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June 2, 2009

DIGITAL MEDIA LAW: SAG-Studio Pregame Report (FEB. 2, 2009)

Filed under: Entertainment — showbizreporting @ 3:16 am
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 SAG-Studio Pregame Report
With kickoff in the SAG vs. studios matchup just a day away, what better time for a pre-game report? Let’s look at length, leverage, and deal points.

1. Length

The SAG negotiations are well beyond any OT contemplated by the NFL. That may be one factor that leads some people to assume the two-day meeting this Tuesday and Wednesday will result in an immediate deal. Not so fast, bucko. Union negotiations aren’t played according to sudden-death rules. The SAG negotiating team has an obligation to seek the best deal achievable, and I anticipate they’ll do so. That’s different from seeking the best deal imaginable, which seemed to be the previous SAG administration’s playbook, but it’s not the same thing as throwing in the towel.

So, I’m guessing we’ll see negotiations continue until the end of February or early March before we see a deal. There would then be ballot materials to prepare for the membership, and a three-week voting period, so ratification, assuming the deal passes, would be about a month later.

For those unionists who pessimistically note that the proposed studio deal is referred to as a “last, best and final” offer, well, that’s almost true, in the same sense that Astroturf is almost grass. The likely truth is, there’s room for negotiation. But how much? That depends on SAG’s leverage.

2. Leverage

Football teams depend on the QB’s throwing arm. In contract negotiations, the key consideration is “leverage,” or bargaining power, and the question here is whether SAG has any. Some people say no, arguing that a union that can’t strike is without power, but I think that’s overstated. SAG does have some leverage, though not much. It derives from several factors:

First is the studios’ desire for labor peace. The uncertainty and turmoil of the last 12 months post-writers strike have not been good for business. Studio theatrical production accelerated prior to the June 30 expiration of the SAG agreement, then slowed almost to a stop. It’s now time to resume production in order to provide for a steady flow of 2010 product.

Second is the difficulty of obtaining completion bonds for movies in the absence of a signed collective bargaining agreement. Unless a movie is 100% funded by a studio’s own cash flow, it usually needs a completion bond, which repays the financier if the movie is never completed. Financiers require such bonds, but my understanding is that they’ve become difficult or impossible to obtain in the absence of a SAG deal. The studios want bonding to be available, but this in turn requires a deal.

Third is the possibility that a bad deal would fail to achieve ratification. It only takes 50% of the vote to ratify a deal—but that means that it only takes 50% to block a deal. If the studios send the negotiators home with a wretched deal, they risk the chance that the deal will fail to achieve ratification. This is a particular risk because the ratification ballot is likely to include pro and con statements, since most or all of the hard-line Membership First (MF) board members are likely to oppose any deal reached with the studios. (I am told, but have not verified, that if at least 25% of the board wants to include a “con” statement, or minority report, they have the right to do so.)

Last, but not least, is the likely desire on the part of the studios to offer a (small) concession to moderates within SAG so that they gain strength next September. In other words, the studios want to reduce the likelihood of having to deal again with an MF-controlled union. The studios—or, at least, some of them—presumably recognize the need to behave somewhat reasonably towards bargaining partners who do likewise.

Now, to be clear, the various studios run the gamut from more hard-line to somewhat less so. They seldom treat non A-listers with the same good graces they treat their favorite charities. And SAG’s leverage is very limited: the DGA-negotiated new media template, SAG’s refusal to bargain early, the AFTRA deal, the mere passage of time, strike fatigue, the deterioration of the economy, and the previous SAG leadership’s reckless behavior have all made it thus.

What of the strike authorization vote? It’s not going to be sent out anytime soon, but if the studios were to be completely intransigent and not negotiate at all, they could crystallize opposition even among the moderates and unite the Guild leadership around a strike authorization. Is that likely? Not at all, but it—and the legal obligation to bargain in good faith—serve as ultimate checks on the idea that the studios have free rein to refuse to negotiate.

And what of the AFTRA deal? Some people suggest that attempting to improve on the AFTRA deal is a fool’s errand for SAG, because any improvements would simply guarantee that new TV production will go AFTRA rather than SAG. It’s certainly true that the AFTRA deal constrains SAG, but not completely. In other words, improvements in TV won’t necessarily drive work to AFTRA, if the improvements are small enough. This is because (a) there are still decision makers, including stars, that have “brand loyalty” to SAG, (b) there are producers who are still more used to working with SAG, (c) shows shot on film (rather than tape or digital) are generally in SAG’s jurisdiction, and (d) small differences in the contracts aren’t enough to outweigh the first three factors.

Also, of course, the AFTRA deal applies only to television, not theatrical, and, even then, primarily to tape and digitally-shot television. And, let’s not forget that one issue, force majeure (discussed below), was explicitly punted to SAG by the AFTRA negotiators; the AFTRA deal expressly reserves this issue for resolution by SAG.

3. Deal Points

So, there are still a range of deal points to negotiate. What are they? Here’s my take.

(a) DVD Residuals. This is a dead letter. The studios will not increase the DVD residuals formula. They can afford to, they should do so, and the issue remains important even as the DVD/Blu-ray business declines, but it’s just not going to happen.

(b) New Media Residuals on Original Made for New Media Productions. Extremely unlikely that SAG will achieve (or even attempt) any gains here. For background, see this article.

(c) Jurisdiction Over Original Made for New Media Productions. Extremely unlikely that there will be any change here too. For background, see this article.

(d) French Hours. This is a studio proposal to eliminate guaranteed meal periods and allow “French Hours” (meals are catch as catch can) if the majority of actors on a theatrical movie or long-form TV movie so vote. The studios will almost certainly withdraw this proposal at some point in the negotiations.

(e) 90-day Taft-Hartley Period. The studios propose to weaken what’s termed “union security” by allowing non-union actors to work up to 90 days in SAG new media jobs before being required to join the union. The applicable time period in traditional media is 30 days. The studios will almost certainly withdraw this proposal, which is inconsistent with the AFTRA deal.

(f) Force Majeure.

This is a legal phrase, but it has a real dollar impact. Here’s what it means. The SAG agreement has a provision that applies if production is suspended or terminated because of certain kinds of events outside anyone’s power. Such events are called “force majeure,” and include riots, earthquakes, terrorism, or—significantly—strikes by other unions. The provision says that under these circumstances, the studio has to continue paying certain of the actors for three weeks at half-salary. After three weeks, the situation becomes more complex, but involves paying full salary in some cases.

SAG says this language applies to the 2007-08 writers strike—i.e., that actors are owed money under the force majeure provision because production was interrupted by the writers strike. The studios disagree, for reasons they’ve never made clear. The language seems unambiguous to me, and, despite my requests, the AMPTP has never explained their reasoning, citing a pending arbitration claim brought by SAG.

This battle is being fought on two fronts. First, the studios are refusing to pay force majeure claims relating to the writers strike, so SAG has brought an arbitration claim against them. Second, the studios want the contract language changed so that force majeure protections would be effectively eliminated. SAG calls this a rollback, and I think they’re right. My discussions with studio-side sources lead me to believe that that the studios will soften this proposed change in language, but it may be difficult to get them to withdraw it altogether.

(g) Contract Expiration Date.

The studio offer sets the contract expiration date at June 30, 2011. That’s 3 years from the date the previous contract expired, but less than 2-1/2 years from now. That puts the date at risk—i.e., the studios might insist on revising it—because the Guild agreements usually have three-year terms.

The date’s important, because the AFTRA deal expires the same day, and the WGA deal just two months earlier (May 1, 2011). That means the possibility of a 2 or 3 union joint strike threat. That, in turn, would give the unions the leverage to achieve gains in areas such as new media and maybe even DVD/Blu-ray that were not realistic in this negotiating cycle. Maintaining synchronization is key to a drive towards reclaiming leverage next cycle. And, synchronization is necessary if AFTRA and SAG are to resurrect Phase 1 for the TV/theatrical contract (as they are doing now for the commercials contract) and negotiate that deal jointly again.

(h) Retroactivity.

Since July 1, 2008 (the day after the previous contract expired), SAG members have lost out on 3.5% increases in minimums—increases which AFTRA members have enjoyed. The studios offered SAG retroactive increases back to that date, but only if SAG ratified a deal by August 15, 2008, which didn’t happen. Many months later, retroactivity would seem to be a dead letter. But is it?

Not necessarily. If the studios are smart, they’ll buy themselves a bit of goodwill by offering some amount of retroactivity. Splitting the difference 50-50 would be nice—i.e., 3-1/2 months’ worth of retroactivity—but it’s rather unlikely. A more achievable target for SAG would be retroactivity to January 1, which also has the virtue of being easily administrable and not retroactively increasing costs for production in a calendar year (2008) that’s now over. If the studios want to demonstrate that MF-style scorched-earth negotiation is not the only model available, here’s one place to do it.

(i) Effective Date for Future Increases in Minimums (“Prospectivity”).

Related to retroactivity is another issue—call it “prospectivity”—that doesn’t get enough attention. It concerns the effective dates for upcoming bumps in the minimums. In other words, if you’re an actor making scale plus ten, the question is this: “when do I get my raise?”

(Note to non-entertainment industry people: This is about raises for actors who are making the minimum union wage. It’s not about increases for multi-millionaire stars. The union contract has no effect on the salaries that stars receive.)

The way the contract proposal is currently structured, there will be three increases in minimums:

First, there will be a 3.5% increase in minimums. This takes effect when the contract is ratified, unless SAG can achieve some retroactivity as discussed in the previous section.

Second, there will be a 3.0% further increase. This takes effect one year after the 3.5% increase takes effect. In other words, it would have taken effect on July 1, 2009 (which is when the corresponding increase in the AFTRA deal takes effect), if SAG had ratified the deal before August 15, 2008. Now, as the offer stands, the 3.0% further increase won’t take effect until sometime in Jan.-March 2010, assuming that the deal is ratified by March of this year and, possibly, contains retroactivity to January 2009 for the first 3.5% increase.

Third, there will be a 3.5% further increase. This takes effect one year after the 3.0% increase takes effect. In other words, it would have taken effect on July 1, 2010 (which is when the corresponding increase in the AFTRA deal takes effect), if SAG had ratified the deal before August 15, 2008. Now, as the offer stands, the 3.5% further increase won’t take effect until sometime in Jan.-March 2011, assuming that the deal is ratified by March of this year and, possibly, contains retroactivity to January 2009 for the first 3.5% increase.

So, retroactivity relates to the first increase, but prospectivity relates to the second and third, and is somewhat independent of retroactivity. There are various possible times that the second (and third) increases could take effect: July 1, 2009 (and July 1, 2010) give the most to the union, and allow the studios to give the new negotiating team a future-oriented concession without implying that management approves of the previous SAG administration’s approach to negotiations. Because this date matches AFTRA’s, it also has an advantage for management: it’s easier to administer. On the other hand, in today’s weakened economy, with several studios having just laid off 7% of their staffs, rapid increases will be a tough sell.

(j) Product Integration.

A big issue is likely to be product integration. Some people are convinced that SAG has no hope of making gains in this area. I disagree, but to understand why, you need to parse out three distinct sub-issues.

First, though, let’s understand what “product integration” means. It’s a form of product placement on steroids. With traditional product placement, a can of Red Bull might sit on the table while two characters discuss how to save the world. With product integration, one character would actually have to drink the Red Bull, or mention it by name (“I’ll save the world after I get hopped up on Red Bull”).

In any case, the “brand” (i.e., the company that makes the product) pays the studio or production company. Sometimes the payment is in cash, which helps defray the cost of production. Other times the payment is “in kind,” i.e., in the form of products or services (this is also called a barter deal). For instance, an airline might give the production company free tickets, which helps reduce the cost of flying to a distant location.

Product integration is often distracting and annoying to the audience, but studios argue that they need the money, because traditional forms of revenue are declining—in particular, ad revenue on television. That’s in part because people use TiVo and other DVRs to fast forward past ads. Actors would like the ability to refuse to perform integrations and, if they do consent, they want to be paid an extra fee for the integration, among other reasons because it’s an embedded commercial. For more detail, see part 3 of SAG & The Studios: What Are They Fighting Over?

The three distinct sub-issues of product integration are these:

Notice. In my view, the actor should be notified about the integration as soon as the producer strikes a deal with the brand. In fact, the new WGA deal has a provision, Art. 48.L, which is even stronger: it provides that the production company has to consult with the showrunner regarding any integration. Thus, there’s pattern-bargaining precedent for some form of notice.

Notice is particularly useful if the integration deal is reached prior to the time the actor is hired. In that case, the actor can decide not take the job if, for instance, he or she has a conflicting commercial (e.g., actor has a Coke commercial but will be asked to do a Pepsi integration if s/he takes the role) or a conflicting integration (actor did a Coke integration last month in a different show but will now be asked to do a Pepsi integration), or has an ideological or moral objection to the integration.

Notice thus benefits actors, yet it costs the studios almost nothing. It is economically virtually neutral to them, with the only cost being (a) some administrative burden to ensure that all affected actors are notified of the integration deal and (b) penalties, if any are provided for, if the studio fails to notify the actor. Thus, I very much hope we’ll see notice included in the deal.

Consent. A broad right of consent is hard to defend. Actors are hired to play a role and, in today’s world, that job increasingly includes performing integrations. However, there is one area where it might be possible to grant a consent-like right—a right to walk away from the job without penalty.

This right could be somewhat as follows: If the actor has already been hired, and is later notified of an integration deal, and the actor has a conflicting commercial (i.e., that is running or as to which the actor is subject to a hold), then the actor ought to be able to give notice of termination to the producer and break the contract without penalty if photography of the actor has not started and the notice is given sufficiently far in advance of the scheduled date of photography of the actor.

What does “sufficiently far in advance” mean? That depends on how frequently the show is shot (one show per week, one every few weeks, or only a one-off, such as a theatrical movie) and what type of player is at issue (day player, weekly, etc.). A definition of this phrase requires more detailed info than I have, but it’s exactly the sort of thing that negotiators can and should discuss. Also, if the studio knows about an integration deal, but delays notifying the affected actor, then the advance notice period from the actor should be reduced commensurately.

This is a deal point that will be an uphill climb for SAG, but might not have been had the union agreed to negotiate 11 months ago when the studios were ready. I’m not hugely optimistic, but I hope the negotiators will seriously consider this deal point.

Compensation. I agree that actors should be separately compensated for integration, for four reasons: (a) Actors have always gotten compensated for doing commercials, and a product integration is an embedded commercial. (b) An integration for one product, such as Pepsi, means the actor loses the potential to do a commercial for another, such as Coke. (c) An integration for Pepsi, for instance, means that the actor might not even get a commercial for Pepsi either (why should Pepsi bother, since they already have the actor in character endorsing the product?), or that the compensation would be less than on the open market. (d) As conventional advertising declines and product integration grows, actors as a whole are losing economic ground in the arena of traditional commercials and should be allowed to make it up, at least partially, in the replacement arena of product integration.

All of that said, I think there’s little or no chance that the studios will agree to compensation. This is an issue that might have been discussable 11 months ago, but the union’s scant leverage today strikes me as insufficient to gain any traction here. Bear in mind, this is my not-in-the-room analysis. I hope I’m wrong.

One specialized area of compensation might be achievable: perhaps the negotiators can obtain additional payment for actors if a clip of a product integration is aired separately (on TV or via new media), since it would then be functioning as a standalone commercial. This would be above and beyond whatever other clip compensation is agreed.

The compensation issue is complex, and it may interact as well with the imminent negotiations over the SAG/AFTRA commercials contract. That adds another layer of complexity, since that contract is with advertising agencies and advertisers, not with the studios, and since not all agencies and brands that do integration deals are signatories to the commercials contract.

Remember that the options I am sketching are at best partial solutions. There will always be the hard case that arises when an integration deal closes shortly before photography of an actor who turns out to have a conflicting commercial. This would be a tough case to address even if SAG had more leverage. But the fact that the negotiators won’t be able to solve every integration issue doesn’t mean that the deal shouldn’t address any of them.

(k) Other Issues.

The issue of clip consent has come up from time to time, but was not in the last “Outstanding Issues” list released by the previous SAG administration, so I’m not sure what, if anything, needs to be done here. Also, there are a variety of other issues identified by a former SAG exec. Finally, it would be great if the negotiators agreed to form a joint New Media Working Group, as I have previously advocated with the other guilds and unions invited as well.


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