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Getting a Piece of a DVD Windfall

By ROSS JOHNSON

Published: December 13, 2004


Tony Cenicola/The New York Times; Illustration by James C. Best Jr./The New York Times

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Kevin Kane/WireImage.com
Above, from left, Jerry Seinfeld, Julia Louis-Dreyfus and Michael Richards. Below, Dave Chappelle.


J. Nicholas Counter, negotiator for an alliance of producers.

When things look darkest in Hollywood, there is always a cavalry over the next hill.

In a town whose economy runs on the slimmest of margins, the latest savior is the DVD, which has filled the coffers of the studios, driven up the stars' salaries and altered the economics of making movies and television.

Now the question is whether there is enough money in the DVD windfall for everybody.

Dividing revenue from DVD's is the contentious issue in negotiations between Hollywood producers, represented by the Alliance of Motion Picture and Television Producers, and the combined bargaining teams of the Screen Actors Guild and the American Federation of Radio and Television Artists. The two sides began meeting in Los Angeles last Monday to fashion a new three-year film and television contract.

The dispute has already led to infighting over Robert Pisano, the chief negotiator and national executive director of the Screen Actors Guild, who also sits on the board and is also a shareholder of the online DVD rental company Netflix. More important, the dispute has raised the possibility of an actors' strike. Most people within the industry believe that another prolonged strike by the actors (the last was in 2000) would be a crippling economic blow for the entire entertainment industry.

"No one doubts that the actors have the power to shut down the town," said John Ptak, an agent at the Creative Artists Agency, which represents the actors Tom Cruise and Tom Hanks. "The question is - and it's the one only the actors can answer - if it's worth it to them over DVD's."

DVD's are just the latest example of a technology that, like the videocassette recorder in the 1970's, Hollywood studios greeted with skepticism - if not outright hostility - only to see the breakthrough add to their bottom lines.

In 1996, the year before the home DVD player was introduced, consumers spent $6 billion buying VHS tapes, and $9.2 billion renting them, with the studios taking in 75 percent of sales and 20 percent of rentals. In 2004, according to Adams Media Research, consumers will spend $24.5 billion buying and renting DVD's and VHS tapes. Almost $15 billion of that will be in DVD sales, and nearly 80 percent of that will go to the studios through their home entertainment divisions.

The explosion in DVD sales has changed the calculus of the Hollywood hit. Last year, "Finding Nemo" sold $339.7 million in tickets when it was released to the nation's movie theaters. It went on to capture a greater amount - $431 million - in home video (including DVD) retail sales and rentals.

Despite the inflow of cash, the studios have refused to change a home video residual formula for the creative talent guilds that puts only fractions of pennies of each DVD sale into the hands of most actors, writers and directors.

"Sixty percent of studio films never, ever, recoup their cost," said a Warner Bros. executive who refused to be identified and who has participated in several recent labor negotiations on the side of the producers' alliance. "We need the huge profits of some of the money makers to cover the losers."

The producers successfully held the line on DVD profits in recent negotiations with directors and writers, but negotiators for the 120,000 members of SAG and the 20,000 members of Aftra have signaled their willingness to fight harder for their piece of the pie.

At issue in the negotiations is a 23-year-old formula that was designed when some major studios were not even in the home video distribution business. The formula held 80 percent of home video wholesale revenues for the distributor. (In the case of the major studios, their home video distribution arms are kept on a separate balance sheet.) Writers, directors and actors then receive a small portion - 1.8 to 5.4 percent - of the remaining 20 percent.

To understand just how the formula works in the age of DVD sales, however, look at Dave Chappelle, star of "Chappelle's Show" on Comedy Central. Mr. Chappelle's show is wildly popular on cable - a limited audience compared to network television - with around three million viewers.

Last February, Paramount Home Entertainment, part of the Viacom conglomerate that owns Comedy Central, bundled Mr. Chapelle's first 12 episodes into a DVD boxed set. It shipped just 35,000 sets to the nation's video retailers.

"Paramount just dumped the DVD out there," said an executive who helped broker the initial employment deal between Mr. Chappelle and Comedy Central and who spoke on the condition of anonymity.

To the amazement of studio executives, sales of the boxed set, which included many of the words that were bleeped when the shows were broadcast, had reached 2.2 million units by the end of November, and had returned close to $37 million in wholesale revenues to corporate parent Viacom.

Mr. Chappelle's reward was a renegotiated deal with Comedy Central that will also earn him several dollars for each future boxed set of DVD's sold, paying him a total of around $25 million a year.

The reward for the rank-and-file actors who performed on "Chappelle's Show"? They will divide 12 cents for every DVD sold, the figure determined by the residual agreement.


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