The Director’s Guild of America has reached an accord with the AMPTP and, depending on the side you’ve taken, this is the straw/camel thing coming to life…or it’s enough to make the writers even angrier. Put another way, there’s some good, some bad in the deal. After all, directors have different needs that writers.
The question on the table now is: will the writers fall in line and will the actors accept the same terms? While the DGA has, again, chosen to go maverick, they’re not the only guild in town. The deals struck today will be in effect for a very long time. Three years is the standard terms for these agreements, and I think we can all agree that three years from now, we will live in a different (technological) world.
I am thinking that Steve Jobs must terrify Hollywood types. Once upon a time, ads and press releases touted “units shipped”. Units shipped — be they CDs, DVDs, or books — don’t represent real sales. I like to think of units shipped numbers as ego stroking devices: my number has more zeroes than yours. These numbers obscured actual sales. One thing that is certain about the Internet is that actual, true sales can be reflected.
While accounting methods will vary, nobody gets paid for “units shipped”. The bottom line number is generally based on “units sold”. That units shipped number contains things like free promotional items (if you look closely, you might even see the units shipped to company executives) and other non-reportable activity. Smart people also note that generous “reserve for returns” — that lovely number is a classic tell. Sure, we shipped 100 units, but we’re expecting fifty of them back.
All entertainment industries are remarkably inefficient when it comes to physical product. While there are guidelines to suggest ultimate sales for a particular product, the truth of the matter is that nobody knows for sure what the consumer will purchase until the consumer whips out his or her credit card. Manufacturing and distribution of physical product being so, well, manual, it is imperative that producers ship far more units than will likely sell — what, they worry, if we have a runaway bestseller on our hands?
(Not to mention that a bin filled with a realistic number of DVDs seems downright sparse when compared to a packed to the brim bin.)
Don’t worry, I’m getting back to the Steve Jobs problem. While there was a lot of focus on the hardware introduced at last week’s Macworld, a few numbers slipped under the radar. First, 7 million movies have been downloaded from iTunes (Steve Jobs says that “didn’t meet our expectations” — I say read my next sentence and the light will shine). Second, they have sold 125 million television shows through iTunes. 125 freaking million. I’m not even going to do the math because you get my point. Plus my calculator is in Culver City and I don’t do anything without my still-cool-after-all-these-years HP calculator.
While you can argue about download sales versus DVD sales, the truth of the matter is that 125 million number represents final sales. Cash in hand. Apple takes its cut; the producers get theirs. The writers, directors, and actors get a share of what the producers receive (recalling, of course, that as of this moment, the base for calculating the amounts for the talent are based on a number that is 20% of what the producers receive).
The AMPTP has been arguing since day one that they cannot begin to anticipate the impact of online sales. We all know that these numbers are expected to be huge. The desire on the part of humanity for motion picture content is not diminishing. We just want more flexibility in how we get our programming. Obviously, we are willing to pay for this convenience.
Steve Jobs has put actual figures out there for discussion. One service, limited selection, 125 million sales. Recall, if you will, that these sales come on top of traditional revenue streams such as advertising and subscriptions.
While the cost of producing programming for television has increased — and I am somewhat bemused that producers argue that it’s the consumer who demands these more expensive productions; I have yet to hear anyone I know take that position — the traditional model continues to ensure that production costs are essentially covered by advertisers/subscribers when a show airs for the first time. Recouping production costs for movies is less of a sure thing; if break-even is going to happen, it’s generally accepted that the point will be at DVD release. Relatively few movies earn back production (plus prints and ads) during initial box office. Sad, huh?
TV is a different animal. It’s run as a (again, relatively) leaner, meaner machine. In the not-so-distant future, those download sale will balance or offset declining advertising/subscriber dollars. Right now, however, they’re just good, thick, meaty gravy. Cheap gravy, too. Producers have all but eliminated the cost of manufacturing and distribution.
So, what has happened in Hollywoodland with the DGA settlement. First, it appears that the DGA has won a concession when it comes to online rentals (where the consumer only has access to the product for a limited period of time). Directors (because they are the only entity to settle at this point) will receive 1.2% of “distributor’s gross” for online rentals. This falls under the terms of a 2001 Internet “side letter”. If my recollection of the specifics of distributor’s gross are accurate (and they are), this a good deal. 1.2% might not sound like much to the average person, but when you factor actors and writers (and participations) into the mix, the studios are giving a fair amount to the talent.
On the other side of the equation, things aren’t so rosy. For sell-through (where the consumer purchases product to own), the rates continue to base off the 20% number. Look back up at that 125 million sales number versus the 7 million in rentals. I have no doubt that the rental number will increase, but look at that sales number. The DGA won a concession on the market that is producing less money.
While it has been widely reported that the DGA won “double” what they’d been previously paid, they are getting double of a small number. The 20% base has been a contentious issue for decades. It made sense in 1982. Then the producers could argue that costs were exceptionally high while profits were exceptionally slim. I have seen these numbers. I agree.
But that argument — as everyone knows — does not hold water in 2008. Adding insult to injury (because injury alone isn’t enough), the higher rates kick in after sales thresholds have been reached. For movies (theatrical), this means 3.25% of 20% after the first fifty thousand units are downloaded (first fifty thousand units are paid at the existing rate). For made for television product, it’s 3.5% of 20% after the first one hundred thousand units are downloaded (first one hundred thousand units paid at the existing rate).
Remember: the basic economics of television production costs have not changed (though they will, of this I am sure). So why the thresholds? Who do they benefit? Let’s set our thinking caps to “analyze”. While the DGA considers the fact that the AMPTP members have budged on electronic sell-through rates to be “historic”, the fact of the matter is that this isn’t much of a concession. Makes for good headlines though.
I could go on for a while about the issues related to “ad supported streaming”. The producers have won a major battle here — a comfortable window where the streaming doesn’t require any additional compensation to the talent. As long as programming is yanked from a network’s website within the correct period of time, no money will be paid to talent no matter how many viewers watch during that period. The producers are likely arguing that this window is akin to “first run” broadcast, but, wow, let’s talk about some swampland in Florida.
As the WGA and AMPTP sit down for “informal” talks after a lengthy stalemate, the headlines from the DGA settlement will have faded and serious analysis of what was won will be performed. I’m not sure why the directors rolled over so quickly on these points, but their “historic” concessions aren’t so groundbreaking when you think about them.