New (Media) Frontiers in the Labor Wars ABA Section of Labor and Employment Law, 2nd Annual CLE Conference September II, 2008 Robert S. Giolito Spivak Lipton LLP Los Angeles, CA rgiolito@spivaklipton.com "This was not a strike we wanted, but one we had to conduct in order to win jurisdiction and establish appropriate residuals for writing in new media and on the Internet. These advances now give us afoothold in the digital age. " - Patric Verrone, President, WGAWI On February 12, 2008, the Writers Guild of America, West (WGAW) ended a 100 day strike against the Hollywood film and television producers after reaching a collective bargaining agreement that contained new provisions governing how writers would be paid for productions distributed over the internet and wireless telephone networks, the so-called "new media." The writers' strike, the first in the industry in nearly 20 years, succeeded in shutting down much of prime time dramatic television and cost the economy tens of thousands of jobs and billions of dollars. 2 Why did this strike happen? What were the hard issues and why were they so difficult to resolve? Have they been resolved and what bodes for the future? The Dramatic Expansion of New Media At the dawn of the 21st Century, film and television producers had three principal platforms to distribute their products: theatrical box office, network television, and cable TV, including basic and pay. They had also developed an extensive home video and TV syndication market in which their original productions could be repackaged, resold, and re-shown, often at a nice profit. The internet was 1 WGAW Press Release, Feb. 12, 2008, http://www.wga.org/subpage_newsevents.aspx?id=2775 2 Kevin Klowden and Anusuya Chatterjee, "Writers' Strike of 2007-2008, The Economic Impact of Digital Distribution, Milken Institute," June 2008, http://www.milkeninstitute.org/ pdf/writers_strike.pdf (July 17, 2008)
everywhere, but downloading or streaming large amounts of video was still difficult, time-consuming, and expensive. Cell phone video was non-existent, just a gleam in the eye. Fast forward to November, 2007. The TV networks are streaming their hit shows on the internet, which millions are watching in addition to (or in lieu of) the family television. Apple, which has eclipsed the music labels and demolished the CD, has begun downloading full-length motion pictures in addition to a large library of TV programs to millions of ipod owners. The cell phone companies are pushing video over their sophisticated wireless networks so their customers can watch their favorite programs on the tiniest of screens. A single popular online video service, YouTube, consumes as much bandwidth as did the entire internet in 2000. 3 How did all this happen? In one word, broadband. Technical achievements in video compression and massive infrastructure investments by the cable and telecom companies had combined to cause a tipping point in broadband penetration. From March 2007 to April 2008, home broadband adoptionhad increased from 47% of adult Americans to 55%.4 It now took less than one hour to download an average feature film (and it will soon be a matter of minutes).5 For the first time, a majority of American consumers could easily purchase or watch their favorite films and television programs over the internet or on their cell phones. 6 Digital distribution represented a small portion of the huge overall market for entertainment products, but its rapid expansion threatened to play havoc with the 3 Steve Lohr, "Video Road Hogs Stir Fear of Internet Traffic Jam," New York Times, March 13, 2008. In May, 2008, Americans watched over 12 billion videos online, an increase of 45% from the year earlier. There were 142 million unique viewers. Fox, Time Warner, ABC, and Disney were among the top ten video sites. comscore, July 14, 2008, http://www.comscore.com/press/release.asp?press=2324. July 14, 2008. 4 Pew Internet & American Life Project, Home Broadband Adoption 2008, July, 2008. U.S. broadband households are growing at more than 10% a year (and half again as fast in the rest of the world), and will reach 101 million U.S. households in 2012. "Global Entertainment and Media Outlook: 2008-2012" ("Outlook"), PricewaterhouseCoopers, June 18, 2008; http://www.pwc.com/extweb/ncpressrelease.nsf/ docid/06525684358163b98525746c0046cof8, July 21,2008. 5 DivX Movies, http://www.divxmovies.com/video/. July 18, 2008 6 "For the first time, this is drop dead simple," Bill Carr, Amazon's vice president for digital media, commenting on Amazon's announcement that it is offering its customers the opportunity to stream over 40,000 films and videos immediately after ordering them. Brad Stone, "Amazon Plans an Online Store for Movies and TV Shows," New York Times, July 17, 2008. 2
industry's existing business models. 7 What would happen to the immensely lucrative DVD market if consumers could get the same films or shows easier and cheaper (or even free) over the internet? How could shows be profitably sold into syndication, if everyone was already watching them on their computers and cell phones? And if advertisers moved from broadcast to the internet, would prime time television disappear? The best minds in the business searched for answers to these kinds of questions. 8 For many Hollywood executives, who had watched the internet demolish the business of their music industry counterparts, panic was just below the surface. 9 The Residuals Dilemma The great Hollywood labor unions representing the thousands of writers, directors, actors, broadcasters, and film technicians employed in the business also faced significant, if not unprecedented, challenges caused by the rise of digital distribution. Since their formation in the 1930's, these unions had succeeded in organizing almost all film and television production in the U.s. Their elaborate contracts had established a comprehensive wage and benefit structure that was the envy of workers world-wide. One of the most unique features of a Hollywood labor agreement is the requirement that a producer pay a fee, called a "residual," whenever an original theatrical film or television program is exhibited or distributed in another market (or, in the case of television, re-run in the same market). For example, a residual must be paid to or on behalf of the director, writers, actors and crew of a theatrical film whenever it is shown on television or sold on a DVD.I0 7 Digital and mobile distribution comprised only 5 percent of global entertainment and media spending in 2007, but it is estimated that these revenues will account for 24 percent of all growth throughout the industry during the next five years. See "Outlook, "supra n. 4. For example, some experts have projected download spending to more than double this year to $254 million, but that is still a small fraction of an over $20 billion DVD sales and rental market. Diane Garrett and Susanne Ault, "DVD biz hanging tough," Daily Variety, July 21,2008. 8 "It's what I spend the most of my time on," Peter Chernin, president and COO of News Corp., commenting on the rapid technological advancements in digital distribution platforms. Erik Gruenwedel,"Panel Debates DVD in Digital Age," Home Media Magazine, May I, 2008; http://www.homemediamagazine.com/news/htmlfbreaking_article.cfm?article_id=12651, July 21,2008. 9 "The feature film and TV content businesses are on the verge of structural changes that appear to impact the core revenue and profits," Lehman Bros. analyst Anthony DiClemente, writing in a recent controversial report on the entertainment industry. Georg Szalai, "Commentary: Analyst's predictions gives industry the willies," The Hollywood Reporter, July 15, 2008. 10 Residuals are a frequent source of Hollywood labor acrimony. All of the major entertainment strikes in the last 50 years involved disputes over residuals. 3
By the time the writers struck in November, 2007, producers were paying well over a billion dollars annually in residuals to the entertainment unions.u Some of these monies went into the members' pockets while the rest helped support the members' comprehensive health and retirement plans. Residuals are a major source of income for Hollywood talent and no one underestimates their importance. 12 The problem that digital distribution posed for the writers and the other entertainment unions in 2007 was that none of their contracts provided a residual formula for internet and cell phone exhibition of films and television programs, either by downloads or ad-supported video streaming. Negotiations in 2001 and 2004 had failed to fill this "doughnut hole" in the residuals structure. 13 By 2007, itwas clear to most that something had to be done. The producers had begun paying residuals for internet downloads based on the relatively low home video residual formula. All of the talent guilds had filed grievances protesting the use of this formula, and there was concern that it would become enshrined as the established template unless changed in negotiations. To make matters worse, producers had begun to experiment with "madefor" internet programming using non-union creative talent. Fearful of high costs, the producers resisted granting the unions jurisdiction over this work,14 The Writers' Negotiations In 2007, the writers were first up in Hollywood's triennial round of collective bargaining negotiations with the talentguilds. Their contract expired October 31 of that year, while the actors' and directors' contracts expired June 30,2008. This unfortunate timing alone exposed the writers to greater risks because if they could not make a deal, they would be the only guild involved in a possible strike or lockout. 11 "Dollars and Sense," AMPTP, http://www.amptp.org/dollarsandsense.html, July 17, 2008 12 "These residuals, that's our lifeblood for actors." Don Cheadle, quoted in Daily Variety, "SAG Holds Out for a Rewrite," July 14, 2008. 13 Beginning in 2001, the unions' contracts required a residual only for the video streaming of programs when the customer paid on a subscription or per-picture basis and the program was available for a fixed orlimited period of time or a fixed number of exhibitions. Residuals for "all other internet exhibitions" were left to be determined in future negotiations. 14 In the "top-down" world of Hollywood labor organizing, the producer's consent to contract coverage is critical. If the producer refuses consent, few if any union members will work on the project, depriving the producer of skilled talent. 4
The writers approached the bargaining table with a comprehensive list of new media demands, the most important of which called for guaranteed coverage of all "made-for" new media productions and payment of residuals for both internet downloads and video streaming. The streaming issue was quite important because the networks had begun streaming much of their prime time content on their own websites. In the past, such re-runs of prime time programs would have generated hefty re-run fees for the writers involved. But the networks were paying nothing to the writers (or directors or actors) for the streaming, claiming that such distribution was for "promotional" purposes, even though some of the streaming was ad-supported. Many writers felt that the widespread streaming threatened to displace traditional reruns on broadcast and syndication and feared that the residual structure in television would collapse. The writers' negotiators had other bargaining demands unrelated to new media, but unfortunately, as negotiations unfolded, these other demands became more and more prominent. They included such things as mandatory jurisdiction over writers in reality television programs,is coverage of animation writers,i6 and, most contentious of all, reform of the decades-old residual formula for home video. The home video issue was a particular thorn in the side of the writers, who believed they had seriously undervalued the home video market at the time the residuals formula was negotiated in the 1980's. At that time, DVDs did not exist and the producers claimed that the expenses involved in manufacturing and distributing the newfangled videocassettes ate up most of their revenue. So they persuaded the writers and the other unions to calculate residuals on only a small portion of sales. When DVDs became available in the 1990s, the home video market exploded and the studios earned billions, but the home video residual remained paltry: writers collected about 4 cents per each DVD sold. The writers' leaders vowed to increase home video residuals, but the studios were even more adamant in maintaining the status quo. They claimed that their DVD revenues helped to offset the skyrocketing costs of production and marketing. 17 They 15 For the last two years, the writers had unsuccessfully tried to organize reality television programs, including a failed recognition strike at "America's Next Top Model." 16 Many film and television animation writers are represented by another union. The writers sought jurisdiction over all non-represented writers. 17 The average cost to make and market a major theatrical film was $106.6 million in 2007. This includes $70.8 million in negative costs and $35.9 million in marketing costs. Total costs had increased more than 35% from 2001. MPAA, Theatrical Market Statistics, 2007, p. 6. According to the AMPTP, the average 5
argued that the guilds' members were not only making more up front in compensation, but much more than they ever expected to earn in home video residuals. The new media issues were hard enough in themselves to resolve, but coupled with the intractable home video dispute and the writers' jurisdictional demands in reality and animation, the prospects for a deal any time before the contract expired were bleak. It did not help that the writers chose to delay the start of talks until mid-july, defying the pleas of almost everyone in the industry (including the producers) to start much earlier. The talks were predictably acrimonious, with the producers reacting to the writers' initial demands with a ludicrous proposal to revise the entire residuals structure.is The producers were forced to withdraw that proposal, but negotiations dragged on. With little resolved and no deal in sight, on November 5, the writers' struck. The Directors' Template The writers' strike successfully shut down most of prime time television programming, dramatically reduced network ratings,19 and eventually led to the cancellation of many writers' employment contracts. 20 But the producers could not be budged, and though the parties continued to meet sporadically, little progress was made. This stalemate created an opening for the directors' union, whose leaders had carefully monitored and studied new media developments in preparation for their own negotiations. Unlike the writers, the directors' negotiators were focused on new media. They had sounded out industry leaders for months and had crafted proposals that they believed were practical and attainable. They had also gained some considerable leverage from the ongoing strike, as the producers appeared open to making some kind of deal on new media, if not on the other issues. deficit (production costs less license fee) for the first season of a one-hour series is $26.4 - $33 million and is $8.8 - $15.4 million for a half-hour series. "Dollars and Sense," AMPTP, http://www.amptp.org/ dollarsandsense.html, July 17, 2008 18 Dave McNary, "WGA, AMPTP take first swings," Variety, July 17, 2007. The producers proposed to pay residuals only on profit-making projects. Given the well-known vagaries of Hollywood accounting, this was a non-starter. 19 Rick Kissell, "Strike Takes Toll on Network Ratings," Variety, January 29,2008 20 Many television writers and showrunners work under term contracts that contain so-called "force majeure" clauses that permit the producers to terminate the contracts after a certain time due to a force majeure event, including a strike. 6
The directors opened negotiations in January in the midst of the writers' strike and concluded their talks in a matter of days. On January 17, 2008, they emerged with a new 3-year deal whose new media provisions have proved to be the template for all subsequent agreements, including the eventual settlement with the writers. 21 The principal points are: Union jurisdiction is granted over programs produced for internet distribution except for original programs whose costs are less than $15,000 per minute, $300,000 per program, or $500,000 per series, whichever is lowest, unless a guild member is employed on the program. Downloads ("Electronic Sell-Through") of films and television programs are paid at double the old home video residual rate for television programs and 80% over the same rate for films, above 100,000 units sold. Below this threshold, the old home video rates apply. Ad-supported Streaming of new television programs, after a 17-day window (24-days for series in their first season), pays a fixed residual calculated at 3% of the residual base for each 26-week period following the window, within the first year of initial broadcast. (In the contract's first year, each payment would be approximately $600 for a one-hour prime time program). Streaming of programs more than a year after their initial broadcast is paid at 2% of distributor's gross receipts. Ad supported streaming of films is paid at 1.2% of distributor's gross receipts. Distributor's Gross Receipts will be used as the base for all residuals calculations, as opposed to producer's receipts. Because of the way residuals were previously calculated in home video, this was arguably one of the most important deal points in the entire negotiation. The guild is guaranteed the right to inspect all distribution contracts. 21 "DGA and AMPTP Re.ach Tentative Agreement," DGA Press Release, January 17, 2008 (attached). 7
The directors' new media deal took the wind out of the writers' strike. 22 While some criticized the deal, especially the fixed residual for video streaming, everyone quickly realized, as the directors' president Michael Apted put it, that the deal had successfully established "two fundamental principles:" union jurisdiction over internet programming and compensation for internet distribution. Unable to move the producers on the home video, reality, and animation issues, and unable to improve on the directors' achievements in new media, the writers agreed to essentially the same terms and ended their strike on February 12. 23 The Template Applied The producers praised their new media deal as a "new economic partnership" with the entertainment unions. 24 This spring, the terms were included in a new television deal with the smaller of the two actors' unions and, as of the time of this writing, the producers have proposed similar terms in a "last, best, and final" offer to the larger screen actors' guild. 25 Few expect the producers to change their proposals in any substantial way in those negotiations, so it appears that the directors' new media template will apply to the entire industry for at least the next three years. What can we expect in the future? Will the directors' template succeed in restabilizing labor relations in this most unionized of industries? All of the unions have emphasized that the new media terms are for three years only and will "sunset" after that time, presumably leaving a clean slate for the next negotiators. But as every labor negotiator knows, each labor contract builds on the previous one and the entertainment unions are no exception to this rule. It is probably best to think of the near future as an experimental and datagathering period. Certainly, the next negotiations will put a premium on industry knowledge and analysis like no other, as each side will approach the bargaining table armed with reams of data to support demands for adjustments or improvements. If, for example, ad-supported streaming substantially replaces broadcast and syndication reruns as some have predicted, there's no question that the fixed residual for streaming 22 Cynthia Littleton, "DGA makes big gains in new media," Variety, January 17, 2008. 23 WGAW, "Summary of the Tentative 2008 WGA Theatrical and Television Basic Agreement" (attached). 24 "Open Letter from the AMPTP," April 7, 2008, http://www.amptp.org/proposals.html (July 17, 2008). 25 While the residuals formulas are essentially the same, residuals are paid at substantially higher multiples in both the actors' and film technicians' contracts. 8
will be front and center of the next negotiations. 26 On the other hand, pressure to improve the formulas may lessen if the data shows digital revenue growth leveling off and spending in "old" media continuing to generate significant returns and residuals. 27 Least likely to be revisited are the "fundamental principles" established in the 2008 agreements: union jurisdiction over internet productions and compensation for internet distribution. If there's anything the writers' strike can be said to have accomplished, it's that no one will want to retread those grounds for a long time to come. 26 The networks are currently reporting dramatic increases in online viewing, but the actual impact on broadcast revenues is unclear. ABC stated that, in May, 2008, viewers on ABC.com watched 37 million full episodes of ABC shows in May, 2008, and overall viewership increasing 110 per cent over May, 2007. John Consoli, "Online Viewership of ABC Shows Soars in May," MediaWeek, July 14, 2008. CBS Interactive recently stated that 46% of its online audience (no numbers given) watched shows on the CBS.com website, and that a third of those persons said they were more likely to watch the shows on the network as a result of having been exposed to the shows online. Mike Shields, "CBS: 46% of TV Audience Watch Network's Shows Online," MediaWeek, July 18, 2008. 27 "Most analysts are techno-geeks with plenty of money and not much time, while most Americans are not technically savvy, and they have plenty of time but not much money," Tom Adams, president of Adams Media Research, commenting on the continued health of the packaged media business. U.S. consumer spending on DVDs and BIu-ray disks in the first six months of 2008 for purchases and rentals increased 1.6 per cent (for a total of$10.77 billion) over spending in the first half of2007. Roberto Rocha, "Retail DVD sales soaring," The Gazette, July 17, 2008. Syndication continues to be profitable as well, with CBS recently reporting increases in its earnings based on syndication of its popular shows. David B. Wilkerson," CBS profit rises 14% on TV syndication sales," Market Watch, April 29, 2008; http://www.marketwatch.com/news/story/cbs-profit-rises-14-tv/story.aspx?guid=%7b3e92ab3e-a622 447F-9DD1-E3601827F436%7D (July 25,2008). In the first quarter of 2008, syndication advertising increased 11.8% over last year (although this may be explained by the lack of broadcast programs during the writers' strike). TNS Media Intelligence, June 8, 2008. 9
FOR IMMEDIATE RELEASE January 17,2008 CONTACT: Sahar Moridani (310) 289-5333 DGA AND AMPTP REACH TENTATIVE AGREEMENT ON TERMS OF NEW CONTRACT DGA Gains Solid Wage Increases with No Rollbacks Plus Precedent-Setting Jurisdiction Over New-Media and a Doubling ofestresiduals Rate LOS ANGELES - The Directors Guild ofamerica (DGA) announced today that it has concluded a tentative agreement on the terms of a new 3-year collective bargaining agreement with the Alliance of Motion Picture and Television Producers (AMPTP). Highlights of the new agreement include: Increases both wages and residual bases for each year of the contract. Establishes DGA jurisdiction over programs produced for distribution on the Internet. Establishes new residuals formula for paid Internet downloads (electronic sell-through) that essentially doubles the rate currently paid by employers. Establishes residual rates for ad-supported streaming and use ofclips on the Internet. "Two words describe this agreement - groundbreaking and substantial," said Gil Cates, chair of the DGA's Negotiations Committee, in announcing the terms of the new agreement. "The gains in this contract for directors and their teams are extraordinary - and there are no rollbacks ofany kind." Formal negotiations between the DGA's 50-member Negotiations Committee and the AMPTP began Saturday, January 12, and were concluded today. Talks were led by Cates and DGA National Executive Director Jay D. Roth. They were preceded by months ofinformal discussions and nearly two years ofpreparation and research by Guild staffand consultants. "This was a very difficult negotiation that required real give and take on both sides," said DGA president Michael Apted. "Nonetheless, we managed to produce an agreement that enshrines the two fundamental principles we regard as absolutely crucial to any employment and compensation agreement in this digital age: First, jurisdiction is essential. Without secure jurisdiction over new-media production-both derivative and original-compensation formulas
are meaningless. Second, the Internet is not free. We must receive fair compensation for the use and reuse of our work on the Internet, whether it was originally created for other media platforms or expressly for online distribution." The agreement includes the following gains in New Media: Jurisdiction: The new agreement ensures that programming produced for the Internet (both original and derivative) will be directed by DGA members and their teams. The only exceptions are low-budget original shows on which production costs are less than $15,000 per minute, $300,000 per program, or $500,000 per series-whichever is lowest. Electronic Sell-Through: ESTis the paid download of features and TV programming. The agreement more than doubles the EST residual for television and increases the feature film residual by 80% over the rate currently paid by the employers. Specifically, the EST residual rates will be.70% for television downloads and.65% for film downloads, above a certain number ofunits downloaded. Below that, residuals will be based on formula employers currently pay. Payments for EST will be based on distributor's gross, which is the amount received by the entity responsible for distributing the film or television program on the Internet. Having distributor's gross as the residuals basis was a key point in our negotiations. The companies are now contractually obligated to give us unfettered access to their deals and data. This access is new and unprecedented and creates a transparency that has never existed before. Additionally, ifthe exhibitor or retailer is part ofthe producer's corporate family, we have improved provisions for challenging any suspect transactions. Ad-Supported Streaming: After an initial 17-day window for free promotional streaming ofinternet programs, companies must pay 3% of the residual base (approximately $600 for network prime time I-hour drama) for 26 weeks of streaming. They can continue to stream for an additional 26-week period by paying an additional 3% -- or a total of$1,200 for one year's worth of streaming. (During a program's first season, the l7-day window is expanded to 24 days to help build audience.) Sunset Provision: Allows both sides to revisit new media when agreement expires. "Our fundamental goal in these negotiations was to protect our interests in the present while laying the groundwork for a future whose outlines are not yet clear," said Cates. "We knew that gaining jurisdiction over new-media production and winning fair compensation for the reuse of our work on the Internet were the key issues for setting a framework for the future, but we also had to secure real gains for our members in today's world." The new tentative agreement includes the following: 2
Annual wage increases of 3% for primetime dramatic shows and daytime serials and 3.5% for all other covered programming. Outsized increase in director's compensation on high-budget basic cable for series in the second and subsequent seasons. Annual residual increases of 3% for primetime shows and 3.5% for all other covered programmmg. Specific advances that pertain to members ofthe director's team. PLEASE SEE FACT SHEET BELOW FOR MORE DETAILS Details ofthe new agreement will be submitted to the Guild's National Board for approval at its regularly scheduled meeting on Saturday, January 26,2008. The DGA's current contracts expire on June 30, 2008. -# # #- FACT SHEET DGA Tentative Agreement January 17,2008 Basic Agreement Wage Increases Compensation for all categories except directors ofnetwork prime time dramatic programs and daytime serials increases by 3.5%, each year ofthe contract. Compensation for directors ofnetwork prime time dramatic programs and daytime serials increases by 3%, each year ofthe contract. Outsized increase in director's compensation on high budget basic cable dramatic programs for series in the second and subsequent seasons: o For 12 hour programs: 12% increase in daily rate and increase in guaranteed number ofdays to 7 days. Results in show rate increasing from $9,009 to $11,760. o For I-hour programs: 12% increase in daily rate and increase in guaranteed number ofdays to 14 days. Results in show rate increasing from $18,010 to $23,520. Residual Increases 3
Residual bases increase by 3.5%, each year of the contract, except for reruns in network prime time. Residuals for reruns in network prime time increase by 3%, each year ofthe contract. Healthcare Employers continue to make health care contributions at specially negotiated rate of 8.5%, secured in the 2005 Basic Agreement to address the impact ofthe growing cost of health care on the DGA Plan. Provisions permitting decrease in contribution rate by employers removed. Other Provisions Second Assistant Directors to manage locations in New York and Chicago. Establishes a wrap supervision allowance of $50/day for the Second Assistant Director who supervises wrap on local and distant locations. Increases incidental fees and dinner allowances for Unit Production Managers and Assistant Directors. New Media Jurisdiction over: All new media content that is derivative ofproduct already covered under current contracts. Original content: o All original content above $15,000/minute or $300,000/program or $500,000/series, whichever is lowest. o Original content below the threshold will be covered when a DGA member is employed in the production. Electronic Sell-Through (Paid Downloads) More than doubles the rate currently paid by the employers on television programming to.70% above 100,000 units downloaded. o Below 100,000 breakpoint: rate will be paid at the current rates of.30% until worldwide gross receipts reach $1 million and.36% thereafter. Increases rate paid on feature films by 80% to.65% above 50,000 units downloaded o Below 50,000 breakpoint: rate will be paid at the current rates of.30% until worldwide gross receipts reach $1 million and.36% thereafter. Distributor's Gross Payments for EST will be based on distributor's gross instead ofproducer's gross, a key point in our negotiations. Distributor's gross is the amount received by the entity responsible for distributing the film or television program on the Internet. We would not have entered the agreement on any other basis. Companies will be contractually obligated to give us access to their deals and data, enabling us to monitor this provision and prepare for our next negotiation. This access is new and unprecedented. 4
Ifthe exhibitor or retailer is part ofthe producer's corporate family, we have improved provisions for challenging any suspect transactions. Ad-Supported Streaming: l7-day window (24-day window for series in their first season). Pays 3% ofthe residual base, approximately $600 (for network prime time I-hour dramas), for each 26-week period following l7-day window, within first year after initial broadcast. Pays 2% ofdistributor's gross for streaming that occurs more than one year after initial broadcast. Clips Provides the companies with limited windows where they can distribute clips offeature films and television programs in new media to promote a program. Provides for payment for all other uses in New Media. Sunset Provision Allows both sides to revisit new media when the agreement expires. -## #- 5
SUMMARY OF THE TENTATIVE 2008 WGA THEATRICAL AND TELEVISION BASIC AGREEMENT This is not a complete summary. The Memorandum ofagreement shall prevail in the case of any inconsistency. From resumption of work through May 1, 2011. Term of Agreement Minimums Minimum rates generally increase 3.5% each year. The exceptions are: network prime time rates and daytime serial script fees increase 3.0% each period; program fees and the upset price increase once by 3% in the second year; and clip fees increase once by 5% in the third year. Writing for Made-for New Media Coverage: The WGA is recognized as the exciusivebargaining representative for writing for new media (such as Internet or cellular technology). Writing for new media is covered by the MBA if: (1) it is written by a "professional writer" (anyone with a single TV or screen credit, 13 weeks of employment in TV, film or radio, a professionally produced stage play credit or a published novel) or (2) the program is derivative of an MBA-covered program or (3) ifthe budget is above any of three thresholds: $15,000 per minute; $300,000 per program; or $500,000 per series order. If initially not covered due to the projected budget but later costs exceed a threshold, the program/series is covered retroactively. Compensation: If a new media program is derivative of an MBA-covered program, minimums for initial compensation apply. The minimum for derivative dramatic programs is $618 for programs up to two minutes, plus $309 for each additional minute. The minimum for derivative comedy-variety and daytime serials is $360 for programs up to two minutes, plus $180 for each additional minute. The minimum for all other types of derivative programs is $309 for programs up to two minutes, plus $155 for each additional minute. Regardless of the length of the program initial compensation can be no less than the two minute rate. For original programs initial compensation is negotiable. Pension and Health Insurance: MBA pension and health provisions apply to all covered writing for new media programs. Credits: The Guild shall determine credits on all covered new media programs. Credits must appear on-screen (or on a link to the program) if anyone else receives such credit. Television Reuse: If a covered new media program is reused in traditional media, the usual residuals for a television program apply with minor modifications. -1-
Writing for Made-for New Media (cont'd),.. Separated Rights: Creators of original new media material are protected as follows: (1) If you create an Internet program that becomes a TV series or feature film which you write, traditional separated rights apply. (2) If you write original material for an Internet program and the Company wants to use it for a TV series or feature film to be written by someone else, the Company must purchase rights from you. The Company may acquire the rights at any time, but separate compensation must be paid. If you want to sell those rights to another studio, the Company has a right of first refusal. (3) If you create an Internet program that is the equivalent of a traditional TV series (over $25,000 per minute and 20 minutes in length) you are entitled to the same rights as in (2) above, plus sequel payments for each Internet episode based on your program. Internet Residuals: Initial compensation covers writing services and 13 weeks of availability in new media when the viewer does not pay, and 26 weeks of availability in new media when the viewer pays. After those periods, certain residuals are payable: (i) if a new media program derived from an MBA-covered program or an original new media program with a budget higher than $25,000 per minute is reused in new media, the new media reuse provisions described below apply, except that electronic sell-through is paid at 1.2% of distributor's gross receipts; and (ii) for original new media programs, the residual for ad-supported streaming is negotiable, while reuse where the viewer pays is compensated at 1.2% of distributor's gross receipts. Other Guild Provisions: A number of standard guild provisions apply to all covered new media programs: Guild shop (writers must join the WGA), no-strike/no-iockout, grievance and arbitration, and timely payment. Reuse in New Media Distributor's Gross Receipts: All revenue-based residuals in new media employ a definition of "distributor's gross" which eliminates the accounting uncertainty inherent in the concept of "producer's gross" as found in the home video/dvd formula. Download Rentals: If the viewer pays for limited new media access to a program, residuals are paid at the rate of 1.2% of distributor's gross receipts. Download Sales (Electronic Sell-Through): If the viewer pays for permanent use of the program, residuals are paid at 0.36% of distributor's gross receipts for the first 100,000 downloads of a television program and the first 50,000 downloads of a feature. After that, residuals are paid at 0.7% of distributor's gross receipts for television programs and 0.65% for feature films. Theatrical Ad-Supported Streaming: Ad-supported streaming of feature films produced after July 1, 1971 is payable at 1.2% of distributor's gross receipts. Television Ad-Supported Streaming (Library): Ad-supported streaming of television programs produced after 1977 (and a small number produced prior to 1977) are payable at 2% of distributor's gross receipts. -2-
Reuse in New Media (cont'd) Television Ad-Supported Streaming (New Programs): Ad-supported streaming of television programs is payable at 2% of distributor's gross receipts one year from the end of an initial streaming window. Initial Streaming Window: There is an initial window of 17 days (24 days for episodes of the first season of a series, one-off television programs, and MOWs) with no residual. This window must include or occur contiguous to the initial television exhibition. Residual Payment (Network Prime Time): In the first and second years of this contract, after the initial window, for network prime time television programs, a fixed residual of 3% of the residual base ("applicable minimum") is paid for each of up to two 26-week periods. For an hour program, this fee is $654 per period in the first year of the contract; $677 per period in the second year. For a half-hour the figures are $360 and $373. In the third year of this contract, the 2% of distributor's gross formula is applied immediately after the initial streaming window. The contract sets an imputed value for up to 26 weeks of such distributor's gross at $40,000 for an hour program and $20,000 for a half hour program. So, for the third year the formula pays a residual of $800 for an hour program and $400 for a half hour program for each potential 26-week period in the year after the initial streaming window. If the Network's exclusivity expires prior to one year after the end of the initial window, the 2% of distributor's gross receipts begins without the imputed value. In the case of a 26-week period being truncated by the end of the year after the end of the initial streaming window, the payment is prorated. Residual Payment (All Other Programs): After the initial streaming window, a fixed residual of 3% of the residual base (the "applicable minimum") is paid for each of up to two 26-week periods in the first two years of this contract. In the third year of this contract, the payment rate rises to 3.5% of the residual base. Fair Market Value: New media residuals based on transactions between related parties are subject to a test of reasonableness when compared to transactions between unrelated parties. Access to Information: The companies agree to provide the Guild with access to new media deals and distribution statements, without redaction, and usage data during the term of the contract. Clips: Clips are defined as excerpts of less than five minutes for episodic TV or ten minutes for features or long-form TV. A company can use a clip for a promotional purpose without payment. Where a clip is not promotional and the viewer does not pay, the fee for the clip in new media is paid at the rate of the lesser of $50 or the residual payable under the Reuse Sideletter for a clip under two minutes; the lesser of $150 or the residual payable the Reuse Sideletter for a clip between two and four minutes; and for a clip longer than four minutes, the residual payable under the Reuse Sideletter. Where the viewer pays, the fee for use of a clip is 1.2% of distributor's gross receipts. Promotion: A clip can be used without payment to promote theatrical, television or new media exhibition if the clip contains "tune-in", rental or purchase information. No payment is due for non-commercial "viral" release of clips from a theatrical or television motion picture. Promotion does not include the use of clips if the primary purpose of the exhibition is to permit viewing of archived or aggregated clips on a new media site (e.g., dailyshow.com). -3-
Pension and Health Fund Provisions Health Fund: The contribution rate shall continue to be 8%% from the start of the contract through September 30, 2008. The contribution rate shall be 8% for the period of October 1, 2008 through March 31, 2009. Thereafter the rate shall return to 8%%. A sideletter resolves a pending dispute about the Health Fund contribution rate. Pension Fund: The contribution rate remains at 6% for this contract. Contribution Caps: For theatrical motion pictures and long-form television motion pictures, the ceiling on which Pension Plan contributions are based is increased to $225,000 ($450,000 for team of 3). For long-form television motion pictures, the ceiling on which Health Fund contributions are based is increased to $250,000 ($500,000 for a team of 3). A cap of $350,000 ($700,000 for a team of 3) is established as the ceiling on which Pension Plan and Health Fund contributions are based for daytime serial writers. Other: The Guild and the Companies will jointly fund a study of new IRS regulations. We agreed how contributions will be paid when a writer is employed on a development deal under Article 14.E.2. and, under the same contract, is employed to perform Article 14.K. services on a series for which the writer receives additional money which is not creditable. Other Provisions Made-for Pay TV Residuals: The annual residual payments increase from $3,000 to $3,500 for a half-hour program and from $5,000 to $6,000 for an hour program. Product Integration: The company will consult with the showrunner when a commercial product is to be integrated into the storyline of an episode of a dramatic series. Showrunner Training Program: The AMPTP and Networks will increase funding for this program to: $225,000 for year 1 of the MBA; $150,000 for year 2; and $150,000 for year 3. Television Recap Clips: The total length of clips that can be used to recap the story in a 60 minute or longer program is extended from 90 seconds to 3 minutes before requiring payment. Tri-Guild Audit Fund: The companies renew the funding of the Tri-Guild Audit Fund. Residuals Reporting/Electronic Data Transfer: Each company shall meet with the Guild to establish a method of transfer for electronic reporting of residuals information. Lists of Arbitrators: Arbitrators were added to the lists by both the Guild and the companies. Foreign Remakes: Alternative terms were agreed for foreign remakes of MBA-covered scripts. Limited Syndication of Half-Hour Programs: A little-used sideletter specifying a discounted residual for half hour series in limited syndication was renewed. Television Separated Rights for a Derivative Theatrical Film: The company has an opportunity to match an offer to purchase feature film rights from the separated rights holder. Committee on Alternative Digital Broadcast Channels: The Guild agreed to participate in a committee to explore the use of alternative digital broadcast channels. -4-
Strike Settlement Agreement Return to Work: A striking writer who prior to the strike was employed by a Company on a project or show ("show") will be returned to the show upon termination of the strike, if the show hasn't been abandoned or cancelled, and writing services will be performed. If the size of the writing staff for a show has been reduced for business reasons, the Company may choose which writers to bring back, subject to the terms of the writers' individual deals. However, the Company may not retain a replacement writer hired during the strike period ahead of a striking writer who offers to return to work on the show on which he or she was employed when the strike began. A Company is not required to reinstate a writer working under an overall deal, except that if the writer has been assigned to perform writing services on a particular show, the writer will be returned to the show. Suspension and Extension of Contracts: Writing contracts in effect at the beginning of the strike have been suspended during the strike period. After the strike, a Company must extend a striking writer's contract if: (1) the writer was working on a show when the strike began; (2) the show remains in production after the strike; and (3) the writer's contact expired by its terms during the strike. A Company must also extend a writer's contract if a notice or option date occurred during the strike and the Company exercised its right of termination. In both circumstances, the Company must extend the writer's contract for a period equal to the portion of the contract term that elapsed during the strike. Withdrawal of Certain Claims: The Guild and the Companies agree mutually to withdraw all pending legal claims arising out of the strike, though the Guild reserves its right to file future charges under the National Labor Relations Act claiming discrimination by a Company with respect to termination or reinstatement decisions. Disputes regarding terminations are not arbitrable under the MBA, but a writer may bring a claim under his or her individual contract challenging a termination. Health Fund Eligibility: The Guild and Companies will jointly recommend to the Health Fund trustees that participants who would otherwise lose eligibility following an earnings cycle that included all or a portion of the strike period will be provided with (1) an additional three months of coverage; and (2) a three-month extension of their earnings cycle. The parties will also recommend that the self-pay ("COBRA") entitlement will be extended for three months for writers who exhausted or will exhaust their COBRA rights in 2008. -5-