As film slates shrink and DVD sales decline, Hollywood talent agencies have increased their investment in digital and social ventures to make up for falling profits from shrinking star salaries.
In the last two months alone, the following developments have accelerated the pace:
>>The CAA-backed mobile gaming company, Moonshark, launched its first game.
>>WME made a seven-figure investment in the social video company, Chill.
>>UTA added social media superstar FourSquare to its client roster.
Meanwhile, ICM Partners rebranded its digital division in May under the leadership of former Warner Bros. executive Keyvan Pemani.
Also read: WME, Kleiner Perkins Lead $8M Investment Round in Social Video Start-up Chill
“Everybody in town is trying to figure out how to diversify and figure out different models and ways of making up for lost income that used to exist purely in the film and TV market,” Peter Principato, a partner at Principato-Young Entertainment, told TheWrap. “The evolution of Yahoo, AOL, Amazon and Netflix and the changing digital model, where they are all becoming cable channels, has people paying much more attention.”
As the $20 million star salaries of the '80s and '90s have become a fading memory, talent agencies have looked to diversify by turning to areas such as sports and fashion. But there is little doubt that digital is the next frontier as online businesses figure out how to make money.
Rick Nicita, a former partner at CAA, said agencies have to diversify to give themselves a financial cushion in these “very volatile days.”
The agency has already dipped its toe into this area, dating to the dotcom boom and pioneering days of online video a decade ago. Subsequent initiatives include CAA’s incubation of Funny or Die with Will Ferrell and Adam McKay and UTA becoming the first agency with a digital-only division in 2006.
But now the agencies are diving in full force, in some cases using in-house investment banks or newfound capital.
Also read: CAA Wants an 'Angry Birds,' Launches Mobile Apps Company Moonshark
ICM Partners hired Pemani because of his Silicon Valley connections and entrepreneurial instincts. It hopes he can better extend its existing talent and brands into web series and social-media sponsorships deals, as well as find new talent to sign and companies to invest in or incubate.
CAA and WME recently sold chunks of their agencies to outside investors, a move borne out of a desire for a cash influx — or to cash out. WME recently sold a non-controlling 31 percent stake to Silver Lake Partners, the Silicon Valley private equity firm, while in 2010 CAA sold a 35% share of the company to TPG Partners.
Also read: WME Sells 31 Percent Stake to Silver Lake Partners For 'Strategic Partnership'
Officials at the two agencies would not speak on the record, but Brian Norgard, co-founder of Chill, told TheWrap, “It seems as if they are paying attention very closely to this new convergence of entertainment and technology.”
And, he said, agencies "that align around digital become more valuable. You can find lots of different ways to make money and can do it without so many hands in the pot.”
WME, along with venture capital firm Kleiner Perkins, announced this week their investment in Chill, a social video company that has built a platform for users to view, share and comment on assorted online videos.
Also read: TPG Capital Buys 35% Interest in CAA
The talent agency also has invested in companies like Grab Games, a social gaming company, and Red Interactive, an web-focused marketing agency, among others.
Like WME, CAA has focused on investment and incubation with such projects as Funny or Die, Moonshark and WhoSay, a social network for high-profile individuals like celebrities and athletes. Moonshark operates out of CAA"s headquarters in Los Angeles, though that will change as its staff expands.
Also read: YouTube Talent Company Big Frame Secures $3M Seed Round
One senior agent from a competing agency who declined to be identified described the incubation and investment model as “more of a bulk and volume approach” but also acknowledged it made business sense.
"When people see an Instagram sell for $1 billion dollars to Facebook, that's what drives these agencies to look at that business," Max Benator, executive producer of "Sonia's Travels," a web series and a former agent at UTA and The Collective, told TheWrap. "I don’t think the agency is saying we want to operationally run a business, but they can package a technology or tech company the same way they do an entertainment property."
Moreover, experimenting first, whether with Red Interactive or Moonshark, permits the agencies to build networks of related businesses that can work with one another.
While UTA has invested in about a dozen companies, it breaks its digital department into four areas: online entertainment, video games, consulting and social media. In fact, it is the lone agency with a social media agent, Eric Kuhn, whose combines consulting clients like the NBA and FourSquare with managing social media for Rashida Jones and teaming Bow Wow with web video service Tout.
In addition, it continues to sign high-profile YouTube talent like Lucas Cruikshank, better known as Fred (right), whose success has spawned popular Nickelodeon films, as well as video game creators, like Electronic Arts.
CAA, WME and UTA have been the most aggressive in their digital efforts, but all agencies are recognizing the need to embrace this new marketplace.
Whether the agency is large or small, the challenge is creating a profitable business. That means captalizing on their core asset — the talent — and pairing them with emerging social and digital businesses.
“Agencies own a vital piece of the value chain,” Norgard told TheWrap. “The clients they represent have a massive footprint and someone will learn how to extract more value from those footprints.
Matt Kozlov, the CEO of Moonshark, said his company came about because major celebrities noticed the growth of the mobile app space and wanted to get involved. Jennifer Lopez, for example, is the celebrity force behind the company's first game, "DancePad," a finger break dancing app for mobile phones.
Because businesses are not yet or only marginally profitable, they must look for auxiliary ways to generating income.
Gersh, for example, represents a variety of digital talents, such as Epic MealTime, a group of Canadians, led by Harley Morenstein, that cook and eat heart attack-inducing food while drawing millions of people to their videos. Epic MealTime only makes six figures a year from advertising on its YouTube channel, but it brings in another seven figures by selling merchandise like T-shirts.
Cruikshank (Fred) has spawned a mini empire of his own thanks to the Nickelodeon movies. Funny or Die is not just a hugely popular website, it has birthed television shows like HBO's "Funny or Die Presents" and a national comedy tour.
Consulting fees and equity in social and digital companies led one senior agent to describe digital as generating a "meaningful amount of revenue" and a "very good business for the agency."
"It's not a loss leader; it's not looked at as something that everyone is in so we must be as well," the agent said. "We're doing it in a way that's profitable."