Digital Distribution Plays Lead Role in Impending Writers Strike

TV and movie writers in the Writers Guild of America (WGA) are expected to hit the picket lines as early as Monday after failing to reach agreements with the Alliance of Motion Picture and Television Producers (AMPTP).

The two factions are waging a pitched battle over DVD and digital distribution residuals, a growing profit center for media content owners. It is an issue that centers around advancing technologies, business models and their long-term impact on broadcast TV and movies.

Years Ago

The contentious dispute, however, has its roots in the contract they agreed to some 20 years ago. At that point, VHS tapes were king and video rental stores reigned supreme. The DVD market had yet to take off, and digital downloads were not yet on anyone’s radar.

“The problem was that no one could foresee that the DVD market would end up with the economics that it does,” said James McQuivey, a Forrester Research analyst. “It is remarkably cheap to produce and ship and distribute the DVD compared to what everyone expected back in the day.”

From the writers’ perspective, studios and producers are making huge amounts of profits on DVD sales. Where writers earn around 5 cents or less for each DVD sold at US$19.99, according to Ad Age, studios — who pay on average 25 cents to produce a DVD — wind up with the bulk of the remainder.

However, before movies and TV shows make it to DVD, they are aired on television or shown in movie theaters. The average cost to make and market a major film by a member of the Motion Picture Association of America (MPAA) was $100.3 million in 2006, according to the organization. Add that against the 607 movies released in 2006 and the industry’s profits of $9.49 billion, and it’s clear that the movie studios depend on DVD sales to balance their books.

In 2006, 63 movies grossed $50 million or more, with one film, “Pirates of the Caribbean: Dead Man’s Chest,” bringing in over $400 million.

“For most movies, this is its lifeblood. Very few movies actually break even at the box office. Most movies require video rental and sell-through to break even,” said Mike Goodman, a Yankee Group analyst. Only about 10 to 20 percent of movies break even on theater revenues, he said.

“There are way more flops than there are hits. And rental and sell-through are the salvation of the movie industry. This is where movies make their money,” he told E-Commerce Times.

However, Goodman said, the studios are greedy. “They’re greedy where it relates to consumers. They’re greedy about sharing revenues with actors. Greedy when it comes to their split with retailers and with writers. They are equal opportunity players.”

Digital Fight

However, when it comes to digital downloads, neither broadcasters nor movie studios pay any significant amount of money to distribute them, McQuivey told the E-Commerce Times

On iTunes, a popular vendor of movies and TV shows, about two-thirds of the money earned on the 200 million downloads expected for 2007 will go back to the content owners.

“They will have no cost to bear on any of that. iTunes takes all of the responsibility for the cost of delivering the content to the consumers. It’s all pure profit for those guys. It’s not a lot of profit because there’s so little of it going on.

“But it is growing, and people fear that if it grows like the videotape and DVD business did that if the writers end up signing on to a deal today that in 10 years they will look back and laugh at them. In this case it is not even an issue of how cheap it will get to sell these. Apple assumes all of the responsibility.”

Writers have a lot of ways to get a share of the download revenue, McQuivey explained.

“They can say ‘We want a percentage not of the gross price of the download, but whatever you get from iTunes, Amazon or Wal-Mart.'”

The entire digital download market, including iTunes, is expected to bring in about $279 million in 2007, McQuivey said.

Right now, digital downloads are a fairly small component, Goodman agreed, but by 2011 he expects it to grow to $853 million.

“They want a piece of this and to make sure that they are fairly represented,” he noted. “Rental sell-through and Internet/mobile sell-through are essentially different sides of the same coin, and therefore they should have the same types of residuals for each one of those platforms. And they believe throughout their current contract they’ve been underpaid on DVD.”

Ad Bucks

However, published reports seem to indicate that the producers do not want to talk about percentages, instead wishing to keep a rigid formula. One possible reason for their unwillingness to change could be that advertising revenues are projected to dwarf digital download profits in the coming years.

“That is tiny compared to the amount of video streaming that is going to go on. If they are having this much of an argument over the download-to-own business, which is really small, I have to believe they are completely unprepared to have a conversation about the bigger future business which is ‘what percentage of the ad revenue do we each get,'” McQuivey stated.

That ad revenue sharing will be a huge issue, and that’s why the two groups are staking their positions now. Advertising revenue in 2007 is expected to reach $651 million, more than double that of downloads. By 2011, ad revenue will increase to $3.9 billion, Goodman predicted.

“There’s a lot of money at stake,” Goodman concluded, “and [writers] want to make sure they’re getting their fair share.”