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Studios and Guilds Attempt to Adapt to Changing Media Landscape With New Residual Agreements

By Jacob Reiser

Expect to see more reruns of your favorite TV shows in the near future on cable and digital networks. Thanks to a new agreement that changes the way residuals are calculated when studios sell reruns of television shows to cable channels and digital networks, acquiring the rights to air reruns of old classics has become more affordable than ever.

Residuals are the compensation paid to writers, directors and performers for use of television programs beyond the use covered by the initial contract. Residuals begin once a show starts re-airing or is released to video/DVD, pay television, broadcast TV, basic cable, new media and/or digital networks.

The New York Times(NYT) reported on August 25th that a new residual agreement for the licensing of TV shows has been reached between Hollywood studios, i.e., The Alliance of Motion Pictures and Television Producers, and the three major show business guilds: SAG-AFTRA, Writers Guild of America and the Directors Guild of America. The new three year agreement goes into effect immediately. (http://www.nytimes.com/2014/08/26)

Under the old residual agreement, a network interested in acquiring a show from a studio was required to pay a fixed residual payment, regardless of the amount the network also paid for licensing the show. As a result, networks frequently held off from acquiring otherwise attractive shows because the sum of the fixed residual payment together with licensing charges was too high. Under the new deal, residual payouts are based on a fixed percentage of the licensing charges the acquiring network paid or will pay to acquire reruns of the show. The hope is that the new residual agreement will allow the acquiring networks to negotiate licensing deals more in line with expected profits and thereby encourage them to acquire more reruns.

The NYT article quoted John Weiser, President of United States distribution for Sony Pictures Television, who explained that "the guilds were open to it because they fully understand how the TV landscape is evolving." The "evolution" Mr. Weiser mentioned is likely referring to the proliferation of digital networks, or "diginets," as they are more commonly known in the industry. The new residual agreement should have a huge impact in the diginet market, as reported by the NYT.

Diginets are digital networks residing in major network broadcasters' subchannels. Diginets came about when television stations were mandated by the FCC to transition from analog (the traditional method of transmitting television signals) to exclusively digital broadcasting of free over-the-air television programming. As a result of the transition, every television station now has digital channels in addition to its prime channel. For example, NBC Channel 4 in Los Angeles carries its programming on its prime channel 4.1, while broadcasting specialty programming on subchannels 4.2, 4.3, 4.4 all the way up to 4.10. While NBC's and some other stations' prime channels are carried by cable and satellite providers, most subchannels are not. However, all digital subchannels are accessible over the air by a digital ready television and a digital antenna for free. Therefore, these diginets are primarily focused on the roughly 10% of American homes that do not pay for cable or satellite service. If you have cable TV, you have probably never heard of a diginet.

Although relatively young, the most popular diginets, which include Me-TV, Antenna TV, Cozi TV and Bounce TV, deliver to defined audiences, beating out many cable channels in certain markets. For instance, in April 2014, Me-TV ranked 19th among all national cable networks in adults ages 25-54, outperforming brands like CNN, TLC, Bravo and 79 other outlets, per Nielsen data. (A three-part detailed report on diginets, including a ranking of the top 25 most viewed channels, is available at: http://www.tvnewscheck.com/tag/diginets-2014)

Many diginets offer some original programming such as local news and sports; but like cable TV in its early days, they primarily air reruns of classic shows. As a result, the popularity and ultimate success of diginets largely depend on their ability to acquire reruns of shows aimed at their target audience. Until now, diginets could not afford to acquire the licensing rights to many popular shows because the combined licensing and residual payments were too high. The new residual percentage structure should open the door to a flurry of new purchases by diginets.

Furthermore, as reported by the NYT, the change from fixed fee residual agreements may also create an opportunity for diginets to capture "broken shows" or shows that were canceled after only a few dozen episodes. Many of these shows, such as "Freaks and Geeks" or "Firefly," failed to capture the attention of the mainstream market, but nevertheless have a dedicated cult fan following. The niche nature of the audiences diginets target and cultivate makes many diginets natural candidates to purchase shows like these. Diginets will be more likely to acquire "broken shows" now that residual charges reflect a percentage of their lower licensing costs.

Although it is perhaps too early to definitively tell if the new residual agreement will have a significant and lasting impact on rerun licensing, it may already be having an effect. On August 27th, AntennaTV, one of the most popular diginets, announced that it would be adding 11 new shows to its schedule. (http://www.tribunemedia.com/?p=19403)

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This page contains a single entry from the blog posted on September 2, 2014 12:58 PM.

The previous post in this blog was Month in Review (August), Part 1.

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