Saturday, November 10, 2007

Why the Writer's Guild strike isn't about greed

The current Writer's Guild of America (WGA) strike is a good thing. They are not being greedy. They are simply tired of being taken advantage of by large corporations that have no interest in an equitable partnership with writers.

First of all, do writers matter? If you think that "Heroes" or "Lost" or "Grey's Anatomy" would be just as good with the actors making stuff up on the spot, then I can't help you. You're an idiot. Film and TV are not improv--they're precisely scripted so that there's a beginning, middle, and end; so that there are engaging emotional arcs that transport the character from one state of mind to another; so that there are setups and payoffs in plotting, jokes, and action; so that the work is structured and entertaining as opposed to the generally non-cinematic random series of events that make up the real world.

Assuming that we're all agreed that writers matter, let's move on.

To understand the strike you have to have a little history. Don't worry, it's fascinating in its brilliance in screwing over the writers.

Ages ago (1985) the VHS home video market was just emerging as a new, unsure source of revenue for the movie studios. Manufacturing costs were high and sales costs were high ($40-$100 per tape). I'm guessing that, given the cost, most sales went to emerging video rental chains rather than consumer households.

Profits for the studios weren't great; costs were somewhere in the range of 80% or worse. So for every $40 VHS tape sold the studios would only clear $8.
note: my 80% number might be a bit off, but it's reasonably close

The writers wanted a cut of that money--residuals it's called. Actors and directors get residuals too so this wasn't a new thing. Because of the high manufacturing costs, the high sales prices, and the unsure outlook for home video, the writers accepted a deal where they would get 0.3% of gross sales. Not three percent; three-tenths of one percent.

On a $40 VHS tape, the writer would get $0.12--twelve cents.

Remember that the studios were clearing around $8 on that tape. So as a percentage of net profits, those twelve cents were equivalent to 1.5%.

At this point in time if the writers had instead agreed to 1.5% of net profits, they'd still only be getting twelve cents per tape. So no diff either way. But that was then.

As time went on, the home video market exploded. VHS sales went through the roof. Manufacturing costs went down and the cost of a VHS tape went down. On a $20 tape the writer's 0.3% take of the gross would have fallen to $0.06. I believe that the manufacturing costs did still absorb 80% of the gross so the studios were making less per tape ($4), but selling more than enough to accept the tradeoff.

Now comes the advent of DVD.

There are only two more pieces of the story that you need to know:

1. DVDs can be made at about 20% cost, 80% profit--basically the opposite cost structure of the more expensive VHS format.

2. The writer's deal didn't change. It still used the VHS format 0.3% of gross formula.

So now a $20 home video sale yields 80% profit for the studios. Instead of $4 of profit on a $20 VHS tape, the studios are getting $16 on a $20 DVD. That's a 400% increase in profits.

But the writers--stuck on the old VHS formula--still only get 0.3% of gross. That's that same six cents they got from a $20 VHS tape.

And manufacturing DVDs keeps getting cheaper. The writers are quoting $0.04 per DVD as their actual residual. That means the studios are distributing DVDs for about $13 per disc (retailers then mark that up to make their profit, but that money stays on their side of the ledger).

Remember that the math worked out so that writers were getting 1.5% of profits on VHS. Their percentage of the profits on a DVD is now 0.38%--they're getting 1/4 the share of the profits on DVD that they were getting on VHS.

The writers are getting screwed twice over:

1. The lower cost of DVD manufacturing lowers gross sales--studios distribute DVDs for $13 instead of $20. And unfortunately writers get a percentage of gross; as gross declines, so does the writer's take.

2. DVD is immensely more profitable than VHS--four times so. But the writers share in none of that expanded profit. It's like the studios have won the lottery. More money is flying in and they are contractually obligated to share NONE of the excess.

If the writer's original VHS deal had been for 1.5% of profits--which is effectively what they were getting under VHS economics--they'd be making about $0.20 per DVD now. That's a 5x difference.

By the way, is home video sales a big deal? The New York Times in April 2004 notes: "Between January and mid-March this year, Americans spent $1.78 billion at the box office. But in the same period they spent $4.8 billion -- more than $3 billion more -- to buy and rent DVD's and videocassettes."

Home video is a big deal.

The writers should have gone on strike when their contract expired in 2004, during the huge growth of DVD. They didn't have the stones to do it then, and they're paying the price for it now.

So, better late than never, what are the writers asking for now? Are they asking for 1.5% of profits?


It's so sad.

They're asking for $0.08 per DVD. A mere doubling of the residual rate for DVDs sold. So they're not asking for a paradigm shift from percentage of gross to percentage of profits. Instead they're just asking for 0.6% of gross instead of 0.3% of gross.

The status quo from VHS to DVD would have been 1.5% of profits/$0.20 per DVD.

But the writers--sad and pathetic and somewhat powerless as they often are--are only asking for 40% of the status quo they used to enjoy ($0.08 vs $0.20).

So you tell me where the greed is.

Now--incredibly--that's only half the story.

The real issue is that another revenue stream is emerging: the Web.

Writers are rightfully worried that they're going to be cheated out of their fair share of profits yielded from putting their content online.

The cost structure for online sales--buying an episode of "Lost" from iTunes for $2--is almost pure profit for the studios. Something on the order of 95% or better. They already have the content, they encode it to a digital media format (e.g. video iPod, cell phone, etc), and then it costs them nothing for each copy sold (retailers like iTunes cover the distribution and transaction costs of actually getting the content to customers). In the online world gross sales for studios are basically equivalent to profits.

I don't know what the studios' take is on a $2 episode of a TV show on iTunes. Let's say it's $1 per download.

The studios, of course, want the writers to stay on the home video formula of 0.3% of gross. That would be 0.3% of $1. If a show was popular and downloaded three million times, the studios would make $3 million. The writer would make $9,000.

Because gross is essentially equal to profit, the studios are telling the writers: you deserve a 0.3% share of the work you created. Yes studios need to make their money and cover their bottom line, but clearly writers are more than 0.3% of the reason for a show's success.

However, if the deal were 1.5% of profits (still measely, but 5x better), the writer would stand to make $45,000. Definitely chump change against $3,000,000 in profit, but a significant difference for the writer nonetheless.

This time--for once--the WGA is getting aggressive.

They're proposing 2.5% of gross sales.

That means if the studios are indeed getting $1 for every download, the writer's share of a 3 million download episode would be $75,000.

Finally the WGA has grown some stones.

The studios, of course, have flatly rejected this proposal.

And this only covers sales through vendors like iTunes. What about or or many others that offer recent episode streaming for free (so-called "promotional" streaming)?

The consumer pays nothing so is there no profit?

Um, what about that Fidelity ad I had to watch during the commercial breaks in the "Pushing Daisies" pilot I watched online? The studios are making money here.

But what percentage do you think the studios are offering the writers for this sort of revenue stream?

Here ya go: 0.0%

The writers are ripped off on home video sales, the studios want to keep them pinned down on online download sales, and they're offering absolutely nothing for profitable "promotional" use of the writer's material.

Wouldn't you strike too?


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