The Writers Guild and Hollywood's studio alliance resume talks Monday morning in Sherman Oaks, but a strike seems increasingly probable after the WGA's condemnation of studio proposals - and in light of an analysis by The Hollywood Reporter that indicates the guild's demands are roughly triple the size of the deal the studios likely are willing to make.
Indeed, an informed observer speaking on condition of anonymity because of the sensitivity of the matter, says the disparity is even more extreme.
"Based on an objective review of the WGA proposals to management this month," said the observer, "it's safe to say that the 'asks' for health and pension plans, plus 'middle class' writers, plus matching up with [DGA] residuals on SVOD [streaming video on demand], AVOD [ad-supported VOD] and premium pay, plus all the others would result in management paying three times to five times the norm."
The guild said last week that it will strike on May 2 if there's no new deal in place by the current contract's May 1 expiration. The union has attempted to turn up the heat by notifying ad buyers that a strike could disrupt the fall broadcast season and telling AT&T and Time Warner shareholders that a walkout could reduce the attractiveness of the telco's proposed acquisition of the media conglomerate, dependent as it is on writers to create content.
If a strike is to be averted, some serious concessions will need to be made (and fast) by one or both sides. THR's analysis shows a three-to-one ratio between the cost of the WGA proposals and the Alliance of Motion Picture and Television Producers' likely bottom line - and that's a $350 million gap that negotiators will find tough to bridge in the next five days of talks.
Costing out the WGA proposals is easy because the guild has publicly priced its demands. "We estimate that our current proposals would cost a total of $178 million over the entire industry," the union noted in its letter to ad buyers last week. The letter says, and the WGA confirmed, that these are annual costs. That puts the aggregate cost of a three-year deal at about $535 million.
But the studios are looking to do a deal at about $180 million, according to THR estimates and guidance from an informed source. For all the talk of principles and issues in labor negotiations, at the end of the day, studio negotiators have a bottom-line number they're willing to live with, sometimes called the "package size."
Peering Inside the AMPTP
The AMPTP and WGA declined to comment for this story, so THR started with historical data. In 2004, the WGA deal was reportedly worth $58 million. In 2007, the studios made what they called a $130 million offer, which the WGA said was worth only $32 million; let's split the difference and guesstimate $80 million.
That was a $20 million increment in one three-year negotiating cycle. To understand more recent trends, look at the package size for the larger actors' unions. In 2005, SAG and AFTRA announced a $200 million studio deal, while in 2008 the AMPTP made what it called a $250 million proposal. In 2011, a down year because of the national recession, the package was worth $170 million according to SAG-AFTRA, and in 2014, the union says it achieved a $200 million deal.
Those ups and downs, combined with the historical size of the WGA deals, suggested that the AMPTP's bottom line figure for the WGA this year is $125 million to $150 million over three years, but the informed source said the top-of-range figure was just a bit lower than the actual number. That would seemingly put the AMPTP number at no higher than $170 million to $180 million.
THR also tried costing out the package from the bottom up, starting with the DGA deal reached in December. It included 3 percent annual wage increases, enhancements to digital residuals (primarily for reruns of SVOD product) and a variety of director-specific changes. The AMPTP utilizes a process called pattern bargaining, in which the pattern set on basic wage increase and residuals for the first above-the-line union that negotiates in a cycle - frequently the DGA - is essentially mirrored for the remaining unions, each of which then get a few bespoke enhancements as well.
For the WGA, those 3 percent wage increases amount to about $150 million or so over three years. That calculation, which a source confirmed, is understood by first looking at the increases: a 3 percent increase in year one, an additional 3 percent increase in year two (thus, a total increase in year two equal to 6 percent) and yet another 3 percent increase in year three (i.e., a 9 percent increase from the base year). Three plus 6 plus 9 suggests a total increase of 18 percent. The actual figure is about 18.4 percent, because like compound interest, the wage bumps actually grow multiplicatively, not additively.
Next, we have to determine what wage base to apply the 18.4 percent increase to. The WGA West reported total member earnings of about $1.2 billion in 2015, but that figure has to be increased to account for WGA East (which doesn't publicly report) and increased again to reflect an estimate of 2017-2020 figures, but then decreased because these are total earnings, whereas the basic wage increases only apply to wages that are at scale or some multiple of scale, such as scale plus 10 (110 percent of scale, with the extra 10 percent to cover the agent's commission) or twice scale. In contrast, a writer who gets, say, $300,000 per movie isn't affected by increases in scale wages (wage floors).
Applying the necessary increases and decreases yields total scale wages of around $800 million, according to a knowledgeable source, and multiplying by 18.4 percent equals about $150 million over three years.
Next, the residuals increases. The WGA West reported total digital residuals for TV and SVOD reuse of $25 million in 2015. Add 33 percent as a rough approximation of the WGA East - it's half the size of the WGAW but many of its members work in news and public television rather than areas covered by the AMPTP contract - then 30 percent to bring the figure forward to 2017, for a total of about $45 million per year or $135 million over the three-year contract.
What the AMPTP did for the DGA, and is understood to be willing to do for the WGA, is to increase a portion of that figure, representing SVOD product (think Netflix) rerun on SVOD and TV product rerun on AVOD platforms such as Hulu, but not TV product rerun on SVOD (such as when a cable or broadcast show is distributed on Netflix).
Since we're talking about an incremental increase of only a portion of that figure, it's probably fair to assume that we're looking at an increase of around $20 million at most. Throw in another $10 million for miscellaneous enhancements over three years, and the result is a $180 million package. Meanwhile the WGA wants $178 million in each of the three years.
WGA Package Breakdown
Taking a closer look, here's how the WGA proposals appear to break down:
* Shoring up the guild's troubled health plan would cost an estimated $56 million (AMPTP analysis) to $90 million (WGA analysis) over the three-year life of a new labor agreement.
* Improving the pension plan's funding status could cost $25 million per year, or $75 million (THR analysis).
* Reversing screen and TV writers' recent wage declines could cost upwards of $75 million (THR analysis in process).
* Three percent basic wage increases would cost around $135 million (see above)
* The DGA pattern increases in residuals could be around $20 million (see above).
* For the WGA's demands on a number of other issues such as family leave and some other wage bumps, we threw in $30 million as a rough guess.
* Next is the cost of revising the WGA's 35-year-old anemic pay TV residuals formula, which currently yields guild members about $8 million per year. They want the DGA's formula, amounting to a big increase, so let's suppose they want to triple that figure. Adding $16 million per year comes to $50 million over the life of the contract.
Not that it matters for purposes of this breakdown, but the pay TV proposal is extremely unlikely to find traction. For one thing, the formula - a flat annual amount payable when a pay TV show like HBO's Game of Thrones is rerun on pay TV - is decades old. The amount, first negotiated in the early 1980s, has been increased from time to time since, but the approach has remained unchanged. It's inferior to the DGA's top-of-the-line formula based on subscriber count (subject to a ceiling) and SAG-AFTRA's mid-level 6 percent of the license fee.
Revisiting a 35-year-old arrangement is unlikely enough under the best of circumstances, but add in the backstory and a reopener is probably dead on arrival: back in the 1980s, the WGA itself initially rejected the DGA formula, went on strike for a flat amount, then later went on strike again - this time seeking the DGA formula after changing its mind. Studio negotiators have long memories and, indeed, AMPTP president Carol Lombardini has worked for the organization since its formation in 1982. The WGA will likely get a bump in the flat fee schedule, but not the DGA's formula.
In any case, adding it all up accounts for $475 million of the WGA's stated $535 million package - not bad for a rough estimate.
And we still have the WGA's own $178 million per year valuation, which leaves the union proposing a figure roughly triple what the studios appear to have in mind.
Profits or Not? It Doesn't Matter
The WGA supports its case by saying the companies made $51 billion in operating profits last year, of which its $178 million per year would equal just a third of a percentage point. However, it acknowledges that that figure includes income from non-core areas, which can include theme parks, cruise ships, local cable systems, animated films, news and reality TV. Operating profit also doesn't reflect any deduction for taxes, interest charges or depreciation. And at least some of the studios may be more challenged than their parent companies.
Taking a different tack, one can also point to high and even stratospheric executive salaries and talk about redistribution. To be clear, the WGA is not making that argument - although some people might - and it's a bit of a glass house, given the income inequality within each of the guilds. Still, knocking off a few tens of millions from CEOs and other top executives' salaries across eight core AMPTP members could bridge that $350 million gap pretty quickly.
Those arguments will variously appeal to some and repel others, but the cold truth is that it doesn't matter either way. The bargaining room at the AMPTP's Sherman Oaks offices simply doesn't function as a referendum on corporate profits or income inequality. To believe otherwise - to the extent of seeking a triple-size package - may be the path to studio hardball and then a strike with an outcome unlikely to favor the writers.