By Ronald Grover
Nowhere are labor relations stranger than in Hollywood. A few weeks back, DreamWorks co-founder Jeffrey Katzenberg was blasting the latest contract offer by the Writers Guild of America, saying it would "bankrupt" Hollywood studios. The writers' demands, Katzenberg said, would cost his industry $1.6 billion over three years if -- as expected -- the other unions demand parity when their own contracts come up for renewal.
Just two weeks later, there was Katzenberg again, this time amiably chatting up John Wells at a Lakers' basketball game. That's the same John Wells who writes ER and is the current president of the WGA. It's also the same John Wells who was elected back in 1999 with a hard-line campaign pledge to deal with "the companies' ever-growing lack of respect for writers."
These days, the WGA and the studios are trying to negotiate a new, three-year writers contract by May 1, when the current one expires -- ostensibly to prevent a walkout that could easily spread to the Screen Actors Guild, whose contract is up on June 30. Everyone says they don't want a strike, citing a potential loss of billions of dollars to the local economy. But there's a funny game going on here: Studio executives don't want to alienate writers like Wells who are their very lifeline to the fresh new films and TV shows. At the same time, there's this creeping feeling among those I've talked with that the studios wouldn't be all that upset if the writers -- and for that matter the actors -- walked off the job. Let's start with the basics. What the unions all want is exactly what the studios will never give them. That's residuals, or pieces of the revenue that comes from so-called ancillaries -- videocassettes, DVDs, foreign TV, and reruns on cable TV or at 2 am. It's the area where studios have seen the most growth in recent years.
Unions are rightfully upset, since the studios have pleaded with them for years not to demand too big a share of those residuals. The ancillaries had to have a chance to get off the ground, the studios argued. "Now it's done and growed up," Wells told his faithful when he was running for election back in 1999. Wells at the time made it very clear: His union would strike if it didn't get what it wanted.
But today's studios could weather a strike much better than the studios of yore. Today, just about all of the studios are parts of much larger conglomerates, with their fingers in everything from billboards to radio stations. Disney's studio generates only about 23% of the company's overall revenues, down from nearly 40% back in 1990. The company makes about the same amount -- and nearly 10 times as much operating income -- from its theme parks. Over at Viacom, the huge radio-station group earns twice as much as the studio on about the same amount of revenues.
The problem is that entertainment costs are going through the roof. A typical film costs $78.9 million to make and market, or more than twice what it did back in 1990, according to the Motion Picture Assn. of America. Few films break even at the box office, meaning that ancillary income is where any profits are generated. Indeed, films only get about 22% of their revenue from movie theaters, according to industry analyst Adam Media Research.
TV production is no bargain, either, with sitcoms costing $700,000 apiece in a market where only few last long enough to make it into syndicated reruns, which is where the real money is. Little wonder, then, that the biggest contract issue may turn out to be so-called "double-bursts," when TV shows like Law and Order: Special Victims Unit show up on NBC and a week later are airing on the USA cable channel. The studios want to pay writers far less for such second airings than the writers think they should get.
A showdown under the current economic circumstances likely would suit the studios just fine. Their parent companies hate the fact that they spend so much to market films and sometimes have to take massive writedowns when a film craters. Last year, in fact, MGM posted its first earnings in years by cutting the number of films it released from 11 to 8 while living quite comfortably off of revenues from its 4,000-title library of older movies. Heck, MGM got revenues of $224 million from a DVD market that didn't even exist two years ago. "The good news is that from an earnings perspective, [a walkout] would be almost entirely positive," News Corp. President Peter Chernin said in a speech to analysts late last year. "There are short-term benefits and virtually no longer-term implications."
Pretty rough, no? But Hollywood seems to be girding for a strike by shooting virtually every script it can, to stockpile films and TV shows. According to the Hollywood Reporter, in fact, there are some 118 films in production right now -- about 44% more than at this time last year. That's enough, studio executives tell me, to carry them well into next year without missing a beat. And not all of them are rush jobs: Just about every major star out there, from Bruce Willis to Tom Hanks to Jennifer Lopez, has started a film in the past month or so. Some, like Tom Cruise and Julia Roberts, will have two in the can should a strike be called by the WGA on May 1.
The same kind of hyperproduction is going on over at the TV networks, where companies are making the next installments of reality shows such as Survivor and Temptation Island at the same time that they're hoarding extra episodes of whatever show they have on the air right now. Throw in Monday Night Football on ABC and Fox' prime-time airings of the Major League Baseball playoffs and World Series, and the start of the TV season this September doesn't look quite so grim. In fact, the ad-buying company TNMedia figures ABC and Fox will have few, if any, repeats on the air in September. CBS will have the most repeats, but even those will account for just 30% of programming.
Of course, all this activity is helping Hollywood writers and actors build up cash reserves, too. But the studios have a nasty surprise in store for many of them. Studios have tons of contracts that include force majeure provisions, allowing them to tear up contracts for everyone from truckdrivers to hairdressers during strikes. The studios all have force majeure plans that in some cases would allow them to do housecleaning they've wanted to do for years but couldn't for a variety of reasons.
The biggest strike risk for media conglomerates involves the TV networks many of them own. The networks have been losing audiences for years to cable, videocassettes, and now the Internet. Back in 1988, when the writers struck for 22 weeks, the three major networks promptly lost 6% of their audience, according to Nielsen Media Research. This time, there are many more cable channels, and the likelihood of even more erosion.
TNMedia, for instance, predicts networks could lose as much as 9% of their audience, on top of the 4% they would have lost anyway as cable-TV audiences continue to grow. But costs will be sharply reduced. "We will probably get less from advertisers," admits Disney President Robert Iger, a former head of Disney's ABC network. "But we will also be spending a lot less. The economics are still O.K."
For the writers, a strike could be brutal. That's what happened after the 1988 writers strike, when a federal mediator came in to help settle the differences. Folks back then lost their houses and had to take part-time jobs. After it was all settled, an eerie calm set in over Hollywood because no one wanted to go through such strife again. The actors, who saw $100 million go out the window last summer when they struck against the makers of TV commercials for six months, already are sounding less adamant than the writers.
The bottom line? There may well be a strike. But with the studios holding most of the cards, I doubt it will be a long one.
Grover is Los Angeles bureau chief for BusinessWeek. Follow his weekly Power Lunch column, only on BW Online
Edited by Thane Peterson