Deal sets residual formula for paid downloads

They got jurisdiction over all but the most low-end Internet production. They got a toehold in Internet streaming that could prove lucrative for popular skeins. And most significantly, they made a big leap on an issue that’s been a sore spot for decades for directors and writers by securing a residual formula for paid downloads based on distributors’ gross, rather than the hated producers‘ gross formula that has long been applied to homevideo.

All in all, the master contract agreement unveiled Thursday afternoon by the Directors Guild of America and the Alliance of Motion Picture and Television Producers provides substantial gains in new media that will put more coin in the pockets of film and TV helmers.

It’s not as much as the writers had on the table, but as many observers, including Writers Guild of America members, noted Thursday, it’s probably the best the market will bear at a time when the majors are still uncertain about the long-term future of their primary profit centers.

At the same time, there’s no doubt that the WGA’s hardline stance — and willingness to make the ultimate sacrifice of going on strike — opened the door for the DGA to prod the majors into making the compromises realized in the deal. There’d been speculation that the DGA’s official statement on its deal would include a nod of some kind to the WGA, but it was not there in the DGA’s immediate statements on the pact.

Now that the DGA has a deal, pressure is mounting on the WGA to move quickly and forge its own path to a deal. For the first time in more than a month, the AMPTP explicitly asked the WGA to resume negotiations in a statement Thursday. AMPTP conglom insiders said the DGA deal would not be presented as an ironclad take-it-or-leave-it deal to the scribes, but its financial parameters for new-media compensation are surely a template from which the congloms are unlikely to stray too much.

The WGA’s official response was measured Thursday, and some WGA members shook their heads at the fact that the guild’s statement included this less-than-conciliatory observation: “For over a month, we have been urging the conglomerates to return to the table and bargain in good faith. They have chosen to negotiate with the DGA instead.”

In the DGA deal, the biggest breakthrough lies in the calculation of residuals for “electronic sell-through,” or paid download-to-own sales of film and TV shows via online platforms such as iTunes. In its press release on the deal, the DGA made a point of tubthumping the fact that those payments will be “based on distributors’ gross instead of producers’ gross, a key point in our negotiations.”

The guild added that it would “not have entered the agreement on any other basis.”

Getting the magic words “distributors’ gross” in the contract with regard to paid downloads was important: It sets a precedent that will likely ensure distributors’ gross will be the basis for future negotiations of residual gains in this area.

From the DGA’s point of view, it banishes from the new-media sector the hated homevideo residual formula (equally loathed by writers) that allowed the majors to calculate the percentage-based residual fees on only 20% of the so-called producers’ gross. (The rationale for this formula was that the majors needed to offset the high marketing and manufacturing costs associated with VHS cassettes back when the homevid biz was young.)

Interestingly, sources on the AMPTP side were quick to cite the increases in the paid-downloads residuals, but they still referred to them as if they were calculated under the old 20% formula. (The math works out the same, even if the numbers are different.)

When the WGA pressed its proposal to base new-media residuals on distributors’ gross, the AMPTP balked. Indeed, the WGA’s demand for a flat residual based on 2.5% of distributors’ gross for all new-media formats was cited by the congloms in their now-infamous ultimatum delivered on Dec. 7 listing six contract proposals that the WGA had to dump as a condition of continued bargaining.

Although most of the attention went to the controversial issues of the WGA’s bid for jurisdiction over reality and animation, WGA insiders said it was the distributors’ gross point that AMPTP reps knew was the biggest deal-breaker for the guild. That the DGA was able to scale the distributors’ gross hurdle in its talks will only reinforce the conviction of many in the WGA that the majors were never truly focused on forging a compromise deal with the scribes and always saw the DGA as the better option.

To that end, however, AMPTP insiders point to the wildly different atmosphere of the talks with DGA leaders. The lack of fiery rhetoric and public sniping went a long way to inviting top execs, notably Walt Disney Co. prexy Robert Iger and News Corp. prexy Peter Chernin, into the mix early on, so that key philosophical issues could be hammered out in a low-profile way. Those early talks made the formal bargaining sessions that began Jan. 12, and ran through Thursday morning, that much swifter and more productive.

The majors were comfortable with the DGA’s paid download formula because it includes the important compromise that the biggest residual gains will go to only the most successful programs. For TV programs that exceed 100,000 units downloaded, the residual rate more than doubles from the current 0.3% of distributors’ gross (which bumps up to 0.36% once a title generates $1 million in gross receipts) to 0.7% of distributors’ gross. The rate for feature films that exceed 50,000 downloads climbs 80% to 0.65% of distributors’ gross.

Using the old 20% formula, the residual rate under the new pact climbs from 1.8% on the high end (after the $1 million threshold is reached) to 3.5% when a TV program exceeds 100,000 downloads. Even though past contracts have referred to the producers’ gross figures, the DGA and WGA have long done the math on those fees as if they were based on distributors’ gross in order to give their members a reality check on how little they were realizing from the total homevid pie.

The DGA pact on ad-supported Internet streaming represents another compromise that moves the numbers forward from the last offer that the AMPTP put on the table for the WGA.

The fee of 3% of the applicable residual (about $600 for a primetime drama) for the first 26 weeks of streaming and a 17-day window of free use for promotional purposes (24 days in the case of new series) compares with the AMPTP’s last offer to the WGA of a six-week window of free use and 1.2% of the applicable residual for the first year.

Significantly, for the most popular programs that are made available for streaming a year after they debut, helmers will receive a fee based on 2% of distributors’ gross — which isn’t that far off the WGA’s position.

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