Internet downloading dilemma

VOD terms add wrinkle to already-tense negotiations

The ghost of 1985 hangs over the stalled Writers Guild negotiations with studios.

The writers find themselves not only battling mega-congloms at the bargaining table but also the prospect of repeating the mistake of under-estimating the revenue potential from new technology. In this case, the technology is full-fledged video-on-demand service, which gives movie fans access to any movie whenever they want it.

It’s among the thorniest contract issues even though it’s not yet generating any significant revenues. The Guild’s convinced that now is the time to settle the question of how much WGA members get paid for movies being downloaded to be owned.

And it’s also a reminder of a painful decision the Guild made nearly two decades ago.

In 1985, the WGA was faced with the dilemma of how to deal with a new technology — the videocassette — and made what turned out to be a monumental concession.

The Guild agreed, after a two-week strike, to follow an agreement between the Directors Guild and the producers, which allowed the latter to apply a formula four times loer than the traditional residual percentage for other revenue streams. Studios contended that they needed to apply this lower rate in order to recoup their investment in the new videocassette technology.

The WGA was under pressure to settle from members who feared a repeat of 1981’s three-month writers strike.

Back in 1985, no one could have expected that shiny DVD discs would be selling at a $25 billion annual pace, or that the WGA would be stuck with the same 0.3% rate on DVDs as on videos — far below its standard 1.2% rate for re-use of material on TV — for the next 19 years.

So, in 2004, the Guilds made the DVD issue front and center in the current talks, declaring that the 66% profit margins on DVD have placed the studios on a veritable gravy train in recent years. DVD/homevideo revenues reached $22 billion last year; WGA members received $51 million in residuals from that, or about a nickel out of every DVD sold.

The current WGA proposal calls for studios to double the DVD-homevideo residual rate to 0.6%. Studios have rejected the demand, asserting there’s no way they can give any more, insisting that DVDs are now the only revenue stream keeping them from drowning in seas of red ink amid soaring costs.

The WGA negotiations — in recess until June 1 — have also stalled over healthcare costs, jurisdiction over reality TV and animation and free rewrites, along with the thorny issue of video-on-demand residuals.

Both sides agreed three years ago that video-on-demand through cable companies or on the Internet would be covered by the contract’s pay TV language at a 1.2% rate.

But the congloms restricted the language in 2001 on films designated as “Internet rentals” — delivery of films that expire or self-destruct after a few playbacks or a period of time; the question of “Internet sales” — in which the film wouldn’t self-destruct — wasn’t addressed in the contract.

The WGA’s current demands include language that spells out that credited screenwriters receive the same 1.2% rate for downloaded self-destructing movies sold via the Internet. But the AMPTP says there’s no business model yet; it asserted in 2001 that the lower percentage rate on video/DVD revenue should apply again.

The dispute comes at a time when cable-based video-on-demand services and Internet-based providers like CinemaNow and Movielink have generated moderate interest among consumers.

Many consumers often don’t know that VOD is available or how to use it, but the guild is convinced that Internet-based services are going to catch on eventually since they can offer virtually any film and a far greater selection than cable pay-per-view services.

“With drive-through fast food restaurants, home-delivered groceries, online banking and overnight shipping, one aspect of the so-called ‘post-modern’ culture has become clear-we want what we want and we want it now,” notes WGA West assistant exec director Charles Slocum. “We are living in an on-demand world.”

It’s possible that conventional retail DVD sales may continue to soar for several more years before video-on-demand takes hold. But with download times shortening and DVD burners expected to become routine parts of personal computers, the WGA’s thinking is that movie fans will eventually want to simply create a DVD at home rather than schlep over to Blockbuster or Best Buy to buy a DVD.

Additionally, if studios delay offering downloadable films, they do so at their potential peril since it opens the door to the same kind of piracy that clobbered the music business.

The outlook for an agreement is unclear.

When negotiations broke down on May 12, the Guild and the AMPTP hadn’t reached agreement on any financial or jurisdictional issue; the contract expired May 2; and the two sides can’t even agree whether the deal should cover one year (as the WGA has proposed) or three (as preferred by the companies.

The only positive signs: Studios and networks haven’t locked writers out, and the WGA hasn’t taken a strike authorization vote. The stalemate could end up being essentially a one-year de-facto extension of the current expired contract.

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