The 12,000 members of the Writers Guild of America (WGA) hit the picket lines Monday after talks with the Alliance of Motion Picture and Television Producers (AMPTP) failed to reach a compromise. At issue are new allocation plans for DVD and digital download residuals. It is the first strike since writers walked out in 1988.
Writers are seeking a larger percentage, reportedly 2.5 percent, of the revenue from video downloads and content used for promotional purposes, as well as a bump up in their share from DVD sales, which they want doubled to 8 US cents for the sale of a $15 disc.
Producers, meanwhile, have circled the wagons to protect their income for fear that bowing to the WGA’s demands will encourage other entertainment-related unions — such as the Directors Guild of America (DGA) and Screen Actors Guild (SAG) — to call for an increase in their shares of these residuals.
Setting a Precedent
The AMPTP’s contracts with the DGA and SAG expire next summer.
“There is a precedent that will be set with the final agreement,” said Kurt Scherf, principal analyst at Parks Associates.
“Hopefully, [the AMPTP] does acknowledge the need to compensate the creative work behind this content regardless of the delivery vehicle. I would expect that this will impact conversations about residuals for other creative personnel,” he said.
“It’s the writers and how many other unions and organizations are just like them who want their piece of the pie. What happens when there’s no pie left to be had? Then everybody gets turned upside down. This is something that is not just a flash in the pan and will take a while to hash out,” said Jason Dowdell, operator of the MarketingShift blog and a business development consultant for Internet companies.
Digital Biz Matters
The movie studios raked in $16.3 billion in box officerevenues in 2006 and another $17 billion from DVD rentals and sales. TVbroadcasters reportedly made some $70 billion fromadvertising. By comparison, the $99 million Parks Associates estimates asthe movie companies’ combined take from Internet streaming and downloads,added to the $133 million that went to companies such as ABC, CBS and NBC,may seem paltry.
However, in less than four years video streaming and downloads will have begun to hit their stride, Scherf told the E-Commerce Times.
“Looking out to 2011, we are forecasting strong growth for both user-paid movie and TV downloads and streams from the Internet. Our 2011 forecast is that movie revenues on the Internet will be close to $1.8 billion, while TV show downloads will be $950 million,” he explained.
Add in Ads
That does not include revenues from ad-supported content. When those numbers are added, the tally begins to reach numbers the industry is more accustomed to.
“Ad-supported content is going to make up the lion’s share of the revenue, and this is where negotiations have probably been at their most complex — determining who gets paid for the ads that are associated with the online video content. Our forecast indicates that ad-supported online video revenues will jump from $1.4 billion in 2007 to $5.8 billion in 2011,” Scherf stated.
In its totality, the online video market — TV show and movie downloads and streams, subscriptions and ad revenues — will grow from $1.8 billion in 2007 and reach $9.7 billion in 2011, according to Scherf.
The entire revenue from video-based entertainment — including video, television programs, movies and pay TV — topped $42.6 billion, according to Ad Age. That represented a growth of 8 percent and was an industry record.
That is balanced against the $400 million TV companies reportedly spend on the development and creation of pilots. The average cost to make and market a major film by a member of the Motion Picture Association of America (MPAA) was $100.3 million in 2006, according to the organization, with 607 movies released in 2006 and profits of $9.49 billion.
Ghosts of Negotiations Past
During the course of the several months the two sides have been in negotiations, the ghost of negotiations that took place over 20 years ago hung over both parties. At the time, no one could foresee what a substantial profit generator DVDs would become.
The AMPTP, used the uncertainty surrounding the emerging market, encouraged writers to sign a contract with the potential to rework the residual agreement once then-emerging media had been available for several years, John Bowman, WGA negotiation chair, said at the start of talks in July.
“Your reasoning is exactly the same as it was in 1985: ‘Models haven’t emerged, the environment is uncertain, we’ll take care of you later,'” he stated. “Well, we know what happened then. Home video and DVD sales soared, and nobody got taken care of later. But this isn’t 1985, when TV writers didn’t envision that their shows would someday end up on DVDs and they’d get stuck with a 0.3 percent return.
“This time, TV writers can see how important the Internet is — our shows are already there and unfortunately for your argument, positive economic events are daily giving the lie to your doomsday scenario,” Bowman continued.
The AMPTP’s intransigence on this issue, however, is because the organization does not want to become a business school case study on how to not deal with negotiations, Dowdell told the E-Commerce Times.
“This is just the tip of the iceberg. The newspaper industry is in crisis because they don’t know how to transition from offline, physical paper and print to online print without laying off a bunch of people. This will not be an atypical situation and will happen in a bunch of other places,” he explained
“Nobody wants to be case study that business schools use to talk about how they had to deal with the situation. They don’t want to give them 2.5 percent and find out five years later that they should have given them .25 percent or 10 percent,” Dowdell pointed out.
If the strike stretches on for months, as the 1988 strike did, the industry could reportedly lose up to $1 billion. However, the impasse between the scribes and producers will set precedents for both groups beyond its staggering loses, Scherf stated.
“Although the total revenues generated by Internet video services remain a tiny percentage of the overall entertainment industry — particularly paling when compared to current box office receipts, DVD rentals and sales, and current television advertising rates — what is occurring on the Internet today is going to be the face of television and entertainment tomorrow in a much more significant way,” he said.
In the future, Scherf noted, many industry observers see the current television model — one dominated by a linear delivery model — shifting to an on-demand model, where the important measurements are not based on a total audience at 8 p.m. Eastern time, but rather a total audience plus the metrics about who chose to watch a certain streaming advertisement associated with the video.
“So, while the stakes are being battled for today are relatively small, the total TV market revenues of tens of billions of dollars will soon be counted in the same way that Internet streams are today. So, getting the precedent of establishing revenue shares per streams is going to keep the writers involved in revenue streams when much more of the TV experience shifts to an ‘Internet-like’ delivery system,” he added.
The principal question for Scherf, however, is whether the eventual agreement will be based on a long-term outlook for the TV industry or just a stop-gap measure.
“A long-term solution is going to take into account the importance of all residuals, including those coming from on-demand, downloaded, streamed and ad-supported revenue streams. It’s going to serve as a precedent for the way the TV industry moves forward in the digital age,” he said.
Viewers, however, will also play a significant role in the negotiations, Dowdell noted.
“The biggest factor here is, what do the masses say? Do the masses rally behind the studios — which is not normally the case — or do they rally behind the writers? The Writer’s Guild has to be careful not to be perceived as every other union out there.”
That will pull the rug out from under the WGA and make it ineffectual as an organization, he said.