Fall 2019

Securing the Future

What drove over $400 million in revenue for Guild members in the last year alone, including over $70 million to the DGA's Basic Pension Plan? Residuals.

By Lily Bedrossian

Illustrated by Peter and Maria Hoey

Minimum wage. Overtime. Benefits. These were major labor battles that helped determine the course of modern working lives. And for creative workers like directors and their teams, there is another battlefront just as significant: Residuals.

Residuals are a DGA fight that's spanned over six decades, shaping the evolution of the film and television industry. And while it's tempting to think of them as a given—settled on long ago—complacency risks forgetting the DGA's past struggles that bore residuals, and the ones that lie ahead.

Residuals are one of the most significant, hard-fought benefits of being a Guild member. And the fight is ongoing and everlasting. Gains won in the past have been fiercely defended, maintained and improved upon in subsequent negotiations cycles. But even then, the philosophical debate is never settled in perpetuity, as innovations in technology and distribution raise the issue anew.

The struggle for these payments is so intertwined with the history, future and health of the DGA that the fundamentals bear repeating—especially in an industry transforming so rapidly before our eyes. Residuals are based on the principle that those who create content are entitled to be compensated for the use and reuse of their work as that work is exploited. In film and television, these payments are made to directors, and sometimes directors' team members, involved in the making of motion pictures and television programs when those properties are reused or exploited in any medium. There's also a deeper significance to what residuals represent for freelance workers whose livelihoods depend on the intersection of art and commerce, where intermittent work is the norm: They provide a critical safety net.

Last year, the Guild collected $416 million in residuals—up from $261 million just a decade ago. That number is even more impressive when you take into account that home video—yesterday's bread and butter—bottomed out during this same time period. In 2009, home video residuals for features alone accounted for $40 million. By 2018, that number had plummeted to just $14 million. But through meticulous research and near-obsessive planning for the future, the DGA has managed to stay a step ahead of the curve in negotiating for strong residuals formulas—while also remaining flexible to allow new technologies and markets to develop and mature.

The Road to Residuals

Tough battles mark the DGA's long and storied history fighting for residuals—each sparked by the emergence of new means of exhibition and distribution. It began with the advent of radio. But things really came to a head with television.

The DGA and other Hollywood guilds negotiated residuals for domestic reuse of TV programs in the 1950s, but ran into resistance when it came to getting paid for feature films shown in the new medium. The dispute was so contentious that a 12-year moratorium on exhibiting new films on TV was declared in 1948. Throughout that period, the guilds and the studios disagreed on whether and how residuals should be paid on feature films being reused for television—with the studios insisting they should only pay when a project turns a profit. The guilds were steadfast in their insistence on a percentage of the gross. This critical residuals deal struck in 1961, which also established a pension plan for members, secured the future of generations of DGA members and set a template for what is now over $400 million in annual revenue.

Other battles ensued, eventually netting new victories for the DGA. The Guild achieved a residuals formula for foreign television reuse of TV programs in 1968. Compensation for the reuse of films on pay television and videocassettes were fought for and gained in 1971. And in the following decades, the DGA succeeded in securing residuals for various other forms of reuse—from pay TV and basic cable to various forms of new media. But it was never smooth sailing, and there were many flare-ups along the way. As new platforms emerged, the studios consistently sought ways to separate creators from the use and success of their work. In the 1980s, a bitter dispute with employers over previously agreed upon percentages for home video residuals came to a boil. And a standoff involving made-for-pay-TV residuals played out with the rise of HBO.

In the 21st century, exploitation in the digital world began to surface, sparking industry upheaval. The Guild would eventually emerge victorious in establishing formulas for the many new media formats. It began in 2001 and continued in 2008 when the DGA established paid downloads and ad-supported video-on-demand residuals designed to be flexible, allowing the medium to flourish. And flourish it did. In 2014, the DGA established the subscriber-based made-for SVOD formula, modeled after its successful pay TV version. And in 2017, as the SVOD market began to mature, those SVOD residuals were tripled by the DGA and adopted by the DGA's sister guilds, as they were in 2014.

But many new challenges lie ahead, and the fight is far from being over. SVOD is fast becoming a primary form of exhibition for audiences. As of the end of 2018, there were 559 million global SVOD subscribers, a number that's more than doubled just since 2016. And that doesn't account for the new services that will be launched by major players in the coming year. As the global streaming revolution kicks into high gear, overtaking other release windows, so too will the need for a further expanded SVOD residuals formula to make up for the difference. Another area of concern is the consolidation of power across the bargaining table as mergers and acquisitions engulf the industry at a fever pitch. Confronting these obstacles won't be easy, but the DGA will apply the same forward-looking, research-oriented approach as it has in the many battles that have come before. The goals will be the same as they've always been: preserving members' strong bonds to the success of their work—and carving a path to financial strength and stability

Collecting and Enforcing Residuals

To ensure that members receive what they are due requires a great amount of strategic planning and hard work. The Guild starts working to protect its members' residuals before they even start work on a project. For most productions, the DGA Signatories Department ensures that potential signatory companies are vetted by the Guild so that residuals will actually be paid when due years in the future, when the production company may have long since released its interest in the film or gone out of business altogether. These "financial assurances" are most commonly in the form of assumption agreements, guarantees from parent companies, security agreements, and residual reserves. This process can be complex and contentious, but it has preserved millions of dollars in residuals payments for Guild members and the Pension Plan. By working with the Guild, even the lowest production budget levels have been able to meet residuals obligations. And in 1998, the DGA successfully championed historic legislation in the U.S. Congress that ensured that when ownership of films is transferred, new owners or distributors would be legally obligated to pay residuals to directors, writers and actors as provided by their collectively bargained agreements.

Companies report earnings to the Guild and are required to send checks made payable to members to the Guild for transmittal to the members. Once the checks arrive, the Residuals Processing Department staff use the accompanying back-up information to log the payment details into the DGA Residuals system, and then mail the checks and statements to the members. This helps the Guild verify the accuracy of the payments and determine that all payments are being made when they are due. Last year, the department processed nearly 350,000 checks comprised of 2.5 million individual residuals payments—that's up over 500% just since 2008.

The DGA Residuals Enforcement Department monitors industry compliance with the reuse provisions of the DGA's negotiated agreements, and aggressively enforces these agreements worldwide via computerized policing systems, audit programs and claims mechanisms that target producers who fail to meet their obligations. If the team identifies a delinquency which the production company or distributor refuses to pay, they call on the Guild's Legal Department to pursue the delinquency by filing an arbitration claim. These claims can lead to court judgments and foreclosures, if necessary. The Guild also represents members' residuals interests related to bankruptcy filings and library acquisitions.

Types of Residuals

Formulas for the different types of residuals vary depending on a number of different factors. In general, there are two types of residuals payments, each of which have many permutations: 1) gross receipts-based, and 2) fixed fee-based and subscriber-based. Gross receipts-based residuals are generally payments for theatrical films made to DGA members for exploitation other than in a movie theater (e.g. DVDs, pay TV, basic cable, free television and SVOD). Fixed-fee and subscriber-based residuals are payments made for the reuse of television and made-for-SVOD programs based on rerun activity or other exhibition. These residuals are based on formulas designed to grow with the medium, and are determined by a complex set of contractual provisions, depending on what market the program was made for, and where it is being reused. Understanding that history is key to the creation of effective residuals formulas in the future.

Did You Know Residuals Benefit All Members?

Direct residuals payments benefit not only directors, but also members of the directorial team when it comes to the reuse of films and TV programs in supplemental markets, and on programs made for premium pay television and SVOD platforms. Moreover, residuals are a significant source of funding for the DGA Basic Pension Plan that supports all members.

The Industry / Technology

Articles on creative issues and new technology in features, television and new media.

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