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The Writers Versus Hollywood And The Global Economy

By John Dietz - Email Editor

Date : 22-Jan-2008

Economics 101 – Protect Your Product
You have been told that Hollywood is losing tens of millions a day, but a deeper look reveals the truth regarding the current writers strike in the United States. The economy may be losing income in terms of employment; however, when Hollywood protects their future assets, they are actually making money in the long run.

The Hollywood writer’s strike is a perfect example of how the global economy affects us all. Before you say, I have heard it all, yada-yada-yada or think that it is a tough love deal for Hollywood, let us relate this dilemma to Asset Protection. It may sound far fetched, but not really. To sum it up in one word, it equates to “theft” due to the global economy of the internet.

The economics of Hollywood revolve around protection. This is the protection of Intellectual Property. Intellectual Property is manufactured (if you will) just like widgets: piece-by-piece and one-step at a time. But Intellectual Property has an inherent problem. Stealing the manufacturing process of a widget is generally difficult, but to steal intellectual property all one has to do is copy it. Now add a global distribution outlet, the internet, and you have a “free for all” scenario.

Back to the Basics – The Unions
Do not be confused by the following acronyms, they stand for the different areas of media production and their unions.

Every three years the Writer’s Guild (WGA East and WGA West), unions, negotiate a new basic agreement called the Minimum Basic Agreement. The Director’s Guild (DGA), the International Alliance of Stagehand Employees (IATSE) and the Screen Actor’s Guild (SAG) follow the same process.

The basis of the disagreement is over residual income, union jurisdiction over reality TV (considered “un-written and un-authored”) and animation. For writers, the most important subject, and most difficult to settle, is “new media.” This is the dilemma caused by the global economics of the internet.

Until there is a way to prevent the “theft” in Hollywood, the fight to protect the finished products, and the resulting future wealth, will continue.

A Foundational Deal Affects Future Deals
Up until 1988, the major Hollywood revenue came from the box office, or as you know it, the movie theater, until along came the “home video” market.

In 1988, the Writers Guild went on strike over the home video market, which was considered small and unknown in profit prediction. The home market was suspected to have potential, but not to overtake the box office revenue. To make a long story short, a formula was created under a philosophy that the box office would remain the most profitable stream of revenue.

The Unfolding Details of the 1988 Deal (just FYI – For Your Information)
The guild accepted a formula in which a writer would receive 0.3 percent of the first $5 million of reportable gross and 0.36 percent as residual profit after the first $5 million. This was in terms of all of the formats of gross proceeds of the intellectual property regardless of the box office or DVD. This home market turned into a $4.8 billion dollar industry overcoming the $1.78 billion dollar box office market.

What the Writers are Asking For
What the writers are asking for equates to a four-cent raise per DVD. That sounds small until you consider the other unions and think about the category of “new media.” Four-cents per DVD sounds like a no-brainer, but in Hollywood it equates to something more like forty-cents per DVD. The Writers Guild is not the only union in town; the Director’s Guild, IATSE, and the Screen Actor’s Guild all follow a similar formula.

With a twist: SAG's formula is three times as large as the WGA's, and the IATSE's is four and one-half times as large. (The DGA's is the same as the WGA's.) New media formulas for each Guild can be expected to mirror each other across unions in the same fashion and in the new media negotiations.

At the End of Day, Forty Cents a DVD adds up to Hundreds of Millions
If the writers get four-cents, the actors get twelve cents. (The actors actually make less than the writers do overall because they have to split it among the entire cast.) The Directors would match the four-cent increase and the International Association of Theatrical Stage Hands would be eighteen cents per DVD. The bottom line is that whatever the writers achieve, the multiplying formula is a 9.5 percent loss for the studios.

In short, the writers would end up with double the take they have now, if they get what they want.

Here’s the Lesson
Double the take sounds like a lot. Can Hollywood afford it? It seems as though the strike is costing Hollywood economics unemployment, the lack of new material and a plethora of bad public relations.

The domestic DVD business reported $16.8 billion in 2006. The executives in Hollywood have learned that protection is worth fighting for even when they cannot possibly predict accurately what will happen in the global economy of the internet. If Hollywood producers are right about the global affect on intellectual property, by giving in to the writers, the publicly traded studios and their shareholders will lose astronomical profit for decades.

Nine and a half (9.5%) percent is a considerable profit, but at the end of the day Hollywood and the producers will still come out, to put it bluntly, rich. After a long complicated mathematical formula, it equates to an $876 million loss per year for the next three years (or until the next negotiation) for the studios if the estimates are correct.

If the writers were to get their way and the networks were to split up all the losses it would only equate to a small loss of approximately $60 million per network.

However, what is at stake is what the studios are predicting to be a massive media surge, like nothing ever seen before. This is the boom of the new media market of the internet in the global economy. The risk to the studios is underestimating the rewards. With the internet and new technology, this is a definite possibility.

Hollywood Has Learned to Protect Their Assets
One more thought regarding Asset Protection is how the networks are using this time to “clean house” of all the shows that have not yielded their worth and the future promises that they feel may not yield profits in the new global economy.

What is really going on is that the networks are attempting to divide and conquer; a basic principle in Asset Protection: protecting current assets and loses from future risks and rewards.

How Long Will It Last?
When the networks have protected their assets, divided the risks and conquered the dilemma of protecting the rewards, they will end it. Stay tuned because now you will understand the resolution to the writers versus Hollywood and the Global Economy.

Do you want to bet who will come out on top? My guess is the Global Economy will dictate.

Until next time,

John

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