Writers' strike: Fast-changing technology complicates talks with producers

Critical sticking point is the writers' demands for a bigger share of the burgeoning DVD market.

Now that Hollywood writers have put down their pens and picked up their picket signs, movie and TV fans – as well as an entire industry – wonder how long the strike will last.

At stake: more TV reruns and fewer films for fans around the world, not to mention an estimated $1 billion in lost revenue for America's entertainment industry if this strike drags on as long as the last major walkout by writers in 1988.

Ostensibly, the crucial sticking point is the writers' demands for a bigger share of the burgeoning DVD market. But the larger issue is how to carve up the revenue pie when technology is changing so quickly that it's impossible to predict how big or even what shape that pie will be.

"So much is unknown about where distribution and entertainment is headed," says Roger Goff, principal of Goff Law Corp., an entertainment-law firm in Redondo Beach, Calif. "And everyone bandies about these huge hypothetical profits that nobody wants to be left out [of]. So it's making the negotiations even harder than usual."

"Usual" in Hollywood is tough enough.

Producers know they must give the same concessions to the directors' and actors' guilds as the writers, which induces extreme caution in every agreement. The last strike lasted five months and cost the industry some $500 million.

Since then, costs have escalated and revenue outlets have expanded, making the film and TV industry one of America's largest foreign exports. It accounts for $30 billion in Los Angeles County alone.

Over the years, writers have negotiated what many producers call more than a fair share of revenues, largely in the form of residual payments. Current Writers Guild of America (WGA) contracts provide for a sliding payment scale. A typical TV scribe might receive roughly $25,000 for a show that runs twice on a network (once as a first-run episode, then again as a rerun). The scale may go down quickly for subsequent airings in syndication, from $5,000 to $3,500. After it hits a certain point, say $300, that's where it will continue to pay the writer in perpetuity every time an episode airs. Many writers depend on these payments as a financial bridge between jobs.

But as programs move to new venues, such as the Internet and cellphones, nobody knows if revenues will follow.

"The advertising models for new media are still up in the air," says new-media guru Jack Myers, publisher of JackMyers.com in New York, who adds that it could be four to five years before the networks or studios can hope to generate sufficient revenue from new media to compare with the billions of dollars they currently earn from broadcast advertising.

As both sides struggle to position themselves for this uncertain future, negotiators use such open-ended umbrella terms as "electronic sell-through" to cover their bases. But the industry can change quickly, says Jeff Fishman, president of JSF Financial, a wealth-management firm in Los Angeles that deals with studios as well as creative talent.

The last time writers went on strike, VHS videotape was all the rage. Today's DVD market, which generated more than $24 billion last year, has leveled off, Mr. Fishman points out. "Who knows how much longer people are going to go into a store and rent a DVD to play at home?"

Writers want to double their residual payment – from about 4 cents to about 8 cents – for every DVD sold, But when tastes change, profits can evaporate, Fishman says. "Studios can't afford to lock themselves into doubling their cut of DVD sales," as the WGA is asking, because there are fixed costs in marketing and stocking DVDs. A formula for payments could hurt them if sales slump.

"Anyone who thinks they can put their arms around either the profits or the structure of the industry to come is just fooling themselves," Fishman adds.

As broadcast television audiences continue to shrink and the number of people who want a piece of the expanding technology pie escalates, the scramble for money is messier than ever, say longtime industry veterans. Many on the talent side are bitter, feeling that the studios have perfected the art of the legal sleight of hand, making profits disappear when it comes to paying up.

Writer-producer Doug Schwartz created one of TV's most successful shows, "Baywatch," but has spent two years in court fighting to get paid. In the end, the studio settled, without divulging profit figures, he says.

This isn't the last time he expects to do fight in court. Most of his colleagues have had to do the same, Mr. Schwartz says. "Hollywood studios have figured out how to hide any profits behind a wall of fake fees and other costs, so that even with one of the most profitable shows in history, they claim there are no profits from which to pay."

Everyone has a stake in the struggle over the shape of entertainment to come.

"This is a significant game of brinkmanship," says Michael Sherman, a partner with the entertainment law firm, Jeffer, Mangels, Butler & Marmaro, in Los Angeles. Studios have as much if nor more to lose than the writers, he adds. "With so many other forms of amusement to choose from these days, once audiences leave, they may never come back to network television."

Many view the issue of who owns what and who has the right to exploit it as seminal in the coming digital world, says Martin Wade, CEO of Broadcaster, an online entertainment company in Los Angeles. Talks about how to split the pie is the visible issue, he says. "But the invisible issue is preparedness. The studios weren't prepared, just like the music industry wasn't prepared and has lost its shirt."

It's hard to prepare, he adds, when you don't know what's coming.

Monitor intern Alison Tully contributed to this report.