Studios standing firm on DVD residuals payoffs

With negotiations starting next week, the PR battle between writers and studios has been triggered.

Both sides began scrambling this week to portray themselves sympathetically, along with launching several well-aimed potshots at each other.

Leaders of the Alliance of Motion Picture & Television Producers — the negotiating arm for studios and producers — plan to harp on a key message: They won’t give any ground on writer residuals — especially in the booming DVD market — because of the difficulties they face in operating profitably amid fast-changing business conditions.

“Residuals were created to allow the Guilds to share in the success, but what they’re doing now is asking us to mortgage our future,” one exec lamented.

For its part, the Writers Guild of America West mailed out its first Negotiations Update on Tuesday with its lead story headlined “Don’t Let Them Fool You.”

“On the eve of negotiations, it’s not surprising to hear media moguls pleading poverty,” the article began. “But don’t be fooled. Despite what the congloms would have us believe, the overall revenue picture for the entertainment industry is remarkably good.”

Though neither side would disclose specifics until negotiations start Monday, both have started issuing numbers to make their case.

In a move designed to advance the argument that scribes are already well-compensated, the AMPTP plans, for example, to release stats showing an average residual payment of $654,000 per movie to writers for each Motion Picture Assn. feature between 1996 and 2000.

The $654,000 figure comes from adding up all revenue streams — DVD, video, free and pay TV and foreign — and not including bonuses.

Additionally, the AMPTP plans to point out that some of those top performing pics generated over $3 million each in writer residuals.

The core of the studios’ argument is that DVD revenues — which amounted to $16.1 billion in 2003 and are certain to increase this year — are a necessity to stay afloat financially for the following reasons:

  • Margins on filmmaking are in the 3% to 5% range and six of 10 films never recoup their costs.

  • Costs of filmmaking have soared with average production rising 9% last year to $63.8 million per pic and P&A costs jumping 28% to $39 million.

  • DVD costs have jumped, thanks to anti-piracy measures, expensive musical clearances and the inclusion of added features.

  • Costs in other areas outside production, such as acquisition of scripts and talent participation, have soared to an average of another $60 million per pic.

As for the WGA, it’s already riled up.

The Guild has asserted that writers earned only $18 million in DVD residuals out of $11 billion in DVD revenues in 2002 — based on a rate under which about a nickel per DVD sold goes to the credited writers.

The rate — set at 0.3% of wholesale revenues on the first $5 million, then 0.36% after that — has been in place since 1985, even though the standard WGA residual rate for other ancillaries like TV license fees is four times higher, or 1.2% of revenues.

WGA West Prexy Daniel Petrie Jr. issued a statement Tuesday that disputed studios’ assertions of falling profits.

“There is no one from Wall Street to the studios to the North Pole or the South Pole that believes the American entertainment industry is losing money,” he said. “It is making record profits. Writers are simply going into these negotiations asking for their fair share.”

The battle has also started on the TV side.

The AMPTP plans to contend that the economics of the small-screen biz has made it much more difficult to turn a profit:

  • License fees for half-hour sitcoms and one-hour dramas have risen only nominally in the last five years while costs have soared. The average deficit on sitcoms is $350,000 per episode and $800,000 per episode on dramas.

  • International revenues have slid due to the increased popularity of locally made shows.

  • Only 12% to 15% of all shows ever wind up going into syndication, meaning that those shows must be the source for recoupment of the costs of the remaining shows.

  • Networks are insisting on long-term contracts, beyond the standard four-year deal, and co-producing projects with suppliers, limiting the upside in syndication.

  • Reality TV, which has little WGA coverage, is becoming entrenched on the skeds and may limit the resources that can be spent on traditional sitcoms and dramas.

  • Though DVD revenues from TV shows are increasing, they have not made up for losses in international revenues.

But the WGA West contends that DVDs are a solution for the financial health of the TV biz.

“DVDs may become the new syndication,” the Guild said. “For TV writers, the later broadcast runs may soon be replaced by the boxed set — and what used to be healthy syndication revenues would be supplanted by the abnormally low DVD residuals.”

Studio execs and producers are less nervous than they were three years ago, when production accelerated to stockpile for possible strike.

That’s due mainly to SAG and AFTRA having already extended their contract expiration a year to June 30, 2005, thus taking away any possibility of both writers and actors shutting down the business this summer.

Petrie took pains to say that a strike is not a given.

“While the potential of a strike is our ultimate leverage in any negotiation, we are not going in to these negotiations seeking a strike,” he said. “Just the opposite: We’re going to bargain in good faith and we’re going to work our butts off to bring back a deal that we can recommend to you.”

The immediate impact of a work stoppage by writers would probably be seen first at the network advertising upfronts in mid-May. If there’s no WGA deal at that point, nets would either put forth fall schedules that would rely heavily on reality programs rather than scripted skeins or decide to delay the fall season.

One immediate impact would be to prevent top writers from performing lucrative rewrites during production. Over the longer term, the entire film development process would be hobbled.

“We’re prepared for the worst but we are hopeful that we can work this out,” one exec said. “A strike hurts everyone.”

During the 2001 negotiations, bargaining went three days past expiration before the writers settled on a deal that included boosted residuals on Fox, foreign and pay TV but no gain on DVD other than a $5,000 fee for the right to include the screenplay on the disc.

The one area that may be easy to work out will be producers boosting contributions to the WGA-industry pension and health funds. The producers’ current contribution level on P&H is 13.5% of covered earnings, leading to a 2003 contribution of $111 million.

The WGA West’s Negotiations Update noted that writers agreed to pay $18 million more annually via tightened eligibility and benefit changes in their health plan last year in response to soaring costs. “We’ve stepped up,” the article said. “Now it’s their turn.”

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