The big elephant in the writers’ strike is the issue of residuals for “new media,” such as online sales and (at least until they were taken off the table) DVDs. Now, it’s completely understandable that writers would want a share of the new revenue streams. If the new revenue sources constitute an increasingly large slice of total revenues, then an old contract based on residuals from sources that are drying up (like VHS sales) will give writers a diminishing share of the gains from trade.
But there is more than one way to give writers a share of a revenue stream. Residuals are one way. Alternatively, we could calculate the expected present value of a stream of residuals, and then tack that amount onto the up-front payment for a writing job. Put simply, the choice is between (a) a smaller up-front payment plus residuals, or (b) a larger up-front without residuals. In expected value terms, the two are equivalent if the calculations are done right.
The equivalence between (a) and (b) doesn’t mean it’s a matter of indifference which is chosen. Arguably, method (b) is superior. It would allow better compensation for both writers and producers, for at least two reasons:
1. After a project is in the can, the writer has little or no further input. Producers, on the other hand, still have considerably input: they can set the price for sales of the product, decide the appropriate amount of marketing, and so on. So the important thing is to get the producers’ incentives right. Residuals paid to writers are like a tax; they reduce the producers’ benefit from pushing the product. They will thus invest less effort in promotion than they otherwise would. Get rid of the residuals, and the producers will market and price the product so as to maximize its net value. That means a bigger pie, a portion of which can be paid to writers in the form of even larger up-front payments.
2. Residuals, being dependent on future sales, are inherently more risky than up-front payments. Writers, like most people, are probably risk averse. Producers, on the other hand, get their funds from investors with diversified portfolios (of entertainment products and other investments), and they are thus closer to risk neutral. Moving from the residuals (a) to the higher up-front payments (b) would shift risky assets – uncertain future revenue streams – onto the more efficient bearers of risk. Meanwhile, the writers would get the equivalent of an insurance policy.
I’m hesitant to conclude that the residuals system is definitely inefficient, because its longevity in the entertainment business provides some evidence of its utility. Maybe there’s some other factor at work I’m missing that would make residuals desirable. In talking to writers and others in the industry, though, I haven’t found a convincing argument yet.
One friend pointed out, correctly I think, that residuals have a historical legacy that goes back to an era when writers had more control over the distribution of the product. For instance, Shakespeare wrote plays and directed the Globe Theater. This history has contributed to a notion that writers should get a share of all future revenue from their creations. But while this story may help explain where the residual system came from, it doesn’t show that it’s efficient now. Shakespeare was both a writer and a producer. We have now progressed to a system of greater division of labor, in which some people do the creative work while others provide the financial backing, distribution, etc. The real issue for writers should be whether they are compensated in a manner that induces them to do good work; if an up-front payment does that while providing better incentives to producers, that’s the way to go.
The best argument for residuals I’ve found so far is this: Writers are trying to guarantee themselves a certain share of the gains from trade. Because residuals are defined as a percentage, their size will rise and fall with the total revenue generated by the product, and thus writers will still have about the same (percentage) share regardless of what happens to the industry. If overall revenues rise, writers’ compensation will also rise; if overall revenues fall, writers’ compensation will, too. This is more difficult to guarantee with fixed up-front payments, although I’m guessing someone could devise a contractual formula for up-front payments that achieved the same effect. In any case, residuals serve this function effectively only if the contract specifies the right revenue sources. If the sources change, as happened after the last contract, then the writers’ share dwindles. What happens if the new contract specifies generous residuals for online downloads, and it turns out the next big thing is wireless direct streaming to the cerebral cortex, or some other delivery method we can’t even imagine? Remember, nobody foresaw online downloads, either. Up-front payments, on the other hand, have to be paid regardless of the eventual revenue sources.
I have one other possible justification for residuals in mind, but I haven’t fully worked it out yet. In the meantime, I invite readers to suggest other arguments for residuals – or further support for my suspicion that higher up-front payments would be superior – in the comments section.