And the Winner Is...

So the war is over. At least for now. The resolution of the writers' strike in time for a "kiss and make up" Oscar telecast was pleasing to the Academy, ABC, and the entertainment community in general. The overwhelming passage of the new writers' contract is also a sign that peace has prevailed, and the tide is running against the probability of an actors' strike in July.

But who was the winner of the WGA's battle? Any fair analysis would suggest that they won something, gave up something, and caved on getting a boost in the DVD residuals (which at first was the sore spot that rallied so much initial attention to their cause).

By holding out for 100 days, studios and networks certainly have not won much either. Outside of Fox, ratings across the board have dropped considerably, the mad scramble to repair the TV season has been thorny at best, studios are still in the mode of "punishing" writers by holding back on the overall deals that they force majeured, and the audience has yawned, finding that those new modes of entertainment they turned to during the strike (chiefly, increased internet viewing) aren't such a bad alternative after all.

War is Hell, General Sherman reminded us. That the 2008 Oscar telecast was the most poorly watched in modern times suggests Heaven isn't awaiting anytime soon.

Hollywood's Unhappy New Year

Comic Martin Mull once noted that Hollywood is just like "high school with money," but the prolonged Writers Guild of America (WGA) strike--now in its third month and with no end in sight--is looking a lot more like "grammar school with credit cards." And while writers contend the dispute is about the future, it's really more about resolving grievances of the past.

The crux of the dispute is how much writers should earn when their work is re-purposed on the Internet. Studios--contending that new media is too new to develop any realistic business model for it--say that such Internet use is for "promotional" purposes, limiting the pay to $250 for a year of re-use, and $1,200 for scripts original to the Internet. Writers are currently paid more than $18,000 for the first network television rerun of a single episode, and a minimum of $30,823 for a one-hour script.

As a counter-proposal, writers (with the slogan "If they make money, we make money") have proposed a simple payment of 2.5% of revenue from all new-media distribution, which seemed utterly reasonable in the eyes of the industry and the public. Yet such a cut of the "distributors' gross" was firmly rejected by the studios. Writers are wary of "producers' gross," as it is dependent on Hollywood's notorious bookkeeping. No wonder early polls showed as much as 15-to-1 support in favor of the writers (Pepperdine University study, November 2007).

The debate was reminiscent of Hollywood's labor battles of the 1980s, when studios made a similar argument about the uncertainties of a new market called "home video," and got the writers to settle for a lowball deal. Studios subsequently reaped the benefits--writers' residuals now amount to about 4 cents per DVD. Resentment from the WGA has grown as the years progressed, as the writers' share continues to decline in relation to booming studio revenue.

But the media has been wrong to suggest the current battle is simply over cash. While the debate does affect how to divide pieces of the digital media pie (for which writers, after all, create the recipes), the work stoppage is really about the writers' desire to be treated as partners in a creative endeavor, a concept that studios have moved further and further away from. Residuals reward creators, just as stock options reward employees, or royalties reward patent-holders. It's funny that with all the MBAs running the show, studios fail to understand that simple principle of commerce.

In many ways, this is a re-enactment of the WGA strike of 1988, when the town suffered a 22-week work stoppage and Hollywood went into a malaise--with many people losing homes and leaving, fed up with the business altogether. New business models emerged from that strike, with the "spec script" boom of the 1990s (wherein ready-to-shoot, fully written scripts, rather than those developed in conjunction with the studio, sold with multi-million-dollar price tags) and the proliferation of reality television. With reality TV, the studios could rein in production costs, which made sense in the short run. But studios soon realized there was no syndication value in reality programming (meaning it had no "shelf life"--who wants to see episode four of the third season of Survivor?) and scripted television became vital once again.

Recent deals with David Letterman, Tom Cruise and Harvey Weinstein, and Spyglass to provide the Writers Guild with everything they were requesting suggests the conflict can be amicably resolved and the writers' demands met. And with the good news of the DGA settlement, the return to the negotiating table is imminent while a growing number of writers are able to go back to work.

But it's the WGA's two deals with Media Rights Capital and Jackson Bites that could end up being most significant. The former company (co-founded by a new media entrepreneur who sold his dot-com for over $1 billion) and the latter company (from Doug Liman, director of "Swingers" and "Bourne Identity") have formed a pay structures for creators' work on the Internet that is bound to have studios reconsidering their strategies. These are the deals that can bridge the gap between the two sides--the gap that's made for an especially chilly Hollywood winter.

As the town starts the New Year, the question facing Hollywood is: "What new business model will emerge from this strike?" Because--as in 1988--it may well be the work stoppage itself that changes the business forever. The studios could be cutting off their noses to spite their faces, because the longer the strike continues, the more inevitably it becomes that their one-time partners will begin to create and distribute product via the Internet--without them.

Why Studios Already Lost the Internet Battle

While the Writers Guild keeps saying its strike against the studios is about the future, one need only look back to the 1988 strike to see that it's really about the past. Nearly 20 years ago, the writers asked for a bigger slice-of-the-pie, the studios shrugged, and Hollywood sank into a malaise, exacerbating divisions in the community and ultimately generating new ways of doing business.

During the 1988 strike, writers worked independently on “spec scripts” (written on the speculation that they would eventually sell them) and in subsequent years a pipeline-dry system snapped up the completed material. Television producers sought alternatives to traditional, high-cost programming. The strike resulted in the spec script boom of the 1990s and reality television – in fact, new business models.

Therefore it’s not the demands, but the work stoppage itself, that creates a new paradigm. By fighting the writers over the new media issues today, the studios are effectively creating what they fear most: a major tectonic shift that will reduce the role of the studios even further.

Generally speaking, prior to 1988 in the feature-film world, the studios - then housed with genuinely creative executives - used to “develop” movies starting from source material - a book, play, life story, or pitch - and hire a writer to nurture it into a screenplay. They would pay the writer usually a five-figure sum, maybe more, and both sides saw the project through.

In the decade following the strike, studios more often bought fully written “specs,” and millions of dollars were thrown at ready-to-shoot scripts. The role of the executive was less and less creative, and more business. The prices for specs escalated to obscene amounts, even as studios, in essence, discovered they were buying only “an idea” and then hiring even more writers to rewrite it. The process was often financially wasteful, and has ushered in the era of concept-driven amusement-park-ride movies. Audiences aren’t as intellectually or emotionally engaged as they were pre-strike, and while the money’s been good, studios largely relinquished the creation of heartfelt, character-driven films to the independent art-house world.

Flash forward to the current debate, where studios claim that new media is “too new to develop any realistic business model.” Their response is based on the fear of that dreaded D-word that’s haunted them since the arrival of the Internet: disintermediation. This is cyber-speak for cutting out the middleman. In such an environment, the studios’ role (as managers of content) is lessened into non-existence. Sound a bit like what happened to the music industry?

In their hubris, the studios balked at writers’ requests for a sliver of the digital media pie (2.5% to be exact), and the current strike began. Immediately, many writers emigrated to the Internet, at first generating short videos to virally market their messages, and now finding more creative outlets to show their talents. The studios have misguidedly maintained their “talk to the hand” strategy, and thus the sensible reaction for writers has been to pick up their toys and go play somewhere else.

While there is a wide gulf between artists’ abilities to monetize user-generated content (where anybody with a computer connection can author an overnight YouTube sensation) and to utilize the Internet as a distribution system (where Google, Microsoft, Yahoo, Apple and telephone companies can compete with traditional networks, piping broadband content into homes), the creative genie is now out of the bottle. And so is the new paradigm. What the studios feared, the WGA strike has brought to life. Even before the strike began, many writers were wondering, “Why are we fighting for only 2.5% of a studio process that’s so inevitably inefficient?”

The evolution is progressing with the creation of every Break, Heavy, FunnyOrDie, and MyDamnChannel – sites that give writers total creative control and up to 50% of revenue. Of course these distribution outlets are tiny compared to the networks’ reach – and nobody thinks the studios will disappear - but it’s a start. And one day soon we’ll have a whole new entertainment model.

There will likely be a deal with the WGA in the coming months, since all-reality-all-the-time is a losing proposition. (Remember when ABC ran “Who Wants to Be a Millionaire?” every night and destroyed its viewership?) So eventually an agreement will be reached and traditional writers will go back to work. And if the deal is as bad for writers as the studios originally proposed, the studios will feel that they have won the war – but the writers will have effectively won the most important battle: their role as the center of the creative process is confirmed.

The studios could have learned a lesson from the U.S. auto industry, which didn’t adapt when it faced more efficient Japanese competitors. The car companies forgot that it all starts with innovation. Somehow the studios have forgotten that it all starts with the word.