A Modest Suggestion on How to End the WGA Strike: Agree That Internet Residuals in the New Contract are Not Precedential

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.

Comments

[NicoleAnonymous]

It looks like the writers strike should be over soon.

[thetvdecider]

well good call miles!

can the writers say no to this?

[corymac]

OK, writers, the directors have made deal, according to the LA Times. Here's the beginning of the article:

Directors, studios make a deal
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The contract terms could pave the way for a solution to the 11-week-old writers strike. Producers invite the Writers Guild of America to reopen talks, but it's not clear how the union will react.
By Richard Verrier and CLAUDIA eller, Los Angeles Times Staff Writers
2:43 PM PST, January 17, 2008
The Directors Guild of America today reached an agreement with the major studios that will now put pressure on Hollywood writers to revive talks to end an 11-week-old strike that has roiled Hollywood.

In a new three-year contract, directors negotiated an improved deal than what studios had initially offered writers, including higher royalties for online sales of their movies and TV shows.

So are you guys ready to go back to work?

[grendl]

The studios have a much greater fear than the profitability of future internet revenues, they fear the balance in the business might actually shift to the people who form its foundation, the talented.

Just as in Michael Tolkin's " The Player" when Tim Robbins, the studio executive chokes the screenwriter in the back alley of a movie house
to death after being confronted with the undeniable truth of his reality when David Kahane says " I can write. What can you do?", the current negitiations smack of that same struggle.

The C students who run the business are worried the A students upon whose shoulders the industry rests will start to actually assert themselves. In that eventuality, unlikely as it is, all hell would break out, at least in the eyes of those in power.

They are terrified people, the studio execs, because it is really them, and not the writers who are as interchangeable as lightbulbs. And were they to capitulate on things like DVD revenues or internet residuals, that would be the beginning of the end for them.

Let's only hope it happens.

[booknutcase]

An interim agreement is a brilliant idea and should appeal to both sides.

[mheister]

Actually, the studios have a pretty damn good idea what they'll make off the 'Net. NBC alone is projecting $1 billion from its online operations this year.

The other dirty little secret? Metadata. The studios and networks stand to make HUGE bucks off this, and this apparently isn't even on the guilds' radar.

Last time the WGA cut the AMPTP a break was in 1988. The writers agreed to lower numbers to help the industry get this new unproven technology called VHS off the ground, with the understanding the issue would be revisited in three years. It never was.

The WGA has negotiated at least four interim agreements thus far, and more may be on the way, with television producers, film producers, and new media companies. These agreements have proven the WGA's proposals are reasonable (Harvey Weinstein is way too savvy to sign a bad deal).

The strike will end when the AMPTP decides they want to end it. Right now the producers are too busy basking in their short-term gains, cleaning house, and gaming each other. Or haven't Moonves, Zucker and whoever's at ABC this week noticed that Peter Chernin's using American Idol to play them for chumps?

[BillSeward]

Today's New York Times:
" 'Sideways' was a smash, grossing $109 million worldwide, despite only a $16 million budget. 'Sideways,' despite its astounding run, is still officially in the red."

This "modest proposal" assumes "honest accounting," an oxymoron in Hollywood. It assumes, after three years, the suits and the unions would both look at an honest, transparent set of numbers and decide, this works, or, we need to adjust this. Never gonna happen. Hollywood SURVIVES on shadowy accounting (a.k.a. "thievery") moving money around to offset their losses, pushing recoupment further and further down the line for the profit participants while guarding the actual numbers like Ft. Knox.

As another blogger on this site has written about this strike, there's an issue largely under the radar:
The "unions" are actually two-tiered models, with 3 to 5% making obscene amounts of money, and the rank and file being paid and treated like Wal-Mart workers. The money is there to end this strike tomorrow, it happens to reside in the pockets of a few of our "union" brothers and sisters, while the rest of us struggle to stay in the business and pay our bills. While stars should be well compensated, the amounts are staggering for these relative handful of actors, directors and writers, not to mention their agents, managers and lawyers, leaving an increasingly smaller piece of the pie to fairly compensate the rest of us.The AMPTP is attacking the rank and file, while catering to the most powerful members of our so-called unions. As Mr. Mogulescu himself writes, he, as an entertainment lawyer is only able to break "precedent" for his "most powerful clients."

"most powerful culinary workers"? "most powerful auto-workers"? I'd like to see it acknowledged that there is class warfare simmmering just beneath the surface, and that the lack of a reasonable distribution of wealth is what actually underpins the issues here.

[corymac]

Great post. It makes alot of sense. But, for the AMPTP, I think this is about more than internet residuals. First of all, I do believe the studios are making money off of this writers strike. This a part of an article I lifted from Media Daily News:

Strike's Dirty Little Secret: TV Network Profit
by Diane Mermigas, Thursday, Jan 17, 2008 7:30 AM ET
THE PROTRACTED WRITERS' STRIKE IS proving to be good--even profitable --business for the television networks, which will reap short-term benefits from scuttling their prime time season. Dramatic reductions in program costs before the full impact of anticipated ad revenue declines could result in quarterly double-digit profit gains, especially for CBS. The next several quarterly earnings reports by CBS, News Corp., Walt Disney Co. and GE will reveal the strike's unintended consequence: a network mini-boon.

It makes sense that the studios are making money from the writers strike because, A) Their ratings are not in the toilet so they are still getting advertising revenue and B) Look at all the people on strike (and now some laid off) who they do not have to pay. And they are still able to fill their air-time with shows that people are watching. If I was the AMPTP, I would keep this strike going for as long as I possibly could. As this article points out, its a great way for the studios to make great short-term financial gains. Plus, I think the studios want to stick it to the writers to show them who is boss. The thing about powerful people is, many times, they don't just want to defeat their opponents, they want to break them. And the WGA, being the proud little upstarts that they are, just keep feeding into that with their snide, wise-cracking bravado. Expect the AMPTP to drag out negotiations with the DGA for as long as they possibly can A) for the short-term financial gains they can make off the strike and B) because they don't like the writers.

[zaneblue]

Bless you! Here's hoping they take your advice!

[shortgirl]

I have a few questions.

Why would the WGA agree to a sunset clause? Would that not make the fight again in a couple of years?

What about the DGA who has studied this over the last few years in preparation?

Did the studios ever increase the residuals when the cost of production went down on DVDs? Does past action account for anything?

Thank you.