs, namely Los Angeles and New York, have fallen out of favor as shooting destinations. Fewer productions are opting to shoot in California and New York in favor of jurisdictions with better credits. Of 24 movies selected in California’s most recent allotment of credits, only three are studio projects, according to the state’s film office in its most recent report. For the same period last year, 11 studio films were selected to participate in the incentive program. 

In California, only the qualified spending portion of a movie’s budget, which doesn’t include star salaries and other payments to above-the-line talent, is eligible for credits under the state’s program, though that may soon change. Gov. Gavin Newsom has proposed making above-the-line wage costs eligible for tax breaks for the first time, with certain conditions, in a bid to fight runaway production. New York is proposing the same in addition to increasing the cap on the program to $700 million and raising the incentive to 30 percent — which could help offset any coming increases in above-the-line labor costs after the 2023 round of negotiations for national unions conclude.

Some production executives say the changes may not convince them to return as the state’s main issue is that it simply doesn’t have enough money in the program, delaying the return of the credits by five to ten years in some instances. On top of that, labor in Los Angeles and New York cost more than it does in other places. “There used to be Hollywood, London — and nobody went to Australia until The Matrix went there, but now look at it,” said Herb Gains, executive vice president of production for Legendary, at the industry panel.

Additionally, some places with robust tax break programs have the added benefit of having favorable exchange rates. A dollar in Canada currently goes more than a quarter farther than in does in the United States, though above-the-line costs don’t qualify for tax credits. Amazon Studios has prioritized expanding production into Africa and South East Asia to capitalize on the strength of the dollar, among other reasons including available infrastructure and incentives.

At the same time, studios have gravitated toward opposite ends of the spectrum on the budgets of projects and away from mid-budget productions. HBO, for example, has adapted to budget constraints by greenlighting more documentaries that cost around $1 million to supplement its blockbuster content. “You try to do a mix of programming,” says Graham-Borba. “The place we’re feeling the pressure most is shows in the middle of our price point.” 

Are major companies factoring in anticipated increases in labor costs, prompted by the WGA, DGA and SAG-AFTRA negotiations, as they implement these strict austerity measures? When queried by THR, a key physical production exec at a major studio downplays the impact of potentially pricier new writer deals on cost-cutting pressure but notes it’s a consideration.

“Will the writer deals be more hefty? Probably, but we get those numbers after the deals are in place, and we are just putting them into the working budgets,” this executive says, adding, “We rarely, if ever, pay scale to writers, so we don’t have a ton of exposure in that regard,” with “scale” referring to WGA wage floors. A new deal might not exacerbate existing budget constraints, the exec claims, because top studios typically pay more than the minimum pay rate for writers on big-budget projects.

While the studios will insist that Wall Street’s latest about-face on their prospects is a valid reason to stand their ground during negotiations, some industry dealmakers say they’re posturing and that the raises the unions seek won’t break the bank. “In the end, there will be a meaningful increase that will be significant for both parties, but it won’t fundamentally change the landscape,” says Matt Galsor, a deals lawyer who counts Tom Cruise and James Cameron among his clients. “It’ll hurt the studios’ budgets and it’ll help the writers, and all of that will be true, and we’ll have the same problem [in the streaming model] we have today.”

The pivot from studios toward slashing content budgets comes as executive compensation receives renewed scrutiny. A production executive at a major studio questions the decision amid sky-high pay for top brass. “The budget cuts stand in stark contrast to the fact that corporate salaries have shot up,” the person says. “Part of the issue is that the studios are not owned by filmmakers any longer. They’re owned by corporations and corporations frankly get into our business as if it’s going to be fun and glamorous, and they don’t realize how incredibly complicated it is to make a movie.”

To incentivize cost-cutting measures, WBD in March tweaked its executive compensation packages for top executives to offer bonuses in the form of performance stock units based on their success in generating cash and reducing debt. CEO David Zaslav’s performance restricted stock units, which have a target value of $12 million, could see their value doubled if he overdelivers on cash flow efforts. His pay for 2022 totaled nearly $39.3 million, mostly coming from a cash bonus of $21 million. Wall Street turning its back on the streaming model similarly didn’t stop Netflix from increasing pay packages to its top executives across the board either. Company chairman and then-co-CEO Reed Hastings brought in roughly $51.1 million in total compensation in 2022 — up $10.3 million from the previous year, according to securities filings released on April 21. Co-CEO Ted Sarandos saw his payout hit just under $50.3 million.

WGA and other union members have pointed to continuously stratospheric salaries for top entertainment executives, including Zaslav, as proof that companies can shell out more for their workforce in union talks this year. “If only there was enough money to pay the originators of their content,” Tom Clancy’s Jack Ryan writer and consulting producer Amy Berg tweeted upon the news of Zaslav’s 2022 pay. “I wonder how many WGA scale writing days add up to that,” added The Twilight Zone director Jen McGowan

Some production executives observe that budgets ballooned too much over the past couple of years and that a recalibration was necessary. Bell says that the “industry-wide content contraction” will lead to “crews having to look harder for jobs,” “empty production facilities” and “equipment sitting on shelves not being rented.” Amid the realignment, some studios expect to find cost savings as a result of recent relief in the supply of soundstages, labor and equipment.

After the initial pandemic-era halt, the production executive says that stages couldn’t be found anywhere because too much content was shooting at the same time. Now, this exec receives calls from stages across the world looking for tenants.

If there is a writers strike come May 2, some top execs and agency partners forecast to THR that it could result in additional cost savings, at least in the short term: A strike could allow companies to invoke force majeure clauses and offload expensive overall deals, as well as temporarily halt certain ongoing projects while relying on their libraries of content to keep viewers happy. Amid the 100-day writers strike in 2007, ABC Studios terminated the development deals of nearly two dozen writers and non-writing producers who weren’t working on major series. The wide reach of the cuts suggested to some that the move was not motivated solely by the work stoppage but rather an effort to downsize its roster, possibly to trim fat. “There’s value in what’s happening in the industry,” the production exec says. “The pendulum had to swing the other way.”

The Writers Guild argues that downward pressure from studios and streamers on their members’ wages long predates the implosion of streaming-model economics. Now, the union says, is the time to push back on what it claims is a trend of writers working for fewer weeks and at scale. Studios “can’t build, maintain or grow their streaming businesses without the content our writers create,” says Blum-Smith. “There’s no question that they need that content and they can afford to pay writers appropriately for their value.” 

Lacey Rose contributed to this report.