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As you know, the potential for a writers’ strike in Hollywood has been occupying more than a fair share of my brain power these past few months. Since I’m just an interested but casual observer, I can well imagine the tensions it’s creating for the real players. Especially since it appears the two sides are further apart than ever.

It is a decided risk to strike for higher residuals.

No mean feat, considering they started on opposite sides of the payscale spectrum.

The story in a nutshell. Both the writers and the studios want to change the way residuals are calculated, specifically for digital media. The writers want a higher percentage of the incomes; the studios, at the moment, want to calculate residuals in a manner similar to the current net proceeds process (all costs are recouped before payment is made). These are drastically different scenarios; the first is a first dollar calculation (based on market exploitation — residuals are not paid, for example, for theatrical release or initial network broadcast). The second could be a very long time coming. In some cases, never sounds about right.

Though, hmm, I would imagine that the “net” part of the calculation would necessarily have to be figured only on a market basis. Oh wait, what am I saying? What studio head in his or her right mind would ever eliminate the cost of production from the calculation? Once you start down that slippery slope…

Eventually, somebody’s gonna blink on this issue — the studios face the serious problem of a labor shortage. In addition to the actors and directors waiting on the sidelines with their own contracts (do not think this only impacts writers — the potential money involved will be spread far and wide), there is the real problem of crossing picket lines. Hollywood is a union town through and through. The ripple effect of a strike could be disastrous for the local economy. The last strike, in 1988, cost the community a estimated $500 million. Given how the industry has grown since then, the associated dollars will be much larger.

In this scenario, both sides are right. It’s an uncomfortable truth. Talent has been shafted for decades when it comes to residual compensation for videocassette/DVD sales. On the studio side, the cost of production and distribution is no small consideration. The former, particularly, is increasing. Sure, cost controls would be useful and better decision-making would help. That’s the topic of other discussions.

Unlike book publishing, the writers in Hollywood get paid each time their product is sold in subsequent markets. Simple formulas determine the compensation. Okay, the formulas are not so simple, but they’re not complex, either. In the early days of video distribution, the talent could easily buy into the studio argument of high cost, low returns. With DVDs, the income associated with home entertainment skyrocketed. Then it flattened. Now, it’s hard to say.

For motion pictures, a successful theatrical run is merely a chance to recoup production costs. Nobody really expects a film to make money prior to DVD release, if it’s going to happen at all. Studios like DVDs (and online media) because they come with lovely high profit margins. Like other entertainment media, it’s the blockbusters that apparently finance the less popular fare. Sort of. With the DVD market and never-ending television market, even those titles that seemingly flop at the box office carry more of their weight than expected.

And if you’re talking television series, the economics are entirely different.

Paying actors, writers, directors, and everyone else higher residual rates is going to increase costs for studios. It’s a given that if the residual rates increase, so will participations. Higher costs will lead to cost-cutting choices. It’s not going to be the Will Smith movies that suffer, mind you. And it’s probably not going to be the low-budget, cheap talent vehicles that feel the pain. It’s those mid-range films that will feel the squeeze.

Since most writers in Hollywood work in this middle ground, it is a decided risk to strike for higher residuals.

Of course, while the studios argue that the online market is too new to settled into a pay formula (and this is an argument the talent should consider as well — while I doubt they’ll sell themselves too high, they risk selling themselves too low), it a fair statement that general cost of sales is decreasing dramatically. Funneling increased profits into new content is an admirable, smart business-oriented goal, but it’s conceivable that there will be room for higher payments and increased investment in new content.

And, let’s be frank, it wouldn’t hurt Hollywood to cut some of the really bad production.

I think there’s going to be a strike. If it doesn’t happen, it will be the studios who blink first. While everyone in this town is writing a screenplay (except yours truly), truly talented writers are few and far between. And while the writers have some momentum now, this will increase as other guilds join the fight.