How Talent Loses if Aereo Wins (Analysis)

THR Union Losses Graphic - H 2013

THR Union Losses Graphic - H 2013

Several weeks ago, Fox, PBS and several other companies were hit with a 2-1 federal court of appeals ruling rebuffing their attempt to shut down Aereo, a new service backed by Barry Diller. Last week, they filed a petition for a rehearing en banc, in which all thirteen judges of the New York based court would rehear the case and potentially reverse the ruling, resulting in the preliminary injunction that the networks seek while the matter goes to trial.

Interestingly the Hollywood unions -- DGA, IATSE, SAG-AFTRA and WGA -- signed on to an amicus brief supporting that petition, as they had also done when the original appeal was heard. But why do the guilds care?

As a reminder, Aereo is a service that allows users to watch and record local TV for $8/month without a cable subscription. The service is available in New York and, soon, in Boston. It’s drawn the ire of broadcast networks because it would facilitate cord-cutting, reducing revenue to networks.

As a result, News Corp. president and COO Chase Carey has threatened to make Fox cable-only if Aereo prevails in court. There are potential downsides to this, and some analysts are skeptical that Fox would make the move, but the threat can’t be dismissed out of hand.

One reason the guilds are concerned is set out in the earlier of the two amicus briefs: “As the value of the creative works is diminished or eliminated by new technologies that subvert recognized distribution models, so too are the incomes and benefits of SAG-AFTRA’s members.” In other words, when technology devalues content, the creators of content suffer. Implicit here is the assumption that cable-only versions of the broadcast networks would yield less revenue to the networks than the existing broadcast versions.

But there’s probably another reason: if Fox and other networks go cable-only, they presumably will argue that they should pay basic cable residuals rather than broadcast residuals -- and it turns out that the former are significantly lower than the latter. The unions each declined to comment on this issue, or failed to respond to an inquiry from The Hollywood Reporter, but the math is inescapable. Each of the three above the line unions receive lower residuals for basic cable than for broadcast.

This is not an insignificant issue. Journeyman writers, directors and actors live on residuals -- for actors, in aggregate, residuals amount to about 40 percent of their compensation. Nor is it a trivial issue for studios: residuals (including both theatrical and television) amount to roughly $1.5 billion per year.

And residuals aren’t the only compensation that would be affected by a move from broadcast to basic cable. Initial compensation for writing and directing cable is also less than that for network broadcast shows. (Scale compensation for actors is the same.) Here again, existing broadcast networks can be expected to argue for the lower rates if they go cable-only.

None of this is apparent from the amicus briefs. One of them notes in passing that SAG-AFTRA members’ compensation includes residuals, but offers little in the way of specifics on the subject. It also says that IATSE residuals fund the union’s pension and health plan, but this in fact is misleading, since there are no IATSE residuals for network reruns or cable reruns.

A Concrete Example

Let’s look at what this all means on a union by union basis, using one-hour primetime shows as an example.

For the DGA, the minimum initial compensation for a one-hour network primetime episode is $40,744. For a cable episode with a budget over $3.4 million, the minimum is $30,525 – i.e., roughly 3/4 of what a network job would pay. For a cable episode whose budget is between $2.4 million and $3.4 million, the minimum is $26,149, or about 2/3 of the network minimum. (These are 2012-13 figures.)

For the WGA, minimum initial comp for a one-hour network primetime story and teleplay is $34,956, whereas for basic cable the figure is $24,254. That’s about 69 percent of what the network job would pay.

What about residuals?

The DGA residual for a broadcast rerun is paid at 100 percent of the network primetime “residual base.” That figure is $23,994, for each rerun.

In contrast, the first cable rerun is based on a (higher) syndication residual base ($24,769), but pays at only 17 percent of that figure, or $4,211. That’s about one-sixth of the network figure. Subsequent reruns pay less and less. This cable formula of descending percentages is referred to as the “Sanchez formula,” referring to the show (Sanchez of Bel Air) with which the formula was first used.

The WGA often uses Sanchez as well (some WGA shows use a formula called “Hitchcock,” named after the show Alfred Hitchcock Presents), except that the WGA calls the residual base the “applicable minimum.” For one-hour network primetime episodes, the applicable minimum, and thus the network primetime residual per rerun, is $23,837. For a one-hour basic cable episode, the applicable minimum is $24,254 -- but the residual for the first cable rerun is 17 percent of that figure, or $4,123. Again, that’s about one-sixth of what the same work would generate if created for network primetime.

SAG-AFTRA’s contracts work somewhat differently. Network residuals are paid at 100 percent of the total actual compensation the actor received for the work initially, but subject to a ceiling. Cable residuals under Sanchez are 17 percent or less of the total applicable minimum -- that is, 17 percent of the scale compensation for the work the actor performed. (In some cases, a different formula applies, resulting in little or no residuals for cable shows.)

Although total actual compensation (subject to a ceiling) and total applicable minimum are different concepts, in practice they’re not dissimilar. But 100 percent is quite different from 17 percent. For a day player who works one day at scale on an episode under the AFTRA contract, it’s the difference between $871 per rerun, versus $148 for the first rerun and less for each succeeding rerun. (Under a SAG contract, the figures are a few dollars lower.)

And let’s not forget commercials: SAG-AFTRA members receive residuals for commercials. The amount varies, but basic cable residuals are once again significantly lower than network broadcast residuals. (DGA members don’t receive residuals for commercials, and the WGA doesn’t cover commercial writing.)

Even now, broadcast residuals are being supplanted by Internet residuals as replays move to Hulu. But if the broadcast networks themselves become cable-only, broadcast residuals would altogether disappear, WGA and DGA minimums would drop, and SAG-AFTRA commercial residuals would plummet. Those risks are no doubt one reason the guilds decided to join the studios in opposing Aereo.

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Twitter: @jhandel