(Variety) HOLLYWOOD — Writers and studios are on a collision course over the red-hot DVD market.
The Writers Guild of America, responding to rising ire among members over their slim slice of the revenue pie, has elevated DVD to its top issue as it heads into bargaining.
That move is going to hit a rock-solid wall of studio resistance, and that impasse undoubtedly will complicate already complex labor negotiations.
Should the issue spiral out of control as writers become angry over the studios’ perceived intransigence, a strike would become a possibility. The WGA struck three times during the 1980s and nearly went on strike three years ago.
Despite that threat, budging even a millimeter on DVDs is out of the question for studios.
Here’s what they’ll argue:
Moviemaking costs have continued to escalate sharply, with the MPAA estimating in March that the average price of a major studio film had risen to nearly $90 million. Negative costs for 2002 films rose by almost 25% to an average $58.8 million and marketing expenses dipped 1.25% to $30.6 million.
DVDs aren’t ancillary income; they essentially keep studios afloat. Only one in 10 features recoups its costs from domestic box office; only four in 10 recoup after all revenues come in — foreign B.O., TV and DVD.
The future profitability of DVDs could vanish, given the already massive pirating of the discs. The MPAA is already claiming the losses amount to $3.5 billion annually.
If the WGA’s contract is adjusted upward, the studios probably will have to adjust the DGA and SAG contracts as well, meaning even higher costs for them.
The looming battle comes at a time of sizzling DVD sales for titles such “Finding Nemo,” “Pirates of the Caribbean: Curse of the Black Pearl” and “Seabiscuit” during this Christmas season. Those results have fanned the fires of discontent among the scribes.
The writers are stuck with uncommonly small residuals amid the current DVD bonanza because the payout is based on a formula unchanged since it was set in 1985.
With WGA member earnings remaining flat or increasing only marginally for the past five years, writers are clearly in no mood for the studios’ likely poor-mouthing about how agreeing to the guild demands will bankrupt Hollywood.
Here are the key points in the WGA’s argument as it heads toward negotiations:
These are boom times in worldwide box office and TV advertising.
Those gains pale in comparison with the DVD sales, which rose from $11 billion last year to $15 billion this year — an “astronomical” revenue stream, according to WGA East president Herb Sargent. The WGA estimates writers earned $18 million out of last year’s $11 billion in DVD revenues.
The 1985 formula, tilted toward studios to help the fledgling videocassette technology, doesn’t reflect changing showbiz economics in the years since then.
The economics of DVD are enormously attractive. Wall Street analyst Jessica Reif Cohen of Merrill Lynch has estimated the 2002 profit margins for DVD at 66%, compared with 45% for videocassettes; average wholesale unit price is $16 with $2.75 for marketing, $1 for duplication, 90¢ for packaging and 80¢ for distribution, leading to a $10.55 gross profit per unit. A hit selling 11 million DVDs equals a $121 million profit.
Under the WGA’s contract, which expires May 2, about a nickel per DVD sold goes to the credited writers. The rate — set at 0.3% of wholesale revenues on the first $5 million, then 0.36% after that — has been in place since 1985, even though the standard WGA residual rate is four times higher, or 1.2% of revenues.
For a moderately successful film selling 1 million DVDs and generating $15 million in wholesale revenues, the credited writers would split a payout of around $50,000 — pretty tiny compared with the $10 million in profit the studio will see.
Even more aggravating to the WGA is how the revenues are calculated under this particular formula.
Unlike its other residual agreements, video/DVD revenues are based on producers’ gross receipts rather than distributors’ gross. The producer figure can be significantly less at major studios, since distributor costs can be subtracted.
“The residual formula for homevideo in the guild agreement is one of the worst formulae we have,” said Charles Slocum, assistant exec director at the WGA West.
The guild pushed hard on the video/DVD issue in the 2001 negotiations, asserting the 1985 costs of videocassette manufacturing were $14 per unit, but had dropped to $3 per unit with DVD manufacturing costs at $2 per unit.
The WGA asked first for a 100% hike, scaled that back to 25% after the first month of talks and then settled for no hike with a one-time $5,000 fee for the right to include the movie script on the DVD.
The WGA’s major gains in 2001 came from hiking residuals for foreign TV, the Fox net and pay TV. The potential strike threat was taken seriously enough that studios spent several months speeding up production to create a stockpile; negotiations went three days after expiration before a deal was hammered out.
Currently, no talks are scheduled, but the future looks rocky and the May 2 contract expiration is only four months away.
The WGA began polling its members last week on a 25-point “pattern of demands,” which highlighted DVD and gave special notice to healthcare and jurisdiction over reality TV and animation.
And in a notable change from 2001, the WGA isn’t demanding elimination of “A film by” credit, which provoked anger from the Directors Guild and proved to be something of a PR headache three years ago.
One of the 25 points simply asks that the Alliance of Motion Picture & Television Producers address “usage and validity of credits in film and TV, with special attention to the ‘A film by’ credit.”
The WGA will release the voting results Jan. 14, then craft its opening proposal to the AMPTP, the negotiating arm for studios and nets.
But during the past year, fuild leaders have stressed that members want a change in the DVD formula more than any other issue, since that area is clearly where the major revenue growth is occurring.
“What is clear to everyone — writers and employees alike — is that we are negotiating in an exceedingly prosperous new atmosphere,” Sargent and WGA West president Victoria Riskin wrote in the “pattern of demands” letter.
“What is also clear to us is that writers did not participate in this bonanza and, in spite of these boom times, were even forced into widespread rollbacks in important areas.”
Those comments went over like a lead balloon.
AMPTP prexy Nick Counter, chief negotiator for the studios and nets, immediately blasted the demands as “excessive” and “a disaster waiting to happen.”
Both sides are likely just warming up.
Before negotiations started in early 2001, studio execs accused the WGA of seeking increases that would add $2.4 billion over three years in entertainment union costs; the WGA called that number “hyperinflated” and said the three-year costs for writers, directors and actors would be $725 million.
Back in 1985, no one could have expected the shiny DVD discs would be the rage of the 2003 holiday season.
When the WGA learned in 1984 that 80% of videocassette revenue was being excluded by studios, it filed an arbitration suit, and that trial was going on when its negotiations with the AMPTP on a new contract fell apart.
The WGA, which had struck for 13 weeks in 1981 and delayed the start of the fall TV season, struck for two weeks in 1985, with the key issue being video residuals.
Under pressure from members who feared a repeat of the long ’81 strike, the WGA agreed to accept the same formula that had been worked out the year before by the DGA, which allowed studios to exclude 80% of revenues in order to give those studios a chance to recoup their investment.
In 1988, the WGA struck for five months, again delaying the start of the fall TV season. The stoppage had a profound impact on Hollywood as writers lost hundreds of millions of dollars and the Big Three nets never recovered all of the audience share lost to cable and local TV.
Partly because of those three strikes, the WGA carries a reputation for being the most assertive Hollywood union.
And though it has not struck since then, it came close in 2001.