Marginal Utility

by Ken Houghton

The NYT tells us that the writers were worrying their pretty little heads over nothing:

After months of informal talks, Hollywood’s movie and television directors agreed Thursday afternoon to a new contract with production companies. The accord would appear to send a none-too-subtle message to striking screenwriters: This is not the time to get hung up on new media....

Over all, the agreement — which also increases minimum compensation rates and other gains for the union — was meant to reflect the directors’ belief, bolstered by an independent study of industry economics, that digital media will provide a negligible amount of revenue during the life of the contract.

In the directors’ opinion, digital media revenues will become significant only after 2010. [emphases mine]

For a slight counterpoint, let's look at the overview of the summary from United Hollywood:

For the first 100,000 downloads of a TV show, the payment is the DVD rate: 0.3%. After the first 100,000, it rises to .7%

For features, the rate is 0.3% for the first 50,000 downloads and 0.65% thereafter.

The good: It's more than twice what we had before.

The bad: What we had before was based on the miserable DVD formula. WGA, SAG and DGA had all agreed that that number really should be 1.2%, and the unions have actually sued the congloms over it, claiming that the use of the DVD formula for downloads is a misinterpretation of their respective MBAs.

So the 0.7% and 0.65% numbers are still terribly low. In addition, many downloads will not reach the 100,000 or 50,000 threshold, and will generate only the abysmal 0.3%.

It's frustrating to us that the DGA couldn't increase that number out of the DVD range. The DVD formula was based on the notion that "home video" meant a bulky plastic VHS tapes with enormous manufacturing and transportation costs. Those costs decreased dramatically over the years. But no increase in residuals. They decreased dramatically again with birth of DVDs. (You can slip them under a door!) But no increase in residuals. With downloads, the manufacturing cost is exactly zero dollars. And terabytes of storage are getting cheaper by the hour. But we still can't improve that DVD formula? Really?

Anyone who believes that the savings here will be passed on as consumer surplus is either lying or Greg Mankiw (if I'm not repeating myself).

It takes only a moment to realise why the DGA has the wrong idea. Look at what happened with VCR royalty rates, right after the Sony decision and over the following 20+ years:

The 0.3% and 0.36% home video residual formula was negotiated in 1985, when the cost of manufacturing and distributing videocassettes was a significant factor in the cost structure for the studios. The AMPTP companies argued that they “needed a break” in order to develop this “unproven business model.” In the years since, as the cost of manufacturing and distribution declined to become a negligible factor, and the business model proved to be one of the most profitable of any of the segments of the entertainment business, the companies have fiercely resisted any change in this formula. Industry analysts predict that home video will continue to be a very important revenue stream for years to come, and it is clearly long past time for an improvement in the home video residual formula.

Just change that first date to "2008," update the modes of distribution accordingly, and this 'graf will be valid for the next twenty years.

Labels: labor unions, mass media, movies, writing