The Residual Effects of Residuals
Since the advent of unions and guilds that represent artists in relation to studios and broadcast companies, the entertainment industry has relied on a peculiar kind of royalty: the residual.[1] Residuals are union-mandated payments parties receive under contract for reuse of their content.[2] The residual also offers recognition and financial incentive to artists involved in film and television because the company often owns the copyright in their works.[3]
The mechanism has its birth in radio, where performers were concerned about their material being recorded and rebroadcast without compensation.[4] Radio artists would perform live on air for East Coast audiences and then again three hours later for audiences on the West Coast—compensated equally for both performances.[5] Broadcasters realized they could record the East Coast performance and replay it for the West Coast without paying the performers twice.[6] The artists, represented by their union, negotiated to receive their rate for the “second” performance replayed for the West Coast.[7]
This arrangement formed the basis for the residual structure that has persisted through radio, film, television, and now subscription video on demand (“SVOD”) and advertised video on demand (“AVOD”).[8] The residual could be described as either remuneration for the value artists contribute or compensation for technological replacement. Either way, the financial mechanism became instrumental to maintaining the balance between creator and distributor in both the film and television industries.[9]
Critical to understanding how to best distribute money through residuals—or other remunerative schemes like revenue sharing—is to understand how films and television shows make money in the first place. The search for profits has utilized shifting strategies across the more than one hundred years of Hollywood productions.[10] Originally, a handful of studios operated as distributors and made their money through ticket sales.[11] Such a system presents a clear and direct relationship between views (here, tickets) and revenue.
Through the innovation of more expansive media corporations like Disney and Sony, the studios began to recoup their investments and build on profits through alternative revenue streams such as merchandising, licensing, and critically home entertainment sales through VHS and then DVD.[12] By 2003, home entertainment sales alone produced almost five times more revenue than theatrical releases, drastically altering how the industry thought about film profitability.[13] This system still had a clear link, however, between individual sales, revenue, and profit.
The latest technological advancements in distribution methods—SVOD and AVOD—have been even more disruptive to the financial incentives of producers and distributors than anything before and have reduced the value of residuals.[14] Because streaming services do not charge for each view (like a ticket sale) or for ownership of a single copy (like a DVD), there is no direct link between a particular piece of content and the distributor’s revenue; therefore, residuals for streamed content are based on how many subscribers a service has, not how many times a piece of content is viewed—this means that artists receive the same residual regardless of how successful a project becomes.[15] This fundamental shift in the industry’s pricing and revenue structure begs the question of what role do residuals play in this new ecosystem? If they are meant to compensate artists for reuse of their work, how effective are they if they essentially become a flat fee for endless reuse?
The various unions representing artists in film and television have taken different approaches in addressing the issue. The Directors Guild of America (“DGA”) has increased its traditional residual rate based on subscriber numbers; it has also added an emphasis on capturing global SVOD growth by adding a new residual structure that considers the number of foreign subscribers.[16]
The Writer’s Guild of America (“WGA”) recently ratified their new agreement in which the union negotiated a new kind of residual, in addition to its residual base, where writers will receive a viewership-based streaming bonus.[17] The bonus consists of an additional “50% of the fixed domestic and foreign residual” for high budget projects that are “viewed by 20% or more of the service’s domestic subscribers in the first 90 days of release, or in the first 90 days in any subsequent exhibition year[.]”[18] This viewership-based residual represents an evolution in the mechanism’s structure—an attempt to adapt the old model to new distribution methods.
While still unsettled, the Screen Actors Guild (“SAG-AFTRA”) has proposed a unique solution through a revenue sharing structure, in addition to the traditional residual, which would leverage third party success metrics to determine revenue per show or movie.[19] The union has suggested using Parrot Analytics, which measures a show or movie’s impact on social media, among other factors, to determine revenue value.[20] The Alliance of Motion Picture and Television Producers (“AMPTP”) opposes the use of Parrot Analytics due to a lack of evidence connecting social engagement with viewership.[21] Parrot Analytics has pushed back, however, arguing that their demand metric looks at a variety of factors, including viewership, and that social media impact carries the least weight while views carry the most.[22] SAG-AFTRA is currently asking for two percent of a show or movie’s revenue based on this third party data.[23]
While there are some attendant risks to SAG-AFTRA’s proposal—for example, what happens if Parrot Analytics changes its algorithm halfway through the contract and one side is unhappy with the results—it does represent the kind of outside-the-box thinking to ensure artists are adequately compensated and properly incentivized. The unions have relied on residuals for almost one hundred years but perhaps something like revenue sharing can be a better alternative or additional element. Only time will tell. For now, the negotiations between SAG-AFTRA and the AMPTP have collapsed again, and both sides still have to iron out other difficult issues such as artificial intelligence.[24] When they do reconvene, however, they will almost certainly still be dealing with the issue of residuals as they have since the 1930s.
Footnotes
