Unless a miracle happened over the weekend and I missed it, there’s a good chance that the writers in Hollywood are going to strike. As you know, the major issue on the table between the producers (the major studios and networks) and the writers relates to residuals for new media. One side says there’s no way to predict the future; the other side says “Remember the DVD!”
As a rallying cry, that’s not so bad.
New media is one of those fuzzy concepts — on the surface, it means any means of distribution not considered “traditional”, i.e, television or video. More specifically, it means distribution to your mobile phone or home computer. But it breaks down even further, and it’s helpful to understand the different models currently being contemplated. Once you understand those, you’ll see that “new media” isn’t so much a revolution as it is a way to expand the current distribution process.
For the sake of ease, I’m going to correlate the “new” to the standard terms used by the industry. Like I said, the basics aren’t all that different.
- Streaming: Streaming is how you get your programming via your traditional television. Basically, you turn it on and the programming comes to you. Within the television world, there are different flavors: first-run network (the Heroes episode you’ll watch tonight), second-run (reruns that make you remember that there’s more to life than television), syndication (how many times have you seen the same episode of Gilligan’s Island?), pay (to catch the cool stuff like The Sopranos), basic cable (where shows like Monk found a life), and a few more slices and dices within those categories.
For the purposes of calculating and paying residuals, each of the above has a slightly different treatment. For example, no residuals on first-run network — that’s what basic compensation (salaries) is for — while syndication can go forever. Provided your show is part of the post-60 bargaining agreement.
With the exception of pay television (and it’s cousin “pay-per-view”), streaming is largely advertising supported. As this model translates to the online world, the basics will remain the same. The producers are still trying to figure out how to work out the advertising model. Let’s be honest, it’s not going to be as easy or clean as it is with syndication. Have faith — you will still get your fix of pre-roll, post-roll, and interspersed advertising. You’ll also see an increase in the already-pervasive product placement, with all the commensurate awkwardness.
Things get a little fuzzy when you start to look closely at streaming — producers and content providers are trying out subscription models and whatnot — but the basics remain the same. Streamed media doesn’t live on your hardware for any length of time.
- Rental: Rental is the market that launched a million complaints. Rental is the basic video model that saw the industry through its infancy and into the mid-1990s. It is currently seeing a resurgence via companies like Netflix. With the rental market, you pay a small amount to keep the product for a defined period of time. Late fees and charges might apply. The defining principle of rental is that you don’t get the product forever.
In the new media world, technical hacks and digital rights management guide the rental market. It is much easier to cut off access to a product after three days or three plays. Thus, prices for rental product are far lower than for sell-through product. The problem for consumers — indeed, this is true across all these media types — is that the producers and content providers are creating a crazy quilt of products, services, access, rules.
For the purposes of residuals, the rental and sell-through markets for video (cassettes and DVD) are treated the same (bascially, a 20% royalty on net receipts is calculated, and then the residual rate is applied to that 20%). In the online world, this gets a little fuzzy as rental can potentially include the formerly television-only model of pay-per-view. What is PPV other than short-term access to a product?
- Sell-Through: Sell-through was, just before DVDs were released to the general public, the next best thing to sliced bread for the motion picture industry. Rather than renting products, consumers could own products. And it turned out that ownership was a very desirable thing for consumers. Product was rolled out at varying price points and consumers snapped up videocassettes that soon left them with little space for furniture.
Luckily, the DVD came along and made the space issue less of an issue. It also lead to consumers who had invested in videocassettes repurchasing libraries. The producers loved that. So much that they are hoping for the same effect with HD-DVD and Blu-Ray. This time, the consumers aren’t so eager to replace entire media libraries. Mostly be cause twice is enough and because who knows what magical inventions the future will bring?
The funky problem with sell-through is that while the consumer “owns” the media, they don’t really own the media. Unlike DVDs, which are portable, playable on a variety of devices, and easily shared among friends (thanks, friends!), sell-through via your phone or computer come with lots of restrictions. Restrictions that make the former territorial encoding restrictions seem quaint and progressive.
The varying restrictions on sell-through product are going to come back and bit the producers in a big way as technology evolves. All it’s going to take is one software upgrade that doesn’t have full, unfettered, unhacked backward compatibility and there will be a lot of unhappy customers.
The main point of sell-through is that the consumer takes possession of the programming, no matter how imperfect the technology. Prices are generally higher for sell-through products because of this.
- Merchandising: Ah, this is where things get interesting. Merchandising is not generally subject to residuals. There is a whole ‘nother accounting known as “name and likeness” relating to merchandising. Since that’s not currently on the table (to the best of my knowledge), we’ll skip the technical stuff.
Merchandising encompasses stuff like wallpaper and ringtones and games and other little tchotkes associated with a motion picture (television and movies are collectively known as motion pictures). Consumers actually buy this stuff like it’s going out of style. Go figure. These merchandising streams are turning out to be a market force.
- Promo/Clips/Other: While this final category seems to fall under merchandising, it has a huge difference: no associated backend payments. This may be one of the hardest to defend areas for the studios when it comes to third party compensation because, well, it’s being eyed a a key revenue stream. Free money, if you will.
Right now, full-length programming isn’t too popular on mobile phones in the United States. Lots of reason, little time. But clips — short excerpts from programming, a scene here, a punch line there — are hot. A clip can range from David Letterman’s “Top Ten List” to the scene from The Office where the Scranton Dunder-Mifflin team watches “their” commercial. Short, easily digested pieces of content.
Naturally, the talent wants to be paid for this programming. Naturally, the producers are resistant. With good reason: there isn’t generally a revenue stream associated with clips (yet). As producers place large swaths of programming (see: The Daily Show) online in searchable, chunked ways, it’s hard to argue that there isn’t an economic model associated with this move. Content is too valuable to give away for free unless there’s another way to make money.
Then comes the notion of made-for-online content and short-form video and the future. These markets are too nascent to have a defined income model (luckily, expense models are never out of style, no matter how new the media), but rest assured that producers are actively seeking new ways to push content to these windows. Talent wants to make sure it gets compensated.
Okay, that’s the basic primer. Residuals came about with the rise of second run broadcast and syndication (domestic and international). As the producers repurposed programming, they raked in lots of money. Talent, naturally, wanted to receive a share of this additional money — after all, you’re not watching Friends because you have a strong affinity for programs produced by Warner Brothers.
As producers saw huge income from videocassettes and DVDs, the talent realized they weren’t getting what they considered to be a fair share of that money. In the early days of distribution, the position taken by the studios was fair; as costs declined and revenues increased, it was a harder position to take. Yet the talent let the producers hold the line. Now, as new distribution streams come online, it is the position of the talent that they won’t get burned again.
The problem is that the studios have a point: there is no true marker of where this market will go. It makes sense to see how consumers will take to this model or that model. The problem for the talent is that while waiting for the “studies” of these emerging markets to be completed, there is also a risk of precedent. Settling for one model now might very well weaken bargaining positions in the future.
Then there’s the issue of costs of production. Movies, if the studio is lucky, recoup these costs during the initial theatrical run. Television, during the first broadcast (the networks kick in production money as they make it back with advertising; pay is obviously different). When costs are higher than income, then the producers take a loss. The video release becomes the new break-even point. The video release also comes with its own set of associated costs.
Since talent — actors, directors, not so much the writers — often enables the increasing cost of production (studios are not innocent parties here, by any means), studios want them to participate in the recovery of costs before paying residuals. This could get difficult and complicated when it comes to movies, but for television, it might be doable, as long as the current reimbursement from broadcasters remains in place. The problem comes in the defining of these costs — production and distribution.
The writers are betting that the producers will feel the economic pain of a strike and come back to the negotiating table with more favorable terms. The producers, well, at this point, they must be hoping that the writers will work as “consultants”. The Writers Guild of America cannot cave on this issue and remain a viable union. The producers have to weigh a range of issues. Both sides have strong, valid arguments; neither side is negotiating seriously.
So it looks like a strike is inevitable. Hopefully that will lead to some common sense entering contract negotiations.