UPDATE: SINCE I POSTED THIS BLOG THIS MORNING, THE DGA AND THE STUDIOS HAVE REACHED A TENTATIVE SETTLEMENT WHICH INCLUDES INTERNET RESIDUALS BETTER THAN THE STUDIOS LAST OFFERED THE WGA. ACCORDING TO THE DGA PRESS RELEASE, AS SUGGESTED BELOW, THE INTERNET PROVISIONS HAVE A "SUNSET CLAUSE" AT THE END OF THE 3-YEAR CONTRACT, SO THAT THE GUILDS AND THE STUDIOS WILL BE ABLE TO REVISIT THE INTERNET RESIDUALS FORMULA IN 3 YEARS WHEN THE MARKET IS MORE MATURE, WITHOUT BEING LOCKED INTO A PRECEDENT.
Since my day job is entertainment law, let me take a moment off from writing about things like the presidential primaries, single payer health care, Iraq, and constitutional rights, and put my two cents in about the Writers Guild strike.
The strike is entering its third month, tens of thousands of workers in the film, television and related industries are out of work, and talks between the Writers Guild and the studios have been halted since early December. Hopes have risen that negotiations between the Directors Guild and the studios, which started last weekend, will result in a reasonable compromise on a formula for internet residuals that will then be accepted by the Writers Guild and the Screen Actors Guild.
There's no guarantee, however, that the DGA and the studios will reach agreement, nor, even if they do, that the WGA and SAG will accept their formula. Given the industry norm of "pattern bargaining" (i.e. the formula given to one guild is the formula given to all guilds,)if the DGA settles with the studios on an internet residual formula and the WGA rejects it, it's likely that hell will freeze over before he studios agree to a better formula with the WGA.
Here's the dirty little secret: No one knows how big or small a market the distribution of films and television programs over the internet will be in coming years--not the writers, not the directors, and not the studios.
And that's the nub of the problem. Hollywood runs on fear and both the guilds and the studios fear they will make a mistake in projecting the value of the internet market and that mistake will be locked in for many years to come.
The guilds are terrified that they will make the error which the guilds made in the '80s when home video was relatively new and no one knew how big the market for videos and DVDs would become. The studios suggested that videos were sort of like records and CDs--pieces of plastic that were shrink-wrapped in a container and shipped to retail stores. Therefore, home video residuals and profit participations should be based on a 20% royalty, similar to records, instead of being based on 100% of the distributor's receipts as was done for pay television.
Entertainment industry agreements tend to be based on precedent and once agreed to, basic concepts tend to be written in stone. (As a studio business affairs executive, I've often been required to tell talent representatives "no" based on "studio precedent", even if their requests seemed reasonable on their face. As a lawyer who has represented "talent", I've bristled when studio lawyers cited "precedent" back at me, but could do little about it unless my client was very powerful.) A 20% royalty became the precedent both for guild residuals and for "profit participants", and only the most powerful "A" list talent had any chance of doing better in their individual contracts. As the video and DVD business grew to become as large as the theatrical business (and the video market for TV series expanded), writers, directors and actors felt that they were being "cheated" out of participating in 80% of the studios' video revenues. But once the precedent was set, nothing could be done to change it.
Likewise, no one knows how big or profitable the internet distribution business will become. The studios are terrified that, in their negotiations with the guilds, they will overestimate the future value and agree to residual formulas that will become precedent but will make internet distribution unprofitable in many instances. (Remember, residuals are payable whether or not a particular film or television program is profitable.) The studios also have to be concerned that whatever formula they agree to for the writers and directors will also become precedent for the actors and IATSE (the guild for "blue collar" workers like electricians and stage hands who also get residuals which go, not into the employees' pockets, but into their health and pension funds.) Indeed the residual percentages that are paid to the Screen Actors Guild and IATSE are higher than those paid to the Writers Guild and the Directors Guild. So if the studios make a mistake and significantly overestimate the value of the future internet market in their contracts with the WGA or the DGA, that mistake will be multiplied in their contracts with SAG and IATSE. A big enough mistake could become a disincentive for distributing films and television programs over the internet which would be bad both for the studios and the guilds.
The nub of the problem is precedent--if either the guilds or the studios make a mistake in estimating the future value of the internet market, they are terrified they could have to live with that mistake for many years to come.
The solution is to agree on a temporary residual formula that would apply only to the next three years that the new guild contracts would run and explicitly agree that this formula would have a sunset clause and not necessarily be precedent for the next contract three years in the future. Over the next three years, it is unlikely that the internet distribution business will grow so large that a mistake would be fatal to either the guilds or the studios. Three years from now the shape and size of the internet market is likely to be much clearer and it will be easier to negotiate a new contract based on real market data and not speculation.
Unless the guilds and studios can agree that the residual formulas that they negotiate in this year's contracts are not precedential, then both sides will continue to live in fear of making a major mistake and the Writer's strike may well drag on for many more months. On the other hand, if the DGA and the studios can agree on a non-precedential formula that the studios and the other guilds can live with for only three years, then there's hope that the DGA and studios can arrive at a new contract that will be accepted by the WGA and end the writers' strike, as well as being accepted by SAG which would eliminate the threat of a "de facto" actors strike starting as early as April.
If that happens, Hollywood will have reason to celebrate and Oscar parties will be even bigger and more extravagant than ever. If not, this could be a very bleak year for tens of thousands of people who normally make their living in the film and television industry, and the ratings of the TV networks will decline even further as consumers find other ways to entertain themselves.