The Red Envelope, Please – Did SAG Drop the Ball on New Media?

A few years back when Membership First was in control of the Screen Actors’ Guild I made the point that their harping on “new media” such as internet based delivery of movies and TV shows was misplaced.

My conclusion was based not on the view that new media would not be a reality some day but that to gain any leverage over these as yet unproven sources of studio revenue, the Guild had to make a serious charge on the DVD revenue sharing model.

My reasoning was pretty simple: the studios know that web based delivery was coming at them like a tsunami. They know DVD revenue is sinking. Nonetheless that revenue remained, and remains, huge relative to new media. They intend to shield that revenue pool as long as possible in order to keep cash flow up while the era of new media is being shaped.  They need the cash to roll out new delivery structures and they do not know yet how they will fare in the battle with competitors which have to be defined widely to include cable and telecom, of course, as well as social networking firms like Facebook and Twitter alongside tech firms like Google and Apple.

But four years have elapsed since I laid out that approach. The ground is shifting fast under the feet of old Hollywood. Ironically, it is Netflix, a company that has relied almost exclusively until recently on DVD rentals, that is leading the way as an article today in The Wall Street Journal suggests.

The Journal’s Lauren A.E. Schuker writes:

“The deal [with FilmDistrict to allow Netflix to stream their films within a new shorter window after DVD release] marks the increasing importance of Netflix to the film industry, where traditional models of distribution—theaters, home video, and pay television—are quickly being upended in favor of new models such as online streaming.”

There is also an important aspect of this story that probably has not been discussed much in Hollywood: the migration of Morgan Stanley internet analyst Mary Meeker to venture capital firm Kleiner Perkins. Meeker’s swan song at Morgan was a slide deck that circulated widely here in the Valley assessing the impact of new media.

Many here noted the dramatic impact that customers of firms like Netflix are having on internet usage.

Here are some of the shocking numbers:

From January to September, real time entertainment (streaming) jumped from 27% of peak hour mobile traffic to 41%!

Netflix subscriber and revenue growth are up 52% and 31% year over year.

And a separate study by Sandvine reported that Netflix “represents more than 20% of downstream Internet traffic during peak times in the U.S. — and is heaviest in the primetime hours of 8 to 10 p.m.”

These kinds of numbers led Meeker to speak of “disruptive innovation” as well as the “furious pace of change” now underway. This is what led her to join Kleiner Perkins where she said, in a recent interview, she could take advantage of “the surging billion-person-plus worldwide Internet audience.”

The impact that Netflix is causing is reflected in the new conflict that has emerged between Level 3, the backbone provider for Netflix, and Comcast. Comcast is threatening to increase the fees it charges Netflix/Level 3 – a kind of toll according to Level 3 – because of the heavy prime time traffic. Of course, Comcast and Netflix are competitors in the streaming v. pay per view market.

This, in turn, is feeding into national politics where the FCC is trying to shape new rules on net neutrality, a principle that would undermine Comcast’s ability to charge differential pricing for internet traffic.

In the last round of bargaining SAG won a concession from the studios that the new media terms would not be fixed in stone and could be automatically “reopened” in this round. Yet, according to the most detailed and credible account of the negotiations, SAG did not take advantage of that opening to confront the studios on the issue.  According to Jonathan Handel, a former WGA staff lawyer and now a labor beat reporter for The Hollywood Reporter:

“Interestingly, neither side sought major changes in new media, other than the expansion in coverage that SAG and AFTRA achieved. That change was a modification to the definition of “covered performers,” whose presence in a made for new media project is one trigger for union coverage.

“In particular, the unions did not seek a reduction in the 17 or 24 day initial period during which no residuals are payable for ad-supported streaming of traditional television programs. That’s an area that has rankled some union members.

“The unions did seek a few, more minor changes in new media. The AMPTP successfully resisted those points. Despite the presence of a “sunset clause” in the existing contract, which theoretically opened the entire area up for renegotiation, neither party wanted a substantial reopening – particularly since new media revenue is still much lower than receipts from traditional media.”

This relatively tame approach is to be sharply contrasted with that of the Writers Guild which, despite being led by a new moderate team, is taking dead aim at new media. According to The Wrap:

“Unlike other labor organizations’ — including the Screen Actor’s Guild’s — more moderate stances, which have in part been driven by fear of work stoppages, the WGA clearly is not anxious to preserve the status quo.

“Especially when it comes to figuring out deals over new technologies.

“‘In the 1980s when basic cable was developing, we negotiated with the companies for minimum compensation rates that reflected a new, as yet untested market,” Wells and Young wrote. ‘But the companies … refuse to raise compensation rates when a market clearly matures.'”

“Illustrating their point, the duo noted that while aggregate basic-cable revenues have spiked 9 percent annually over the last four years to $42.9 billion in 2009 — far exceeding revenue from broadcast networks — script fees have not kept up.

“While the average writer’s rate for a 30-minute broadcast show is $22,900, cable compensation averages only around $12,857, they noted.

“Wells and Young also pointed out the need to improve the guild’s contract provisions regarding new media.

“For example, the fixed residual rate on TV series presented online haven’t kept up with an overall average increase in advertiser CPMs, they contend.

“‘We need to increase the ad-supported streaming residuals to bring them in line with the current online marketplace,’ the duo wrote.”

Unlike SAG and AFTRA, then, the WGA appears to be taking the opportunity to reopen the new media issue by putting on the table the broader context of the changing Hollywood business model.

Ironically, it was the SAG moderates currently running the Guild, led by NED David White and advisor John Maguire, who also fought at the end of the last round to retain coordinated contract expiration dates with the WGA to avoid the whipsawing tactics of the AMPTP. Yet, now SAG and AFTRA have inked a deal (subject to member ratification) that leaves the WGA, a much smaller union, on its own, again, as in 2007-8, to confront the powerful studio alliance.

4 thoughts on “The Red Envelope, Please – Did SAG Drop the Ball on New Media?”

  1. A reply to Ted:

    Well, as I tried to suggest, it is a problem if SAG cannot find a way to work with the other guilds to confront the shift to digital. This shift has now reached take off stage and I wonder if you feel confident that 1.2% is fair. Apparently, despite the existence of the sunset provision, no significant improvement was made this time around. I fear SAG/AFTRA will be facing a dramatically different landscape in three years, heck in three months.

    The larger picture here is a shift in where the real revenue is being generated and whether or not performers can secure a stable living through just direct bargaining with the studio divisions every three years. I don’t think so. Merger advocates seem to think that the new union will usher in an era of stability and prosperity. I don’t think so.

    That there is an anti-WGA attitude expressed by you and presumably others is troubling to say the least.

  2. Fyi, if anyone is interested, just the other day I posted a TV interview on the SAG Actor BB. In the video, analyst, Craig Moffett, discussed the New York Comcast Internet black out. He also stated that “25% of Prime Time Television” now belongs to Netflix (streaming videos).

    ra

  3. they did not only drop the ball they deflaited it as well.

    Have you read the wording of it?
    The performer is “free” …..after that word all other words are meaningless to producers minimum wage laws or not(do they verify that insurance is in force?)

  4. All of the Guilds have terms that cover this type of internet exhibition, and have had them since 2001. The residual rate is the same as the cable pay-per-view rate: 1.2% of 100% of the studio’s revenue from the licensing fees paid by the exhibitor (Netflix, in this case).

    About five times the DVD rate, in other words.

    In both the 2001 and the 2004 negotiations, SAG/AFTRA, the DGA and the WGA all held firm and together on the position that rate should apply to all internet exhibitions, whether considered “rentals” (as in the case with Netflix) or “sales.”

    In 2008, though, the WGA folded, and accepted a permanent term covering “sales”-type exhibitions (aka “ESTs”) that was based on the DVD rate, instead of the far more lucrative pay-per-view rate.

    Whereas, the DGA and SAG/AFTRA agreed to the DVD-based “EST” rate as a temporary term in their contracts, while maintaining both the contract language that says the actual rate is yet to be negotiated, and holding firm to their position that anything less than the pay-per-view/”rental” rate is unacceptable.

    That’s the purpose and the value of the sunset clause on the “new media” terms — the one that the DGA insisted on, that SAG and AFTRA both agreed to, and that the WGA rejected.

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