What's making writers and studios so nervous

The union says it won't be shortchanged on new media as it was with DVDs. But no one's sure of future dollars.

By Richard Verrier and Meg James
Los Angeles Times Staff Writers

November 19, 2007

Damon Lindelof got a sobering glimpse of his future as a television writer two years ago as he strolled through the Grove shopping plaza in Los Angeles.

Hanging in the window of the Apple store was a gigantic poster for "Lost," the hit ABC show on which he serves as executive producer. Just days before, ABC's owner, Walt Disney Co., had announced that "Lost" and other TV programs would be sold through Apple's iTunes store.

Though Lindelof was thrilled that his show was at technology's vanguard, he was dismayed that Disney had not consulted him about either the program's digital debut or the pay he and his fellow writers would receive.

"I felt like somebody was trying to pull the wool over my eyes," Lindelof said Friday, as he picketed outside Disney's gates.

Such suspicions are widely shared by many of the 10,500 members of the Writers Guild of America, who have been on strike for two weeks. Talks between the writers and the major Hollywood studios about a new contract are scheduled to resume Nov. 26, but the walkout will continue until a pact is finalized. The parties remain far apart -- particularly about compensation for new media.

Writers fear they are being shortchanged as the studios rush to distribute their TV shows and movies on the Web, cellphones, video iPods and other devices. The payments they receive when their material is reused, known as residuals, help writers weather the feast-and-famine cycles of Hollywood. As a result, they view this is as a seminal moment to claim their fair share of new-media revenues, not just for themselves but for future generations of writers.

The studios, however, are worried about committing to the guild's new-media pay demands when the economics of the Internet and other digital technologies are uncertain. Sales at the moment are minuscule, amounting to millions, not billions, of dollars. Internet video advertising is also in its infancy, and no one knows just which format will click with consumers. Will they pay to download movies or insist on watching them free?

Still, entertainment industry executives have touted digital media as a key driver of future growth. "Even the most ardent DVD supporter at a studio would have to admit that a good proportion of the content is going to be delivered electronically," said Kurt Scherf of Dallas-based Parks Associates.

In fact, the current stalemate between writers and studios is based in part on their shared nervousness about the toll new media is taking on their traditional sources of income. The Internet has lured away younger viewers and advertisers from television while threatening to make movie studios more vulnerable to piracy and to gut their lucrative DVD business, which has recently peaked.

"The writers and the producers are in the same boat," said David W. Rips, director of Deloitte & Touche's media and entertainment practice. "Writers want to know what their percentage of residuals should be, but they don't know what the total market size is or the profitability of that market. And the producers are in the exact same position."

Writers have seen the sea change coming as the consolidation of media companies left fewer content buyers. The $2-billion-a-year syndication market, in which TV studios sell reruns of their prime-time hits to TV stations and cable channels, has been in decline. The most popular shows no longer fetch the premiums paid a decade ago.

Some of TV's biggest hits, serialized dramas such as "Lost," don't repeat well -- further reducing their value in syndication. "All of the supplemental viewing of 'Lost' has gone from traditional media platforms to new-media platforms -- DVDs, digital video recorders, downloads of the show and online streaming," said Carlton Cuse, an executive producer and a member of the WGA's negotiating committee.

Though the dispute between writers and studios centers on future revenues, the roots of the conflict date to 1985 and a much-maligned pay formula for home-video residuals. Under the arrangement, 80% of the wholesale revenues were taken off the table to cover manufacturing and other costs tied to the fledging home-video market. Writers and other talent unions receive residuals based on tiny fractions of the remaining 20%. For the writers, that amounts to 0.36% of wholesale revenues, or about 4 to 6 cents for every DVD sold.

At the time, guild officials say, studios contended that the royalty was crucial to getting the fledgling videocassette business off the ground. The guild was embittered when VHS tapes, and later DVDs, became a multibillion-dollar business.

But studio executives say the royalty was market-based and no one anticipated the home-video boom.

Guild leaders have tried repeatedly to increase the DVD rate, but studios stood firm, pointing to the rising production and marketing costs of TV shows and movies, including the salaries of stars like Johnny Depp, marquee directors such as Steven Spielberg and top writers like J.J. Abrams ("Lost," "Alias").

Studios note that 6 out of 10 movies don't make a profit and 80% of new TV shows fail. Still, writers have vowed to avoid repeating the same mistake with the Internet.

Such feelings boiled over in February 2006 when ABC said it would pay residuals on the sales of downloaded TV episodes using the DVD formula.

The writers guild was joined by unions representing actors and directors in complaining that the network had violated collective-bargaining agreements by unilaterally imposing terms. Applying the DVD formula was especially unfair, they said, because the cost of a download is much less than that of making and distributing a DVD.

Executives at ABC and other networks and studios note that the download business is hardly the financial windfall that writers suggest, citing the low retail price of $1.99 per episode, indirect costs such as building Web players and creating digital files, and the small sales volume.

Adams Media Research projects that paid downloads on iTunes and other services will more than double to $194 million this year -- roughly the cost of a big-budget movie.

Among the most popular downloads have been of "Lost." Lindelof said he received his first residual check in June for the eight episodes he wrote for the initial season. The total for a three-month period in late 2005, after the iTunes launch: $455.05.

"Profitability is next to nothing," said one studio executive who asked not to be named. "The notion of taking out more money from a business that's nascent just seems crazy to us. The problem is, we said the same thing about DVD and it became a $10-billion business."

Initially, many writers embraced the Internet as a way to connect with devoted fans who chat online about their shows. They crafted short features known as webisodes based on their programs.

But even that became a source of conflict.

NBC Universal last year tapped writers of prime-time shows such as "The Office" and "Heroes" on NBC and "Battlestar Galactica" on its Sci Fi cable channel to create webisodes. "We said, 'Great. That sounds like a cool idea,' recalled Ronald Moore, writer and executive producer of "Battlestar Galactica." "Then they said they considered them promotional and that they weren't going to pay actors, writers and directors for working. At which point I said, 'Thanks, but no thanks.' "

After the writers balked, NBC filed a complaint in August 2006 with the National Labor Relations Board, alleging that the guild was improperly holding up Web productions. The board later sided with the guild, although it did not address compensation.

As writers and studios repeatedly clashed on the new-media front, anger swelled across the union.

"There's been a tin ear at the companies to the growing level of frustration within the Writers Guild about how the companies have dealt with these new-media issues," said writer-director and past guild President John Wells of "ER" and "West Wing." Barbara Brogliatti, spokeswoman for the Alliance of Motion Picture and Television Producers, responded: "We have a tremendous regard for writers and their contributions. . . . We were willing to share revenue from Internet streaming even before we had recouped our costs. We had a proposal to that effect on the table when they went on strike."

Guild officials, however, said the proposal was unacceptable because residual payments would kick in only after six weeks of Internet play, and they objected to sweeping promotional language that would allow studios to stream full-length movies and TV shows without paying. "That would be like going to see the movie "Beowulf" and then saying, 'Hey, I just saw the trailer for "Beowulf," and it was two hours long and contained the whole movie,' " Lindelof said.

Those and other differences led to a breakdown in talks Nov. 4, paving the way for the strike.

Still, some modest headway could provide the basis for a deal when talks resume Nov. 26.

Writers, for example, dropped their demand for doubling DVD pay, and studios agreed to pay for Web episodes derived from scripted network shows.

"Producers and writers alike," said Forrester Research analyst James McQuivey, "are desperate to make sure they don't accidentally give the farm away."