United States: SAG-AFTRA Shifts To A New Residual Program: An Overview Of The New Residuals In The 2014 SAG-AFTRA TV/Theatrical Contracts

On August 22, 2014, SAG-AFTRA members approved new three-year TV/Theatrical contracts negotiated between the union and AMPTP. As the first negotiated agreement since the historical SAG-AFTRA merger, the new contracts provide advances in subscription ad-supported on-demand viewing (SVOD) coverage and new residual payments for on-demand viewing that are more attuned to the evolving landscape of the television industry.

Old Residual Agreements

Under the old residual payment formula, the residual payment structure restricted the number of reruns cable companies and digital networks licensed to include within their programming. For instance, under the old SAG-AFTRA basic agreements, cable companies and digital networks paid a fixed fee structure and license fees negotiated between the studios and cable companies. For network prime time dramatic programs, cable companies had to pay generally 6% of the gross receipts in perpetu­ity, which also included health and retirement contributions. SAG residuals were calculated for television shows in syndication using varying percentages of the minimum rate of compensation for the actor based upon the number of reruns. For the first rerun, above-the-line actors were paid 40% of their minimum compensation rates, 30% for the second rerun, 25% for the third through sixth reruns, 15% for the seventh through tenth reruns, 10% for the eleventh through twelfth reruns, and 5% for the thirteenth rerun and thereafter. These additional compensation payments on top of the licensed fee structures were presum­ably one of the reasons why cable companies and digital networks licensed classic game shows and classic television comedies in order to minimize their costs in content programming.

However, the old residual payments and the tra­ditional business model of licensing shows to cable networks were threatened as the shift to digital and new media landscapes posed new challenges. The para­digmatic shift to new media viewing of television pro­gramming (e.g., Netflix, Amazon, Hulu), has resulted in fragmented viewership and a threat to cable companies whose business model is based primarily upon syndicat­ed reruns of popular broadcast television shows? Broad­casting networks struggle to maintain strong viewership to increase their revenue streams through advertising sales as consumers enjoy more "binge" watching of their favorite television shows through online media. It has become more difficult to produce a successful television show that will attract viewers during the prime time slots, as fewer shows continue after the first season. Since 2006, on average only 35% of shows were renewed for a second season. In 2013 alone, only 29% of television shows were renewed for a second season. An increase in cancelled shows has resulted in fewer shows entering the syndication market to attract licensing deals with cable companies. The net effect means fewer opportunities for above-the-line actors to receive residual payments for the exploitation of their performances in supplemental markets.

New Residual Agreements

The newly approved SAG-AFTRA TV/theatrical contracts, however, enable actors as principal performers to collect more residual payments. The new agreements replace the additional fixed-fee structure with residuals based upon a percentage of the rerun licensing deal. This payment structure allows for more cable companies and digital networks to license more affordable content. Yet the new agreements also enable actors to capitalize on the wave of new media productions and licensing deals for online viewing of television programming. The agree­ments now include new residual payments for SVOD and shorter free streaming window periods from 17 days to seven days to allow actors to collect more residual payments.

Basing the new residual payment formulas upon a percentage of the licensing deal versus the fixed-fee pay­ment structure will lucratively benefit actors, particularly in the SVOD realm, as the rerun exhibition windows in supplemental markets are shorter. In its recent annual re­port, Netflix disclosed that in the 2013 year, spending for streaming content online jumped up 30%, reaching $7.3 billion. Licensing deals between CBS and VOD/SVOD services like Amazon Hulu for shows such as Under the Dome and Extant, to be shown four days after an episode's initial run, satiate online subscription service companies' demand to provide content to consumers, while generat­ing more opportunities for actors to collect higher residual payments in the performance of their works.

Although it is premature to determine what overall benefits will result from the new residual payments for actors who are qualified for residuals in television shows, the new SAG-AFTRA TV/theatrical contracts are better aligned with the shifting landscape in viewing television shows across multiple media platforms than ever before.

Reprinted with permission from: Entertainment, Arts and Sports Law Journal, Fall/Winter 2014, Vol. 25, No. 3, published by the New York State Bar Association, One Elk Street, Albany, NY 12207.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances

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