Jonathan Handel’s Conference Call on WGA Strike

Jonathan Handel over at Digital Media Law briefed investors today on the WGA strike and I listened in on the conference call. Jonathan is of counsel at LA law firm TroyGould and was in house counsel at one point in time for the WGA itself. He is a double graduate of Harvard, undergrad and the law school. My thoughts are in italics.

He summarized the basics: the AMPTP is the key bargaining agent for the producers. He pointed out that they are dominated by the six majors (Fox, Disney, Sony, etc) but also include MGM and CBS. In the actual negotiations with the guilds, the TV networks also sit in. The AMPTP includes in its organizations many independent producers, but they have no seat at the table. The AMPTP makes decisions by unanimity so in theory any one of the 8 key players could veto a deal or deal point. (Not clear if this happens very often – probably not.)

Across the table from the producers is the WGA and Jonathan noted that there is a tremendous amount of animosity between the heads of the WGA (President Patric Verrone and ED David Young) and the AMPTP (apparently this extends to a personal level at least with respect to AMPTP honcho Nick Counter which would make negotiating very hard…although not necessarily to the level of Moonves, Chernin, Iger, etc.)

The new ED of the WGAw is a “hard core” union guy with a background in the garment workers (this is true of Young and his top deputy Jeff Hermanson – both long time union staffers but definitely outsiders to the entertainment environment).

In addition to the WGA, the DGA represents directors and others who are behind the camera (assistant directors, too). It has 13,000 members or so and “never strikes” well it did once for a few minutes. Viewed by the producers (patronizingly) as “the adults” in the guild world. But that is because they are seen as more management-friendly. (The DGA deal of course is already in the can and that is putting pressure on the WGA to cut a deal too and will possibly pressure SAG to cut a deal, too.)

Next there is SAG with 120,000 members whose contract is up June 30. Here, too, the Guild hired a new NED who comes from the Football Players and is considered hard core.

Next up, there is AFTRA with 70,000 members, 40,000 of whom also hold SAG cards They are considered less assertive. And SAG has now moved to sever its relationship with AFTRA. (Vallywood! readers know all about this of course).

Finally, the IATSE or “IA” for short represents the crew and craft (or “below the line”) workforce on a TV or film production. They have 100,000 members and more management friendly. They have been very hostile to the WGA strike to the point of attempting to ridicule the WGA.

(Now on to the negotiations)

The WGA contract is over 650 pages; complicated agreements and issues; 3 year term; possibility of 3 or 6 years from now could see another strike or threat of a strike.

Certain portions of the agreements are patterned. But not set in stone; a practice not a law. Management likes it that way. WGA and DGA are breaking pattern.

And individual (actors and writers can) have their own deals; can be better but cannot contradict the master collective agreement; only a small proportion of the talent do better.

Residuals? What are they? They are reuse payments – if a TV or Film is released on cable or DVD then those are reuses in secondary markets. And so payments are made for those reuses.

Because of pattern bargaining if WGA asks for an increase in DVD rate then this is magnified several fold as other guilds get a similar share. (This is an important point and what probably produces heart burn on the producer side – today’s studios answer to a higher power: Wall Street since they are all mere subsidiaries of large publicly traded companies with pressures to rein in costs.)

Home video is key to the WGA strike – talent feels they got screwed years ago. In 1973 deal was made that was pretty good. Then did a new deal in 1984 by DGA for 80/20 split. The producers thought the ’73 deal was too talent friendly. In 84 the deal was to allocate 80% of revenue from home video sales to distribution companies (still largely independent at that time) and then have those distribution companies pay a 20% “royalty” to the producers (in turn, then, the talent guilds and the IA every three years battle the producers over how to split up that 20% pie).

Right now, writers get only 1.5% to 1.8% of that 20% (i.e., 0.3% to 0.36% of 100%). With a multiplier effect, talent as a whole is getting only 15% to 20% of that 20% (i.e., 3% to 4% of 100%)

Now DVD are cheap to make – 25 40cents but earlier it was more expensive.

(So now arguably there is no justification to continue paying the distribution side of the studios 80% – that 80% is a huge cash cow for the studios, of course, that they are desperate to protect – for some reason the WGA dropped its demand to break into that 80% and concentrate on new media – but DVD revenue is 20bn a year and new media is not yet 200 mn! and that could continue for years)

The DGA less concerned about residuals – for example, assistant directors get no residuals practically so not likely they would strike over them but WGA has to live off them in lean years.

WGA wanted DVD residual increased but dropped it. Off the table as far as we know but SAG has said they do not consider it off the table. That might be pushing the WGA to push for it as well.

Bitter strike by writers in 1988. Lasted 22 weeks, got little, ended by showrunners who threatened Fi-Core (Fi-Core is an anti-union initiative endorsed by the Supreme Court that allows workers who are not union members but are still protected by a collective bargaining agreement to pay a lower “agency fee” rather than full dues – this in theory prevents the union from spending a non union member’s money on non collective bargaining activities yet reimburses the union for funds that it will have to spend on behalf of that protected non union member as a result of being selected as the exclusive representative of workers in a particular bargaining unit. “Fi-Core” is short financial core, the equivalent of an agency fee in the guilds.)

After 2004, Google buys YouTube and writers start to be more concerned about new media as they did on Home Video. Concerned that formula adopted today will be there for ever.

(In retrospect this may be the key to understanding the outcome of this strike – both Membership First at SAG and David Young at the WGA seem to be of the view that this is 1984 all over again – that the formula put in place today for new media will be fixed in stone. That is a huge bet to make and if one is really making that bet then why not arrange to put your strongest forces in the battle?? Yet the WGA has found itself out on strike for months while SAG’s contract does not even come up renewal until the summer.)

Jonathan then summarized the New Media landscape. There are several key layers:

EST or electronic sell through – these are paid downloads of content;

Ad supported streaming – such as offered by Hulu

Download rental – like the initiative by Apple iTunes

Jurisdiction over content created directly for new media – such as mobisodes

And this new jurisdictional battle includes:

Derivatives on existing works

Original works

Finally, there is a battle over Reality and animation – wga wants jurisdiction – studios will never grant this as IA is already there and if WGA controlled it they could choke off supply of reality to substitute for scripted content.

The initial studio proposal represented a massive rollback – including an end to residuals – deliberately inflammatory.

That meant a stall in negotiations and then last minute attempt to hammer out a deal. (Presumably the producers did it this way to enable them to get the DGA to the table first to cut a deal to then pressure the WGA and SAG.)

The strike was initially very enthusiastic but then flagging energy set in. The IA attacked the strike (surely one of the low points in recent labor history and a real black eye for the AFL-CIO – if the AFL was looking to win friends in SAG and the WGAw – which is still independent from the federation – it failed miserably here) .

Jonathan pointed out that while on a typical TV show there might be 5 writers there are hundreds of crew on any one show.

The cost of strike in LA alone is $20 mn per day – 1.5 bn to date. SAG role could drag strike on.

Scripted TV shut down now – 70 shows down. Threat to slow or stop film beginning in March.

Interim deals with some mini-majors – Lionsgate; Letterman. Demonstrate that a deal with the WGA is doable.

Strike shut down the Globes essentially. Actors refused to cross the picket line. Could foreshadow a similar problem at the Oscars. Only the Superbowl is more important to networks. And it is of course a big night for the studios. Could implode and turn into a press conference or a show of old movie clips.

Will the DGA deal serve as a template? Significant negatives for WGA. Split in the writers guild tho on quality of the DGA deal.

Degree of split is unclear. WGA is pretty hardline. SAG has spoken out against the DGA deal too and that encourages the WGA leadership. (SAG leaders may have been goaded into an intervention here by their own hardliners – but now they seem to have laid out their bargaining position without much advance preparation and it suggests that they will agree to a patterned deal in the end. Is SAG prepared to lead an effort that will reshape the balance of power in the industry??)

Jonathan noted that Informal talks preceded the DGA deal – with studio heads Iger, Chernin (Newscorp) and Moonves.

The basics of the DGA deal:

Electronic Sell Through: WGA want 4x what DGA got; Stremaing they wanted 3x tho revenue model different – DGA taking $1200 fixed payment; WGA wants a formula driven by viewership or distributors’ gross; new media jurisd: mixed but probably ok with DGA approach but no minimums are set; the sunset provision after three years (allowing a reopener on new media down the road – consistent with DGA view that it is too early for a knock down and drag out fight on speculative revenue streams) – this looks a little bogus to Jonathan – he points out that the contract is always up for renegotiation in three years and since people are not going to ignore what happens in that first three year period it could weigh down efforts to renegotiate (my view tho is that it also provides a lever to make sure that these issues are reopened.)

Transparency provisions to audit, looks good;

Reality and animation and separated rights not in deal

SAG is concerned about “forced endorsements,” where an actor/character actually touches the product, says its name, and/or extols it and yet is not separately compensated. (Ever wonder why all those Detroit cars appear in Transformers? It’s not an accident.)

And no increase in Home Video and SAG is not happy about that

So now informal talks are underway with the WGA and studio heads. People saw this as positive. WGA dropped reality/animation demands to show intent.

But in last few days lot of concern. WGA initially scheduled a Wall Street Analyst meeting to dump on CBS. (Query: Why did they wait so long to put in place an investor strategy – this is a well honed path for labor and they should have created a “financial picket line” in the early days). Now tho the analyst meeting has been cancelled that under pressure.

SAG too is now rattling its saber. Some prominent writers have critiqued the deal.

What are the scenarios? Oscars may be a deadline.

Cost of deal? Not backbreaking. But as internet becomes bigger could be more difficult for the studios.

Management failure to figure this out and do a deal? Perhaps.

Settlement before the Oscars odds?

If no settlement by then then this drags on for a long time. Jonathan spoke with a former hi level WGA staffer – her take was the same.

Then it turns into a SAG strike as well. (The problem with that of course is that in essence many SAG members are on strike now, at least in TV – will they want to drag this out until late summer?)

Doubt over where new media will be in few years. Decline in TV viewership. DVD leveling off as is theatrical release. More time spent by people in online gaming and more time on the web.

Overall, the WGA leadership wants to remake posture of writers and solve some longstanding problems like home video. The WGA is pushing a proactive agenda and studios are resistant.

Thanks, Jonathan. Thoughtful and useful analysis as always.