Sunday, December 7, 2008

SAG & The Studios: What Are They Fighting Over?

Several days ago, I analyzed the studios’ offer, which has sat on the table for over five months pummeled by SAG’s rejection and which the studios recently made public. Today, let’s drill down on the key issues that separate the two parties and ask, what are they fighting about, and which issues truly matter today and in the next few years?

This is a long post, but I think you’ll find it useful if you want to understand the issues, rather than just listen to slogans and each side’s self-interested positioning. As always, I welcome comments, corrections and questions.

UPDATE: Just as background: Before I posted this piece, I called both the AMPTP and SAG to discuss various aspects of it. The AMPTP took my calls, including during evenings and the weekend. SAG, however, never returned my call. In addition, the AMPTP read the piece after it posted and pointed out a few factual inaccuracies, which I have corrected as updates below. SAG has not given me any feedback on the piece. Representatives of both SAG and the AMPTP, as well as the other guilds and unions, are on my email list, so all of them are aware of the piece.

1. Jurisdiction Over Original Made for New Media Productions.

The AMPTP (studio) offer gives jurisdiction to SAG over derivative made for new media productions. Those are new media productions based on an existing television show. In the studios’ view (and, after reviewing the language, I agree), SAG does not currently have this jurisdiction, though the union has signed one-off deals for specific productions. SAG contends that under existing language, it does have such jurisdiction. In any case, that’s not what the fight is about.

What SAG objects to is this: the studio offer does not give jurisdiction over original made for new media productions unless the budgets are unrealistically high or the production uses a “covered performer,” such as an actor with two movie or television credits, for instance. Original made for new media productions are those that are not based on an existing television show.

SAG wants jurisdiction for all such productions, regardless of budget or covered performer status. The studios say no, arguing that they didn’t give any other union this unrestricted jurisdiction, and that the covered performer clause means most of these productions will be covered anyway, unless they’re truly experimental (i.e., no experienced professional actors at all). They want the freedom to compete effectively with non-union productions.

The studios are right, plus there’s another point: they can already shoot non-union by setting up sister companies, as Disney has done by creating Stage 9, a non-union company. (This practice is known as "double breasting" or “dual shop operations.”) SAG’s not fighting this. So why the big fuss over jurisdiction? SAG should drop this issue and move on.

On the other hand, you might turn the argument around and say, why don’t the studios just concede this point, since they can already shoot non-union using a sister company? Fair enough. The studios respond by pointing to the same or similar provision in the new media deal accepted by the Directors Guild, Writers Guild, the smaller AFTRA actors union (in two separate deals), and the IATSE union (which covers technical and craft workers, i.e., crew members).

So, you get finger pointing. SAG says it wants to uphold the sanctity of the principle that signatory companies should only do covered work—even though the SAG one-off Internet deals apparently have no minimums, which drastically reduces the significance of making something a union job, and even though non-signatory sister companies can do whatever they want. The AMPTP wants to uphold the sanctity of the new media template, and not reward SAG for negotiating late and being difficult to deal with. Nor does the AMPTP want to poke a finger in the eye of the other four unions for being willing to make a compromise.

Thus, each side says the other should concede on this issue that, as far as I can tell, means very little. Meanwhile, SAG is missing out on 3.5% increases in television and theatrical minimums, and other increases that I blogged about two days ago; also, pilots are shifting dramatically to AFTRA (which does have a deal). Does it make sense for SAG to forego these increases, continue to lose market share, and strike over something so meaningless today? No.

To reiterate: The dollars involved in original made for new media product are trivial, and almost certainly will be for the next three years. In contrast, what SAG is losing in increased minimums is a much greater amount. If there's a strike, the studios will likely pull the offer, and then—particularly in light of the collapsing economy—SAG won't even get the 3.5% increases that the other unions got and that are on the table. This is an economy where people in general are losing their jobs, not getting increases.

SAG argues that the next round of negotiations will be too late, since the contract language, once in place, will be hard to dislodge. There’s some truth to this; the home video (VHS/DVD) provisions in the union contracts, which are very unfavorable to actors, writers and directors, have been in place for 24 years without material change. (The unions also object to cable TV minimums and residuals.) So, to some extent, the studios are reaping the whirlwind they themselves have sown.

Nonetheless, striking now would be shortsighted, because the guild will have more leverage in three years. That’s because there’s something else in the offer as it stands today—something else that SAG may lose if it delays much longer: a synchronized expiration date with the WGA. Under the offer as it now stands, the WGA and SAG contracts will expire in three years virtually simultaneously. That will give the two unions true leverage, because they can threaten a joint strike. That will be the time to fight—a time when there’s more leverage, a better economy (hopefully), and perhaps some real money at stake.

2. New Media Residuals on Original Made for New Media Productions.

Now let’s turn to another major sticking point for SAG: residuals for original made for new media productions. Under the AMPTP offer, there would be no residuals in most cases that involve such productions.

Again, let’s be clear about the issue that SAG is objecting to. This scenario does not involve “move over” reuse—i.e., when a television show is rerun on the Internet instead of on network television. That scenario deprives the actor of large fixed residuals, and pays much smaller residuals in its place (under the deal on the table, which has been accepted by all of the other guilds and unions). It’s a real threat to actor’s livelihoods—and to studio profitability as well, since the ad revenue for a given broadcast (i.e., streaming) on the Internet is much lower than a network broadcast. However, the audience is moving online. They’re going to watch television content through pirate sites if it’s not available on network sites and Hulu (co-owned by News Corp. (Fox’s parent company) and NBC Universal).

So, “move over” reuse is a real economic issue. But—SAG is not objecting to this scenario. It’s conceded the issue. Nor is there an issue regarding derivative made for new media productions.

Instead, SAG is objecting to the fact that there would be no residuals for original made for new media productions when they are rerun repeatedly on the Internet. SAG says there should always be residuals for reuse of any kind of production, and that this is the opening gambit in an attempt to eliminate residuals altogether. SAG’s probably right. The studios say that original made for new media productions make little or no money, and object to paying residuals on top of a losing proposition. They’re probably right too.

SAG also says or implies (they haven’t made their proposal public) that the residual formula it seeks would be a percentage of distributors’ gross revenues, and that this means that “if they (the studios) make money, we make money,” and, conversely, if the studio doesn’t make money on a show, then SAG members won’t either (in the form of residuals).

Unfortunately, that just not true, because it ignores the difference between gross revenues and net revenues. A percentage of gross means that SAG members would receive a residual from any revenue the studio receives, even if the studio had not yet recouped its costs on the show. In other words, the actor would receive a residual even if the studio was still losing money on the show. The sloganeering obscures the reality. Not surprisingly, the studios object to SAG’s position; they also point to the fact that the other unions accepted the deal.

So why not have a residual formula based on net profits—i.e., a formula that kicks in once the studio has recovered its costs on the show? That might be a good idea, though there are problems. One is the difficulty in defining the costs that would be deductible from gross revenues. In talent contracts, for instance, the definition of net revenues can go on for pages. Another difficulty is that studio accounting, in the area of net revenue, is filled with sharp practices, and, at least in some cases, outright dishonesty. That’s what led Eddie Murphy to refer to net points (i.e., percentages of net revenues) as “monkey points,” because you’d have to be a monkey to think they meant anything. A third consideration is that no other residuals formula in the guild and union agreements, to my knowledge, is based on net (rather than gross) revenues. In any case, I don’t know whether there has been any serious discussion of a net-based residual formula for new media. There may have been (and there probably should be), but I just don’t know.

So does this mean that the issue of residuals for original made for new media productions is significant? Eventually, yes. Today, no. If you’re an actor, ask yourself this: when is the last time you auditioned for an original new media production, let alone worked on one? Probably never. When's the last time you even watched an original made for new media production (made by a studio, not some 20-something in his garage)? Maybe never as well. Simply put, there are very few productions of this sort, and even fewer that generate any revenue to speak of. Their economic value is dwarfed by television and theatrical production. Once again, SAG is fighting over pennies while ignoring the real dollars that members are losing by foregoing the 3.5% annual increases in television and theatrical minimums.

In response, SAG says that “new media is really now media”—i.e., implying that all media today is new media. That’s catchy, but false. There are television productions being shot across this city and elsewhere. That's not new media. There were studio theatrical motion pictures being shot across this city and elsewhere until the SAG contract expired. They're not new media either. There are a small number of derivative new media productions (new media based on existing television shows) being shot. They are indeed new media, but they aren’t relevant to the discussion, because SAG has not threatened to strike over them. (That’s because the studio offer on the table in this area gives union jurisdiction from dollar one and pays residuals in all cases.) There are television programs being rerun on Hulu and movies available for download on Amazon, but these aren’t relevant either, because SAG’s not threatening to strike over them.

All that’s left of “now media,” when it comes to a discussion of whether to authorize a strike, is a very small number of original made for new media productions. Their economic value is miniscule today. That’s not “now media”—it’s closer to “no media,” if you insist on a catchy slogan. Sometime in the future, there may be real money here; there probably will be. But, as I said in the preceding section, SAG should fight over these issues in three years, when the economics may actually mean something and when the guild may actually have leverage.

And, another point to remember—AFTRA has shared jurisdiction over made for new media productions, including original made for new media productions. If SAG tries to obtain gains in this area, more of this work will probably shift to AFTRA, which has the same exception to jurisdiction that SAG objects to. The work will then be non-union under the AFTRA deal, rather than union under the SAG deal. SAG’s boxed in: the more it fights for, the more it loses to AFTRA.

3. Product Integration.

Now we leave the area of new media and move on to other issues SAG has raised. The first of these is product integration. It’s a form of product placement on steroids. With traditional product placement, a can of Red Bull might sit on the table while two characters discuss how to save the world. With product integration, one character would actually have to drink the Red Bull, or mention it by name (“I’ll save the world after I get hopped up on Red Bull”).

In either case, the brand (i.e., the company that makes the product) pays the studio or production company. Sometimes the payment is in cash, which helps defray the cost of production. Other times the payment is “in kind,” i.e., in the form of products or services (this is also called a barter deal). For instance, an airline might give the production company free tickets, which helps defray the cost of flying to a location shoot.

Product integration is often distracting and annoying to the audience, but studios argue that they need the money, because traditional forms of revenue are declining—in particular, ad revenue on television. That’s in part because people use TiVo and other DVRs to fast forward past ads.

SAG has presented three objections to product integration: (1) It’s artistically objectionable. (2) Actors should have the right to refuse to do integration; that is, they should have a right of consent. (3) Actor’s should be compensated for integration. These objections need to be separated out and considered one by one, not jumbled together. So let’s look at each in turn.

(1) The artistic objection, although valid from the audience’s point of view, is simply not a credible or tenable position for the union to take. Entertainment is “show business.” It’s a business. The person funding the show generally gets to decide its artistic parameters. As an audience member, I certainly dislike product integration—and still, paradoxically, I also skip ads with my TiVo. You probably do too—even if you’re actor whose livelihood is being diminished by the softness in the ad market. That’s nice for us as viewers. Yet, someone has to pay for content. In any case, SAG is not the TV and Movie Artistic Czar.

(2) As to consent, it’s not reasonable for SAG to expect blanket consent, as much as actors would like it. Producers need the revenue that product integration provides. But, some forms of consent are reasonable. For instance, actors should be able to indicate prior to employment that certain sensitive categories of products are not acceptable to them. These might include tobacco, firearms, alcohol, meat, leather, fur, animal products generally, and even junk food (for the health-conscious) or contraceptives (for the religious conservatives). As long as the producer knows these things prior to hiring the actor, the producer can make an informed decision as to whether to hire the actor or not.

A more complicated issue relates to commercial conflicts rather than ideological ones. If an actor has a Coke commercial running, or has a commercial hold, he or she should be able to so indicate prior to employment, and not have to do an integration for Pepsi. Of course, there are complicated variants on this issue: what if the Coke commercial was a year ago and there’s no hold, or what if the commercial opportunity comes up mid-season? Those are issues worth negotiating. They’re not worth striking over.

(3) What about compensation? I agree that actors should be compensated for integration, for four reasons: (a) Actors have always gotten compensated for doing commercials, and a product integration is an embedded commercial. (b) An integration for one product, such as Pepsi, means the actor loses the potential to do a commercial for another, such as Coke. (c) An integration for Pepsi, for instance, means that the actor might not even get a commercial for Pepsi either (why should Pepsi bother, since they already have the actor in character endorsing the product?), or that the compensation would be less than on the open market. (d) As conventional advertising declines and product integration grows, actors as a whole are losing economic ground in the arena of traditional commercials and should be allowed to make it up, at least partially, in the replacement arena of product integration.

So, for those reasons, actors should receive compensation, at least when the product integration is a cash deal. In a barter deal, the production company is not receiving any cash, so it’s harder to argue that it should pay cash out of pocket to the actors if it isn’t receiving any cash in the first place. (You could argue that the producers will just have to ensure that they always get at least some cash.) Actors should also receive additional payment if a clip of the product integration is aired separately, since it would then be functioning as a standalone commercial.

The compensation issue is complex, and it may interact as well with the upcoming negotiations over the SAG commercials contract. That adds another layer of complexity, since that contract is with advertisers and major brands, not with the studios. Getting the studios to pay compensation for integration will be extremely difficult. This is an area where hard bargaining is certainly appropriate. Once again, though, there should be ground for compromise—and there might be, if SAG would abandon the new media issues.

4. Force Majeure.

This is a legal phrase, but it has a real dollar impact. Here’s what it means. The SAG agreement has a provision that applies if production is suspended or terminated because of certain kinds of events outside anyone’s power. Such events are called “force majeure,” and include riots, earthquakes, terrorism, or—significantly—strikes by other unions. The provision says that under these circumstances, the studio has to continue paying certain of the actors for three weeks at half-salary. After three weeks, the situation becomes more complex, but involves paying full salary in some cases.

SAG says this language applies to the 2007-08 writers strike—i.e., that actors are owed money under the force majeure provision because production was interrupted by the writers strike. The studios disagree, for reasons they’ve never made clear. The language seems unambiguous to me, and, despite my requests, the AMPTP has never explained their reasoning, citing a pending arbitration claim brought by SAG.

This battle is being fought on two fronts. First, the studios are refusing to pay force majeure claims relating to the writers strike, so SAG has brought an arbitration claim against them. Second, the studios want the contract language changed so that force majeure protections would be effectively eliminated. SAG calls this a rollback, and I think they’re right.

This issue, like product integration, is a good candidate for tough bargaining. There may be compromises to be had here; I don’t know. In any case, it will take a lot of force, no pun intended, for SAG to push back. But this is more feasible if the new media issues are dropped.

5. DVD Residuals.

SAG wants a 15% increase in DVD residuals. (More specifically, they want pension & health contributions to be paid on DVD residuals.) That's a valid issue—an increase is long overdue, as I blogged during the writers strike—but the issue is a complete non-starter. The studios will never give on this when SAG has so little leverage. It’s simply a dead letter, unfortunately.

6. Other Issues.

SAG has publicly raised various other issues, more minor than the above. Most or all of them are worthy of negotiation; all are resolvable though negotiation; and none of them are strike worthy.

7. Why the Stalemate?

There's really no chance of SAG changing the new media template, so far as I can tell. If SAG would drop the new media issues, a negotiation could ultimately resolve the rest. A tough negotiation should produce a reasonable compromise: not perfection for either side, but not a strike either.

Why won’t SAG do this? The answer is politics. In particular—believe it or not—the issue is politics relating to next September’s SAG elections. As horrible as it may be, the good of the membership is being sacrificed on the altar of elections that don’t even happen for another ten months. Here’s the dynamic at play:

The hard line, Hollywood-based Membership First (MF) faction has yoked itself to unreasonable and unobtainable demands. The leaders of SAG are all from or aligned with this faction—the President, the National Executive Director, the head of the negotiating committee, and others. This faction also controls the negotiating committee and the Hollywood Board. They have spent months trying to marginalize AFTRA and defeat its deal (see my posts starting in April of this year onward for details), rather than taking a hard and realistic look at their own negotiating position. In the meantime, the economy has deteriorated dramatically, to say the least, further undermining SAG’s leverage.

In contrast is the moderate Unite for Strength (UFS) group, also based in Hollywood, which scored a victory in the SAG board elections two months ago. This faction is aligned with the NY and regional board members; in combination, they now have a thin majority on the National Board. Why don’t they change SAG’s approach to negotiations—and also derail a strike? Several reasons:

(1) SAG rules and other considerations make it difficult to change the approach to negotiations. The key operatives who are driving SAG’s train off a cliff are the National Executive Director, the President, the chair of the negotiating committee, and one or two others. But, as I have previously blogged, it would be expensive to fire the NED, and it’s difficult to change the negotiating committee, thanks to a rule that MF put in place last year to help cement their control. The President’s term doesn’t expire until next September. So change isn’t easy.

(2) UFS is focused on a long-term goal, merger with AFTRA. Fair enough, but unfortunately, this focus has come at the expense of forcefully dealing with the current stalemate.

(3) In service of its long-term goal, UFS wants to elect more board members next September. For that reason, they don’t want to be vulnerable to a charge by MF that they (UFS) undercut the guild’s leverage by opposing a strike authorization vote or by appearing soft on the issue of new media. So, UFS shilly-shallies—sending out an email urging SAG members to “carefully weigh[] all the issues and the potential consequences”—rather than coming out against the authorization. Meanwhile, MF and the control group at SAG surge forward, clear in their goals, aggressive in their strategy, even if unencumbered by any vision of reality.

MF is in a win-win situation, since they can blame UFS for their likely failure to achieve unrealistic goals. Unfortunately, a win-win for MF has turned into a lose-lose for the members, and for the industry. As yet, there’s no end in sight, although failure of a strike authorization vote might hasten the day that the stalemate gets resolved.


Postscript: A Response to Robert Elisberg

A recent HuffPo article by Robert Elisberg argues for a strike authorization. I think a response is useful. In essence, the article misses the points above, including that the dollars involved in the specific new media issues SAG is raising are trivial, whereas the loss to the members (due to delaying ratification or rejecting the deal) in traditional media (such as the 3.5% annual increases) are huge. The article also has what I consider overbroad or misleading statements regarding new media. These statements, and my responses, are as follows:

  • “ … just made a $12 million profit, streaming video”: Maybe true—I haven’t double checked, and I’m also not sure if Robert means “profit” or “revenue,” which are two very different things (profit equals revenue minus costs). However, Hulu is mostly content from traditional television. Residuals are payable on such a “move-over” reuse—and SAG does not appear to be objecting to the formulas in this area.
  • “[I]n New Media, … [t]he proposed minimum rate is zero.”: Only true in original made for new media productions that don’t use a covered performer. Not true in other original made for new media productions, or in derivative new media productions.
  • “[I]n New Media, … [t]he proposed residual structure is zero.” : Only true in original made for new media productions that don’t use a covered performer. Not true in other original made for new media productions, or in derivative new media productions.
  • “[I]n New Media, … [t]he proposed overtime protections are zero.” : Only true in original made for new media productions that don’t use a covered performer. Not true in other original made for new media productions, or in derivative new media productions. Also, note that state law has some overtime protections.
  • “[I]n New Media, … [t]he proposed ‘forced call’ protections are zero.” : Only true in original made for new media productions that don’t use a covered performer. Not true in other original made for new media productions, or in derivative new media productions.
  • “[I]n New Media, … [t]he proposed protections for minors are zero.” : Only true in original made for new media productions that don’t use a covered performer. Not true in other original made for new media productions, or in derivative new media productions. Also, note that state law has some pretty specific protections for minors.
  • “Warner Bros.’ … Internet division had already cleared 15,000 TV episodes.”: Don’t know if this is true, but even if it is, so what? SAG is apparently not objecting to the residual that applies to such uses (see bullet point above re Hulu).
  • “[T]he AMPTP companies have … failed to make proper payments on streaming, blaming ‘technology problems.’”: True in some cases (the studios admit it), but somewhat understandable. The new media deals are about 30 pages each of dense legalese, with dozens of details. You can’t reprogram computers for this stuff rapidly. And the studios have stated that they’ll pay interest on the late payments. (Note: "in some cases" is an UPDATE; the first version of this post did not include this qualifier.)
  • “[T]he AMPTP companies have … even claimed that the new rates for downloading doesn't apply to any material produced before the strike - and therefore insist they owe nothing on the studio libraries.” Guess what—they may be right that the new rates don’t apply. I’ve read the contract language—has Robert? The language in this area contains an explicit start date of February 13, 2008 for payment. Thus, the issue is at best ambiguous. The WGA cites 1971 and 1977 dates that don’t even appear in the applicable section. It’s just not true to imply that AMPTP has no justification for its position. (The WGA may also, but the AMPTP may have the better of the argument.)