Residuals Chart Available

Residuals are complex. Flummoxed by formulas? Most people are. Whether it’s 1.2% of gross, 100% of TAM, or the complexities of new media, it’s easy to find your knickers in a twist if you spend more than a few minutes puzzling over this stuff.

Puzzle no longer — or, at least, not as much as before. I’ve managed to compress most of the guild and union residuals formulas onto a single page color chart. A second page gives cross references to the actual sections and paragraphs of the guild and union agreements themselves. That means you can look up the actual contract language and marvel at its opacity.

The chart’s not available in stores, but it is free, and suitable for framing. You could also laminate it for a nice placemat. Get your copy here: http://jhandel.com/residuals (check back from time to time for updates). Feel free to print, email and distribute. And let me know if you have corrections or comments.

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Subscribe to my blog (jhandel.com) for more about entertainment law and digital media law. Go to the blog itself to subscribe via RSS or email. Or, follow me on Twitter, friend me on Facebook, or subscribe to my Huffington Post articles. If you work in tech, check out my book How to Write LOIs and Term Sheets.

Closing Windows?

Interesting email from my satellite company today. DirecTV urges me to order Julie & Julia on PPV. Not my cup of tea, thanks, though I suppose Julia Child probably had a clever way to brew a cup of tea while cooking up some unusual dish at the same time. But more interesting to me were two little notes that accompanied the ad: "Now Playing" and "Same Day as DVD." The movie's official Sony website confirms that this is non DirecTV-specific.

That's intriguing. There's usually an exclusive DVD window before the pay-per-view release, with the window averaging 37 days this year, up from 32 days last year, says research firm SNL Kagan. Even the shortest average was 20 days, over at Lions Gate.

Is this a trend or an experiment? Probably the latter, but who knows where it might go. And for those wondering what effect this might have on the guilds, consider that the DVD residual formula is much less favorable to talent than the pay TV formula. Time for guild members to cross their fingers and send Sony some holiday best wishes - and maybe a gift basket worthy of Julia.

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Subscribe to my blog (jhandel.com) for more about entertainment law and digital media law. Go to the blog itself to subscribe via RSS or email. Or, follow me on Twitter, friend me on Facebook, or subscribe to my Huffington Post articles. If you work in tech, check out my book How to Write LOIs and Term Sheets.

Fixing the Residuals System

The residuals system is broken. It’s expensive to administer and is an invitation to conflict as platforms such as new media evolve. Yet we need residuals, because talent survives on these payments between gigs. Can the system be fixed?

Yes, I believe so. For a proposal, see my piece in today’s Hollywood Reporter.

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Subscribe to my blog (jhandel.com) for more about entertainment law and digital media law. Go to the blog itself to subscribe via RSS or email. Or, follow me on Twitter, friend me on Facebook, or subscribe to my Huffington Post articles. If you work in tech, check out my new book How to Write LOIs and Term Sheets.

SAG Thinks, Blinks

The Screen Actors Guild bowed to the inevitable yesterday and set a concrete date -- April 15 -- for commencement of talks with the studios. Had SAG not done so, it faced the prospect of a rival actors' union, AFTRA, setting a date for talks first, and thereby setting a template for SAG's negotiations.

That prospect -- which seems unlikely now -- would have undermined SAG's leverage, a situation unacceptable to SAG. That's because SAG represent movies and almost all primetime television shows, whereas AFTRA represents no movies and only three primetime shows. The contract being negotiated concerns movies and primetime shows (as well as some other areas).

The problem for SAG is that AFTRA may not be looking for the same deal points SAG is. The situation's unclear, because the committees of both unions reportedly agreed on the same package of demands. Yet, the recently-agreed AFTRA daytime pact (an agreement that is soley negotiated by AFTRA) doesn't track with SAG's publicly-stated demands, suggesting that AFTRA may be more willing to compromise than SAG. That's been SAG's concern with AFTRA in general; each union has a rationale for the approach -- hard line or conciliatory -- that it takes.

In any case, the key publicly-discernible differences are as follows (for detailed explanation of these issues, see my previous blog article):

First, SAG wants improvements over the WGA deal in new media, apparently in at least two areas: elimination of the 17-24 day window during which no residuals are payable for ad-supported streaming of new television shows; and elimination or reduction of the budget floors below which certain shows produced for new media are not covered by the union agreement.

Second, SAG wants compensation for forced endorsements (product placement on steroids). AFTRA's daytime agreement gained some improvement in a related matter, which is announcer endorsements of products, so perhaps the unions are close on this issue.

Third, SAG wants improvement over the writers deal is DVD residuals. These rates (percentages) have been low since 1984, when the directors accepted what the writers and actors view as a bad deal, one which has persisted to this day. AFTRA, in contrast, did not obtain (nor, presumably, seek) such improvements when it negotiated its daytime deal.

Another point worth considering: if SAG does strike -- which seems less likely now -- will the strike rules prohibit SAG actors from working not only on SAG projects but also on AFTRA contracts? (Although this by definition exceeds the jurisdiction of the SAG agreement, recall that the WGA strike rules prohibited writing for animation, even though this is beyond the WGA's jurisdiction.) If so, the 44,000 dual cardholders -- i.e., members of both unions -- would be put in an untenable position if working on AFTRA-covered shows: violate the rules and be subject to SAG discipline, or obey the rules and face discharge by their employers for breaching their employment agreements. Quite a dilemma.

What's the Deal?

We haven't been hearing much detail yet on the WGA deal in process, but here are a few data points:

On ad-supported streaming, Variety says the deal is initially similar to the DGA deal - in other words, a fixed dollar residual. No word if the amount is the same as in the DGA deal, and it might be difficult to make the amounts match exactly, because the fixed dollar amount in the DGA deal is keyed off of provisions in the DGA agreement that may not be identical to those in the WGA agreement.

In any case, note that I say "initially" similar. The WGA agreement has a three-year term. Variety reports that for streaming occurring in the first two years of that term, the fixed amount would apply. In the third year, the residual would be 2% of distributors gross (i.e., the amount that the network receives). This is a great improvement.

In contrast, the New York Post reports that the deal on ad-supported streaming is altogether different: their sources say that it is a tiered system based on viewership (no word on how the tiers would work or what the payment amounts would be). They also say that the 17 to 24-day free promotional window (during which no residuals are payable) has been shrunk to 7 days.

I don't know which of these reports, if either, is correct. However, either one of these approaches would probably be a victory for the WGA.

Variety also reports that the WGA has obtained separated rights for programs created for the Internet. This technical-sounding provision, which has no analogue in the DGA agreement, means that writers could receive various payments if, for instance, material they create for the Internet is later turned into a TV show or movie. That's another win for the WGA.

I haven't heard reports of any other differences from the DGA deal, but no doubt there are some. Also, there are a miscellany of other issues that are WGA specific.

Just for fun, let's look back at the six "roadblocks" the AMPTP cited when it walked out of talks in December:

1. Reality jurisdiction. The WGA dropped this demand a few weeks ago.
2. Animation jurisdiction. The WGA dropped this demand a few weeks ago.
3. Sympathy strikes. Status unknown, but the WGA has probably dropped this demand.
4. Distributors gross as a basis for residual calculation. The AMPTP conceded this point for the DGA, probably as a result of pressure from the WGA strike.
5. Self-dealing transactions. The AMPTP gave the DGA some advances in this area.
6. Industry standards (requirement that subcontracted work be subject to terms of Guild agreement). Status unknown.
   

HBO Free Online VOD Test

The Cynopsis Digital email newsletter has an interesting report today:

HBO begins testing a new broadband content offering today in a selection of Time Warner Cable systems in Milwaukee and Green Bay, Wisconsin. HBO on Broadband, viewable only on PCs by HBO TWC subscribers, will offer access to some 600 episodes (400 at any one time) of HBO originals per month for no additional charge, including The Wire, Sex and the City and The Sopranos. ...[N]o details on whether or not the service would eventually be offered nationally.

Unclear if this is streaming or download, and what residuals formula will be used.

Wedge Issue in the Hollywood Strike: New Media Residuals

The directors guild (DGA) and writers guild (WGA) are meeting soon to discuss new media. That's a hopeful sign, but does it mean the WGA leadership is likely to support the new media deal that the DGA and studios ultimately agree to? Maybe not, for several reasons.

First, as I've previously discussed, the WGA leadership may be subjected to scathing criticism if it looks at the DGA's deal and simply says, "yes, I'll have one of those too." (See WGA Strike: How to Restart the Talks, And Why, section entitled "Why It's Important to Do a Deal Before the DGA Does"). Rightly or wrongly, people will question whether a bruising strike was necessary at all; why not simply have worked without a contract for a few months instead, and let the DGA do their deal?

Second, the DGA places less emphasis on residuals than the WGA or SAG do (see sec. (1) of Writers' Strike: Why They're Talking). This means that the DGA will probably emphasize other issues, such as compensation minimums, somewhat at the expense of new media residuals, in the eyes of the other WGA and screen actors guild (SAG).

Third, each new media residual dollar that the DGA obtains will cost the studios more than twelve dollars. That's because, if the DGA deal on new media residuals serves as a template, the studios would have to pay corresponding amounts to the other unions: in other words, $1 to the DGA means also paying $1 to the WGA, $3 to SAG (there's a 3x multiplier), $4.50 (a 4.5x multiplier) to the IA (the IATSE, which is the union that represents technicians and craftspeople), and around $3 (another 3x multiplier) to the AF of M (musicians union). See Reflections on Residuals: Go Forth and Multiply for discussion of this phenomenon, called pattern bargaining.

Those multipliers are definitely a problem, because they create a wedge that the AMPTP (studio negotiators) can exploit between the DGA and the other two unions. For instance, suppose the DGA were to say to the AMPTP during negotiations "give us $10 more in new media residuals, and, by the way, we know the WGA would probably be happy with this amount too." Sounds nice. However, the AMPTP would look at this proposal and realize that the actual cost to the studios would be more than $120, because of those multipliers.

In response, the AMPTP might say, "no way, but we'll instead give you $50 in additional minimum compensation" (the money that gets paid to a director upfront). In that scenario, the DGA gets more than it asked for ($50 rather than $10), but the other guilds and unions get nothing, because minimums are not mirrored across the various guild and union agreements.

In other words, there's no pattern bargaining, and no multiplier effect, when it comes to minimums or other non-residuals issues. Thus, the AMPTP is more willing to give a dollar on a non-residual issue than on residuals. And - as mentioned above - those non-residual issues are precisely the ones that are somewhat more important to the DGA anyway.

So, the DGA might well accept the AMPTP counteroffer, since $50 is a lot more than $10. Now, that's no criticism of the DGA. Its duty is to represent its members. And, of course, the DGA are not pushovers, and they come to the table armed with almost $2 million worth of research on new media issues, plus a veteran entertainment lawyer, Ken Ziffren, as a consultant. But this "wedge issue" does create a problem when it comes time to sell the new media deal to the other two guilds.

The resolution to this problem has less to do with math and more to do with words: if there are no words on the page, there's nothing to direct. And if there are no actors to speak those words, there's still nothing to direct. Nothing to direct means no work for the DGA member. So, the DGA will need to balance its members' on-paper financial interest with the real-world scenario of one or even both of its sister guilds on strike.

At the end of the day, the DGA and the AMPTP will reach a compromise that, hopefully, incorporates the interests of the other two guilds indirectly as well. In our example, perhaps the DGA and AMPTP would agree on a $5 increase in new media residuals plus a $15 increase in DGA minimums. That would be a $20 total increase for the DGA (better than $10, though worse than $50), a $5 increase for the WGA (better than nothing, but not as good as $10), and corresponding increases for the other guilds in accordance with those multipliers. The cost to the AMPTP would be $75 ($5 times twelve, plus $15), which is not as costly as $120 but is more so than $50.

The key, then, is for the DGA - as well as the AMPTP - to believe that the WGA is serious about the strike, and willing to stay out for months no matter what the loss of income to writers, directors or others (actors, IA, and everyone else). That's a brutal truth, but with direct talks between the WGA and AMPTP stalled, keeping the DGA under pressure may be the WGA's only option.

This article was first published on the Huffington Post on December 18, 2007.

DVD + Hi Def = $20 billion in 2012

"By 2012, standard DVD discs will total $10 billion in U.S. consumer sales, HD DVD $5 billion and Blu-ray $5 billion," per Adams Media Research, as reported by Video Business.

This compares with 2006, in which DVD was a $16.5 billion business, according to the Entertainment Merchants Association trade org. (Unclear if this also includes hi def, but the difference is probably not great either way.)

That growth, even in the face of the continued hi def format war (Blu-ray vs. HD DVD), means that the WGA's failure to achieve an increase in the DVD residual (see WGA Strike - Negotiation Issues) will continue to represent a significant loss, as I previously predicted. See Slipped Disc: Why DVD Residuals Still Matter — and Always Will.

Streaming Ad Market Worth $120m to Nets in '07

The Financial Times is reporting that the four major U.S. networks will reap $120 million in 2007 from ads connected with free streaming of their content. The number is expected to sharply increase next year. The FT's source is Starcom, described as a leading media buying agency.

The WGA wants 1.2% of such ad revenue, which suggests $1.44 million would have gone to the WGA for 2007. However, the Guild is willing to give the nets a residual-free promotional window of several days (i.e., the first several days that a particular program is available would not trigger residuals). Thus, the WGA's take would be less than the math suggests.

The cost to the nets and/or studios would be 9.5 times as much, because the residual formulas in agreements for the directors, actors and below-the-line craft workers would contain similar residuals formulas.

Reflections on Residuals: Go Forth and Multiply

Just four cents per DVD — that’s the writer’s home video residual, we’re told. More specifically, the hated DVD formula is 1.5% (or 1.8%) of 20% of the studio’s gross on DVD sales. That odd looking set of percentages is equivalent to 0.3% or 0.36% of the studio’s gross. The 1.5% or 0.3% applies when the studio’s gross on a title is less than or equal to $5 million; the 1.8% or 0.36% applies thereafter. If the studio gets about $11 on an average $22 DVD, the writer(s) get a total of three to four cents.

That sounds small, and it is. The WGA made a proposal to double those residuals — that would be a four-cent raise per DVD — then withdrew the proposal at a bargaining session two weeks ago. Now the proposal may or may not be back on the table when talks resume next Monday, but even eight cents per DVD sounds modest. Why are studios resisting?

Then there’s new media. Here, the Guild is looking to double its take on streaming (from 1.2% of studio’s gross to 2.5%) and an eight-fold (not eight cent) increase on downloads (from 0.3% of the studio’s gross to 2.5%). That last one is large in relative terms, but the actual dollar amounts are small today (though will be larger in the future). Hence, again, the question: why are the studios fighting the Guild so vociferously?

The answer on DVD dates back to what many of us inadequately learned in third grade: multiplication. On new media, throw in a bit of geometry as well. What are the facts and figures, and are they persuasive? Here’s the 411.

Multi-Guild Residuals — Almost Ten Times the Fun

A four-cent per DVD increase sounds like a no-brainer. But in the world of Hollywood unions, four cents is actually almost forty cents. This is true for a simple reason: the WGA isn’t the only union in town.

As it turns out, all three guild agreements (WGA, DGA and SAG), plus the IATSE agreement, have similar DVD residual formulas. Any amendment to the WGA’s DVD formula will almost certainly be made to the other unions’ as well. It’s called pattern bargaining; the deal for one is the deal for all — but with a twist: SAG’s formula is three times as large as the WGA’s, and the IA’s is four and one-half times as large. (The DGA’s is the same as the WGA’s.) New media formulas can be expected to mirror each other across unions in the same fashion.

So, if writers get a four-cent raise, actors get an extra twelve cents. That’s not because actors are three times better than writers, but because there are so many more of them on any given movie or TV program. The actors split the residual among themselves based on a formula that reflects both salary and time worked on the show. Thus, each actor’s share is less than the writer(s)’ share. (Writers too have to split among themselves when there’s more than one writer on a project.)

The DGA raise would match the writers’ — four cents. Most of that would go to the director. Yet, 40% of the DGA membership are below-the-line workers who receive a miniscule share of DVD residuals (less than one-fifth of a penny per DVD). Doubling the formula would make little difference to them, which is one reason why DGA support for a strike over residuals is so tepid.

The IA raise would be 4.5 times the writers’ — an extra eighteen cents per DVD — yet IA members receive no residuals directly. Instead, the residuals are used to fund the IA’s health and pension plans. So, residuals matter to IA members, but in an attenuated way.

Bottom line: whatever increase the writers achieve in DVD or new media has to be multiplied by a factor 9.5 to determine what the studios will be paying out. (9.5 = 1x for the WGA, 1x for the DGA, 3x for SAG, and 4.5x for the IA. If you want to read the contract language for yourself, check out the WGA agreement (Art. 51.C.1.b), DGA agreement (Sec. 18-104), SAG agreement (Sec. 5.2.A.(2)), and IATSE agreement (Art. XXVIII(b)(2)).)

DVD — The Shiny Little Disc Just Keeps Spinning

How do these numbers play out in practice? The studios and the WGA each have their own numbers, and so far as I know, are not releasing them publicly. But we can take a stab at it.

Start with DVD. Let’s reject the conventional wisdom that physical media don’t matter. DVD is a $16.5 billion business (domestic sell-through in 2006). That’s a far bigger business today than downloads and streaming (see below). When the Blu-ray / HD DVD format war gets resolved, people will probably start buying more product, and that number will spike up. And in the more distant future, even if discs are replaced by chips, holographic data storage, or little nano-somethings, the “DVD formula” — i.e., the home video formula — will still apply. So, the formula matters.

Now let’s do the math. $16.5 billion retail gross equals an approximate $8.25 billion gross to the studio (assuming a 50% margin). Multiply by 0.3% or 0.36%, yielding a $24.75 million to $29.7 million single-guild residual. Multiply by 9.5, to arrive at a 4-union figure of $235 million to $282 million. Now, multiply by 3 — the guild and IA agreements are three-year contracts — to arrive at a $705 million to $846 million cost over the term of the contract.

This calculation assumes that the DVD business (standard def plus Blu-ray and HD DVD) neither grows nor shrinks materially over those three years. This was true of 2006 as compared to 2005, and some analysts predict little growth over the next few years (see chart in 12/19/07 print edition of LA Times, p. A15; not available online). I believe the actual figure would be higher if one of the high def formats takes off, but that’s unlikely unless and until one of the formats prevails and the other drops by the wayside. When, or even if, that will happen is anyone’s guess.

The WGA wants to double the residual, which would add an extra $705 million to $846 million cost to the contracts, whereas the studios want to keep the formula unchanged. So, the parties are $705 million to $846 million apart on the issue of DVD residuals.

Let’s look at the numbers another way. Can the studios afford to increase the DVD residual? Yes. There were 1.3247 billion units of DVDs shipped in 2006. $16.5 billion divided by 1.3247 billion units yields a mean (average) price of $12.45 per unit. The cost of manufacturing a DVD in quantity, including insert, packaging and shrink wrap, is frequently quoted to me as only $0.25 - $0.35. That leaves a lot of profit ($12.10 - $12.20). But, there are also marketing and distribution expenses. One well-regarded book (p. 130) estimates manufacturing, marketing and distribution costs at “less than $5 per unit.” That implies net receipts per DVD of about $7.50. A $0.38 increase in the residual is a 5% additional cut out of $7.50.

However, from this $7.50, we should deduct some allocation of the cost of production of the film. How much this allocation should be is hard to determine. For one thing, it depends on the negative cost of the film. This, of course, can vary widely. In addition, there is probably some correlation between negative cost and DVD sales, but this would be contained in proprietary studio models which I don’t have access to (and which would be protected by confidentiality agreements in any case). How strong this correlation might be is unclear in any case.

Also, there might be some correlation between negative cost and DVD manufacturing, marketing and distribution costs, since negative cost might correlate with the quantity of DVDs manufactured, and also with how elaborate the packaging and insert might be. (Clearly, there’s correlation between these latter items and domestic box office, since studios will spend more on the DVD for a successful movie; but whether there’s also a correlation with negative cost is less certain.)

In addition, deciding how much of the negative cost to allocate to the DVD revenue, as opposed to how much to allocate to theatrical and other revenue streams, is somewhat arbitrary. Should all of the negative cost be allocated to theatrical, since this is the initial market? Should the allocation be proportionate to the revenue received from each window? Or should the allocation proceed in some other fashion?

So, that $7.50 figure has to be reduced, perhaps significantly. Thus, the $0.38 increase in residuals represents a greater than 5% additional cut of the studio’s net, perhaps significantly greater. Conclusion: on some DVDs, a $0.38 increase might be too high to be reasonable, but it’s hard to tell. So, it’s probably appropriate for the Guild to settle on some compromise between leaving the residual unchanged, on the one hand, and doubling it, on the other. This is why I have previously proposed a 1.25x – 1.5x increase.

New Media —Now Playing on a PC and Cellphone Near You

On new media (streaming and downloads), much of our work is already done. Using various research data, Michael Learmonth has estimated that the parties are $7.2 million apart in 2007, with that gap increasing to $71 million in 2011, on a single-union basis. Assuming for the sake of simplicity that the growth between then and now is linear, this results in a single-union three-year gap of $117.6 million ($23.2 million in 2008, plus $39.2 million in 2009, plus $55.2 million in 2010). Multiply by 9.5, to arrive at a 4-union figure of $1,117 million. Michael’s figures don’t include revenue from banner ads and subscriptions, which the WGA rightly wants a piece of. Those revenues are probably larger than the revenue from in-stream advertising (ads in the videos themselves) — though who knows — so I would at least double this figure to $2,235 million.

Can the companies afford the increase? Yes. Distribution costs are negligible, since there is no manufacturing cost, and marketing costs can best be described as moderate, since films and TV shows have built-in name recognition (no need to spend astronomical sums to drive traffic to the company websites). Even after allocating a portion of negative cost to new media, the companies’ profit will ultimately be quite high. This is why execs have been effusive in their embrace of new media and their predictions as stated to Wall Street.

Divide and Conquer

Adding the home video and new media gaps yields a total gap of about $3 billion on the residuals issues. That’s more than the pocket change implied by “four cents per DVD” — or is it? After all this multiplication, now it’s time for division. Divide by 8, yielding $375 million as a per-company average, to roughly account for the fact that there are six majors, one quasi-major, and many smaller companies in the AMPTP. Then divide by 3, yielding a gap of $125 million per major per year.

Remember too, the WGA doesn’t realistically expect to get all the numbers it’s asking for; a negotiation is a compromise, not a diktat. Let’s assume the parties split everything down the middle. That’s about a $60 million increase per major per year. $60 million? It’s a small fraction of the typical revenue and profits the conglomerates are achieving. The numbers are complex, but the conclusion is simple: the producers can afford to increase the residual payments, and it’s time for them to do so.

PS: The LA Times (11/19/07, p. A15) has new media numbers that are slightly higher than Learmonth's in 2007 and significantly lower in 2011. The difference on a per-studio per-year basis is not great.

Also, note that the above article only discusses residuals. The WGA proposal also includes an increase in minimum compensation rates for film and TV writing, and a request for jurisdiction over writing for new media. Both of these requests increase the studios' costs by an amount that is difficult to determine.

Oh, a couple definitions might be helpful too. "Negative cost" means the cost of making a movie, including writing, development, preproduction, production and postproduction.

Negative cost does not include the costs of distributing a movie theatrically (such as the cost making prints of the movie and paying for advertising, marketing and publicity -- so called "prints & ads" or "P&A") nor the cost of releasing a movie on DVD or television.

"Majors" means the six major studios - Disney, Fox, Paramount, Sony, Warner Bros. and Universal.

The quasi-major I refer to in the article is MGM, which was once a full-fledged studio with its own studio lot and an extensive library (catalog) of films. It now has, instead, an office building and a small library, but retains some other attributes of a studio.

I also mention in the article that there are many smaller companies in the AMPTP. More precisely, there are many smaller companies that are signatory to the WGA Agreement. Not all of these companies are actually members of the AMPTP, but the distinction makes no difference to the economic analysis. A list of signatory companies can be found at http://wga.org/subpage_member.aspx?id=2537.

This article originally appeared in The Huffington Post on November 23, 2007.

Slipped Disc: Why DVD Residuals Still Matter — and Always Will

Until last Sunday, the WGA's proposals included doubling the home video residual. But that day, at a last-ditch bargaining meeting, the WGA rolled over and dropped its proposal, trading it off against gains in new media residuals and jurisdiction. Big mistake. Why? Two reasons: because now the home video residual becomes a major impediment to settling the strike; and because the home video residual matters enormously, even in the world of Internet and cellphones.

The home video residual will be a major impediment to settling the strike because of what happened in that room on Sunday — namely, as everyone now knows, the talks collapsed. It's unclear why. The AMPTP made concessions on streaming and on Internet jurisdiction, although they hadn't yet moved on Internet downloads.

By the way, the distinction between downloads and streaming is misguided and will lead to trouble in the future. It rests on an assumption that streaming video can be promotional and is free to the user, but that downloads are neither. Yet, this is not true: downloads are sometimes promotional, just as streaming can be; and streaming video is sometimes sold, just as downloads often are. Moreover, some technologies, such as the recently introduced Vudu box, are hybrids. (The box downloads and stores the first 30 seconds of thousands of movies on its hard disk, but then streams the remainder of the selected movie.) How will they be treated?

But leave all this aside. The AMPTP's concessions sound like progress, but for some reason that wasn't enough to deter a strike. When the clock struck 12:01 a.m. in New York, the east coast branch of the WGA went out on strike, even though talks in LA were still ongoing. Predictably, the producers walked. And we find ourselves in the middle of a bitter strike.

The problem is, now the producers know that the WGA is willing to give up on DVD residuals, even though the guild refers passionately to "the hated DVD formula." Now that the producers smell blood, they're less likely to ever concede on this issue. And the guild, having once been burned for conceding on home video residuals, is less likely to do so again. Fool me once, shame on me; fool me twice … well, you know the rest.

But does it even matter? Conventional wisdom is no. The Internet and cell phones are the wave of the future, we're told. Streaming and downloads beat physical goods every time: infinite selection, no manufacturing cost, content on-the-go, and no need to run out to the video store, or pay late fees.

All true. Yes, streaming and downloads will one day be huge. But not yet. The predictions I've read say that even five years from now, the majority of in-home revenue will be from physical media: DVD and Blu-ray and/or HD DVD. Indeed, when the studios finally settle their self-defeating fight over high-def formats, they can expect a wave of new revenue as consumers re-purchase videos they currently own on DVD.

Meanwhile, efforts to connect PCs to television sets have faltered. Devices are awkward to use, and haven't proved popular; and, of course, anything with a Windows PC in the mix is likely to be crash-prone and flakey. That means that getting all that wonderful Internet-based content to people's home theaters and expensive plasma screens is tough. Advantage DVD.

Still, one day those problems will be solved, and Blu-ray or HD DVD will eventually be left in the dust. Doesn't this mean downloads and streaming will ultimately vanquish packaged goods once and for all?

No. The fallacy in the conventional wisdom is assuming that packaged media will develop no further than Blu-ray or HD DVD. That ignores history. Storage densities in hard drives, for example, have increased by an astonishing ratio of 500,000,000 — that's 500 million — in the last fifty years. Even today, physicists are working on nano-scale devices that could further increase densities by a factor of 10 to 100 in the next few years. These devices, like hard disks, are magnetic media; optical media, such as holograms, might offer even higher density.

Density matters, because higher density means more data on smaller media. More data means more content, at higher resolutions. One day, for example, we'll probably have wall-sized displays, as seen in sci-fi movies. Those displays will be paper thin. Perhaps they'll be sold in rolls like so much wallpaper; maybe they'll be painted on the walls. No one knows. But large scale displays will require ultra high-def content.

We'll probably also see some form of 3-D entertainment in the future — first using on-screen technology, and ultimately, perhaps, via holographic images of actors playing out a story in our living room, or a bare-walled media room. This kind of movie/stageplay hybrid would require enormous amounts of data to be delivered and processed at high speed. Also, with new types of images come new requirements for sound. More speakers — more channels — mean more data is required to store that sound.

Couldn't all this content be delivered over the Internet? Maybe one day. But if history is any guide, pipes will always lag devices. It has always been possible to deliver more data, more quickly, on a physical device than via telecomm lines into the home. That's why, even today, you buy most software in physical form rather than via download. That's also why CDs are higher quality than MP3s — the latter are compressed, the former aren't. There's no reason to think that physical media won't always have the edge when it comes to timely availability of large amounts of data. For a leading-edge experience — wall-size displays, holographic movies, or whatever else — physical media will probably always have the advantage, and transmission lines will always lag.

Now, nano-scale devices and holographic media don't sound much like DVDs or video cassettes. Perhaps the home video residual formula won't apply? Guess again. The Guild agreement defines "videodisc/videocassette" as a "disc, cassette, cartridge and/or other device serving a similar function which is sold or rented for play on a home-type television screen." See Art. 51.B.1, p. 277 (italics added).

This means the home video formula is likely to apply far into the future. Wall-sized displays will be the television screens of the future. Linear 3-D entertainment on-screen falls easily within the definition as well. And holographic entertainment, even absent a screen, might well be covered by this definition as well, if such entertainment replaces 3-D entertainment delivered on a screen. This kind of argument by functional analogy is one way courts, for example, analyze the scope of old contract language as new technologies arise.

The Guild agreement is an archeological document. The basic cable residual formula is named after old TV shows like Alfred Hitchcock Presents and the term "producer" is defined in terms of the duties of Samuel Arkoff and Alan Ladd in 1977. See App. 2.b.(2), p. 501 and Art. 1.B.1.a, pp. 14-15. Decisions that get made today will still have meaning decades into the future. The Guild shouldn't roll over on home video residuals. They're important now, and always will be.

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This article originally appeared in The Huffington Post on November 12, 2007 at http://www.huffingtonpost.com/jonathan-handel/slipped-disc-why-dvd-re_b_72245.html.

Writers and Producers: Here’s the Deal They Should Make

[Note - this article was first published about 10 days ago.]

As the deadline for the writers' strike bears down, Hollywood waits with anticipation and fear. The effect of a strike, if not averted or delayed, would be programs off the air, movies delayed, and people out of work throughout the industry and the local economy. It doesn't have to be that way. There's room for a deal on all the major issues:

DVD Residuals. DVD residuals are the writer's cut when a movie or TV show gets released on DVD. The current formula – which the WGA calls "the hated DVD formula" – is crazy. It dates to 1985, and is adapted from an old record industry royalty formula. What's more, it's based on the assumption that "videograms" – videotapes, at the time – are expensive to manufacture. That's no longer true; DVD's in quantity are $0.25–$0.35, shrink-wrapped with inserts and ready to sell.

Of course, there are other expenses – shipping, recoupment of production and advertising costs, etc. – but still, the studio profit is large. Meanwhile, the writer gets under $0.05 (five cents) per unit sold. That's ridiculous. The writer's want $0.10 per unit. Not a huge increase, but the actors and directors will get parallel increases too. The parties should compromise on $0.075 (seven and one-half-cents) or $0.0625 (six and one-quarter cents) and call it a day.

Residuals for Internet Downloads. The studios want to apply the DVD formula to downloads as well. This, too, is ridiculous. The DVD formula makes no sense any more for home video, let alone for downloads, where the manufacturing cost is zero. The studios' position amounts to paying the writers 0.3% of the studio's gross on downloads, whereas the writers want 2.5%. They should compromise on 1.2%, which is the figure used for videogames and pay TV (HBO and Showtime).

Residuals for Internet and Cell Phone Streaming. The studios' position is unclear. They say they want to apply the DVD formula, but they also reserve the right to deem any streaming (and even download) usages as "promotional" – even if the studio receives revenue – which means no residuals would be payable at all. Piggy, piggy, piggy. Give the writers the 1.2% unless the studio receives no revenue on the usage.

Jurisdiction Over New Media. When writers create content directly for new media (webisodes and mobisodes), the WGA wants the guild agreement to apply. That's a bit much. The agreement is 625 pages and is so incomprehensible that the day I started working at the Guild (I'm a former WGA Associate Counsel), my boss told me not to bother reading it because none of it meant what it said anyway. Plus, setting minimum compensation levels for writers, when business models are unknown, is not feasible.

However, there is a voluntary Internet Sideletter (p. 561 of the agreement) that a few studios have signed on a project-by-project basis. All it requires is that the studios pay pension and health insurance benefits (P&H). The compromise: make the Sideletter apply to all new media (such as cell phones), add a provision requiring credit parity (require that the writer get credit on-screen if the director or actors do), and make the Sideletter mandatory. Done.

There are some other issues as well:

Animation. The writers want jurisdiction over animation writing, which they've received on a case-by-case basis. Trouble is, a rival union, IATSE (the "IA"), also claims jurisdiction in this area. Ironically, the president of the WGA is an animation writer. Still, this one's probably a lost cause.

Reality. The writers say they want jurisdiction over this issue, but their strike rules don't even bar such work (in contrast to movies, scripted TV, and animation – the writers can't do any such work during a strike). They're signaling that they'll pass on this issue at the end of the day.

The CW. The writers want to treat the CW like a full-fledged network for compensation and residual purposes. It isn't; treat it like Fox in the '90s and set the levels in between network levels and the current lower rates.

MyNetwork TV. The writers want higher residuals here. Please. MyNetwork TV? This channel is more like no one's network TV.

So, a deal is possible. The parties should make one and let the town get back to work.

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This article originally appeared in The Huffington Post on November 5, 2007 at http://www.huffingtonpost.com/jonathan-handel/writers-and-producers-he_b_71157.html

Union Disunity

Today's Hollywood Reporter leads with the news that AFTRA has moved its national HQ from NY to LA, in the same building that SAG occupies. That sounds nice - the actors' unions sitting next to each other like good friends in math class, passing notes (or texting each other) when the teacher's not looking.

All very fine, except for one thing: AFTRA and SAG aren't so friendly, it turns out. Technology is one reason why: the unions have overlapping jurisdiction in primetime shows shot digitally, and AFTRA makes deals with producers that undercut SAG's rates. Indeed, I advised a filmmaker once who was shooting a film in digital, and guess which union he chose to sign with?

(By the way, if you're a producer, talk to a lawyer first before signing with any union. There are some significant benefits, but also major pitfalls if not done right.)

The tension between the two unions may undercut their unity when contract negotiations with studios, producers and networks begin next year. In fact, SAG members on the joint SAG-AFTRA negotiating committee plan to bloc vote, which would undercut AFTRA's influence on negotiations. Tit for tat? Perhaps.

Meanwhile, the two branches of the Writers Guild of America (WGA) - East and west (the West-Coast branch insists on lowercase) - have never been close, but generally play well together. Not so the IA (International Alliance of Theatrical Stage Employees) and the WGA. They each claim jurisdiction over animation writers and reality TV writers, and the words between the two unions get nasty at times. The studios, meanwhile, take the position that there are no writers in reality TV at all, which is kind of a complicated question.

As for contract negotiations, while SAG's (and the DGA's) begin next year, the WGA's have already begun. Those talks are getting nowhere so far. All three unions have big issues: home video residuals (the formula, in place for 25 years, dramatically favors the studios), compensation and residuals for digital media, and, of course, two perennials, compensation rates and pension and health insurance rates.

SAG has observers on the WGA strategy team, while the Directors Guild of America (DGA) is a bit less aggressive in its posture with the studios. At the end of the day, though, the residual formulas in the three union's agreements with the studios tend to be similar, as do some of the other provisions as well.

The bottom line though, is this: studios and networks are stocking up on scripts, shows and movies, filling their larders today as insurance against possible multiple strikes next year. Even if none materialize, a de facto strike - i.e., a work slowdown imposed by the studios - seems certain. That's because, come next year this time, the studios and networks will find their cupboards overflowing with product, and will have little need for more until they've drawn down what they've got.