Residuals Are Key to Nearly Every Strike in Hollywood History Heres Why

What would it take to get a fair residual in streaming?

That is the question at the heart of both the Writers Guild of America and SAG-AFTRA strikes. It’s also a deep question, with roots in the history of technology and its impact on labor going back nearly a century. Residuals are, now and always, the product of a struggle.

In the simplest terms, they are the payments that artists receive for reuse of their work. Unique to the entertainment industry, they are calculated through obscure and mysterious formulas. When a green envelope arrives in a writer’s mailbox, she often has no idea how many zeros will be on the check.

Residuals are also fiercely defended. In a feast-or-famine industry, they keep artists afloat, and have been the key issue in nearly every strike in Hollywood over the last 71 years. With the transition to streaming, a dramatic overhaul in the entertainment business model, residuals are once again at the center of controversy.

But what are they really?

They are sometimes thought of as a piece of ownership, like a patent or a copyright, establishing a claim on a share of profits. But they are not that. In a collaborative medium, the company holds the copyright.

What they are instead is a deferred minimum payment. They are sent out when a recorded work — a soundtrack, a movie, a TV show — is reused in the same medium or sold to a new medium, regardless of whether that reuse turns a profit.

At root, residuals are about technology. Every advance in the mechanisms of recording or distribution poses a both threat and an opportunity to artists. Residuals are a solvent that allows technology to proceed. Artists capture whatever upside they can find, while the residuals compensate for the threat.

In the 1930s, live radio performers would do a show for the East Coast, and then three hours later another show for the West Coast. Radio networks figured out how to record the first performance and replay it, cutting the performers’ wages in half.

The American Federation of Radio Artists — forerunner of AFTRA, later to merge with the Screen Actors Guild — struck an agreement in 1941 under which performers would be paid their fee for the replay.

In the same era, the American Federation of Musicians, led by James Petrillo, fought especially bitter fights against “canned music.” Radio stations were using phonograph recordings to displace live orchestras, juke boxes were crowding out club performers, and talkies put an end to silent film accompanists. In 1942, Petrillo ordered a full halt to all recording by AFM musicians.

The impasse was only resolved, over a period of two years, after the record labels agreed to pay a small “royalty” on each sale. The AFM used the money to set up the Musicians Performance Trust Fund, which hired out-of-work musicians to play at free concerts.

The royalty plan was the foundation for residuals that took hold a few years later among the Hollywood guilds.

International Musician, the official publication of the AFM, articulated the need for residuals in its April 1945 issue. The payments, it argued, were were partial compensation for the unemployment caused by record companies.

“Their payments are neither tip, dole nor largess, but rather the only possible means toward a partial balancing of accounts,” the union stated.

The AFM stressed that the unique nature of recording technology required a unique solution.

“Only the musician creates the article that displaces him. Only the union-paid royalty can partly compensate the musician for such displacement.”

The AFM landed on residuals only as a last resort, after several failed measures to stop the threat of recording technology. For a time, the union required radio stations that used recorded music to hire “standby orchestras” that did not actually play.

And when Hollywood studios wanted to play old films on TV, they at first had to hire new orchestras.

“The AFM convinced the studios to hire dummy bands to replay the soundtrack,” said Jennifer Porst, author of “Broadcasting Hollywood: The Struggle Over Feature Films on Early TV.” “They took that soundtrack and threw it away or gave it to the AFM. It was all symbolic.”

In TV, as in radio, residuals ultimately proved to be the only practical solution. But it was still immensely difficult to arrive at formulas that felt “fair” — that replicated the compensation structure of the old medium in the new medium.

“Television was fundamentally different than film, in terms of an economic structure,” Porst said. “Everyone had to wrap their heads around what it meant to be an advertising medium. Who is a customer? What is a ‘ticket’? You’re trying to take this equation for theatrical film releases and you’re trying to force it on the television model and it didn’t fit.”

Many recording musicians also did not approve of their residual fees going into a general fund for unemployed musicians. The AFM itself acknowledged that residuals could only provide an imperfect remedy.

“I wouldn’t suggest musicians were fully ‘compensated,’ nor would I say many saw the royalty plan as ‘fair,’” said James P. Kraft, author of “Stage to Studio: Musicians and the Sound Revolution: 1890-1950.”

Kraft said the royalty was a “limited victory in an age of major setbacks.”

“Petrillo and the musicians wanted job security in theaters and radio but the fund didn’t provide that,” he said. “The vast majority of musicians who lost theater jobs in the 1920s and 1930s (perhaps 25,000) probably never received a dime from the MPTF.”

Any new technology that catches on tends to benefit consumers, creating more convenience and abundance, often at a much lower cost. But advances often present a mixed blessing for artists, creating opportunities but sometimes reducing demand for their services. That story has played out again and again in the evolution of residuals.

Since the 1950s, each new entertainment medium has led to a residuals fight — videocassettes, basic cable, premium cable, the internet, and now streaming. Each time, unions have tried to adapt the old formulas to a new distribution technology, to arrive at something that feels fair.

In general, residuals are calculated in one of two ways: either as a fixed fee per “run,” which covers reuse in the same medium, or as a percentage of a license fee, which covers reuse in a different medium. The per-run payments decline over time, reflecting the declining value of an older show.

The first effort to apply those formulas to the internet was fairly simple. In 2001, the studios agreed to treat electronic rentals as a “supplemental market.” That meant that writers would get 1.2% of the license fee whenever a show was sold to an internet platform — a percentage that dates back to 1960.

The 2007-08 writers strike established terms for digital downloads.

But that still left the thorny problem of made-for-streaming shows.

Streaming shows live on their platforms indefinitely. There are no “runs.” A subscriber can watch whatever they want whenever they want, typically without ads, for a modest monthly fee.

That is an unprecedented bounty for consumers. But it has also collapsed traditional release windows, eliminating the scarcity that once ensured a generous harvest of residuals for artists. In 2013, unions tried to figure out a residual that would make up for that lost scarcity.

The solution came from the Directors Guild of America, which proposed a streaming residual based on its formula for original shows on HBO and Showtime. Unlike Netflix, HBO has reruns. But those runs don’t generate ad revenue. Much like Netflix, the only thing that matters to HBO is attracting and retaining monthly subscribers.

The DGA formula on HBO — first negotiated in 1981 — is based on subscribers, not runs. After an initial window, HBO gets unlimited reruns in exchange for a set residual for each year that the show remains on its service. The residual increases with the total number of HBO subscribers. It is aligned with HBO’s economics — betting on the success of the platform, not the individual show.

The DGA likes that formula — it has paid off handsomely — and was willing to accept something similar in streaming, with payments determined by subscriber tiers. The WGA and SAG-AFTRA went along with that as well, and accepted significant increases in 2017 and 2020.

But over the last decade, streaming has gone from a niche market to the dominant form of television. And that HBO-based formula no longer feels fair to the writers and actors. They want something that works more like regular TV.

That’s not because residuals, as a whole, have tapered off in dollar terms.

In 2005, residuals made up about 22% of total compensation paid to writers, according to data released by the WGA. In 2021, after the collapse of home video and syndication, the decline of cable, the rise of streaming, and a doubling of the number of TV shows, writer residuals accounted for… 24% of total income.

Adjusted for inflation, residuals have increased 37% over that period. Streaming has come to represent the lion’s share — 45.2%. Most of that comes from content licensed from other platforms. Just 5.4% comes from the made-for-streaming formula.

The studios are offering to increase that formula again in 2023. The DGA took that deal, but the WGA and SAG-AFTRA are not interested.

Instead, the WGA is focused on creating a new made-for-streaming formula, with a updated structure that would reward writers of successful shows. In addition to the payment based on subscriber tiers, the WGA also wants writers to be paid for views.

In the old system, writers on “Cheers” and “The Cosby Show” would not get more money if their shows got higher Nielsen ratings. But they would get a check every time their episode re-aired on primetime or in syndication — which would add up to a lot of money for popular shows.

The current streaming formula has eliminated those massive wins. Now all shows get the same residual, regardless of how successful they are — and that doesn’t seem right.

In the WGA’s streaming proposal, “views” would take the place of “runs” — the incremental unit that triggers a new payment. Sources have said that the guild wants $6,000 for every 2.5 million views on a platform, where a “view” means someone watched at least 50% of a program.

The WGA has argued that its proposal is rooted in the way things used to work.

“Talent has a long history of sharing in success in residuals,” said Ellen Stutzman, the WGA’s chief negotiator, in an interview with Variety earlier this year.

SAG-AFTRA, meanwhile, wants 2% of the streaming revenue attributed to each show by Parrot Analytics, a third-party data firm. That would cover both made-for-streaming shows and shows licensed to streaming from other platforms.

The idea has novel elements. No residual has been pegged to third-party data before, nor to an exhibitor’s revenue, rather than a distributor’s or producer’s revenue. But the union has argued that it mimics the basic idea of revenue-based residuals found in license-fee formulas.

The streamers have protested that the unions’ proposals make no sense, because additional views may not translate to additional revenue. They also argue that Parrot Analytics’ methods — which rely on statistics like social media mentions and illegal downloads — also bear no relationship to revenue.

The streamers essentially operate vast libraries with low membership fees. They are competing with each other and with free content on YouTube and TikTok. With the exception of Netflix, they are losing money in streaming, at least for now.

“Since the basic economics of the streaming model are not that clear-cut in terms of where the value lies, if you’re approaching it as ‘We as writers deserve X% of this value,’ that might be an impossible equation,” Porst said.

Both unions are confronting the same challenge that faced Petrillo and the AFM, and that faced the unions that worked out the first TV residuals — how to apply old payment structures to a new medium. Such efforts are always complicated, and always present only a partial solution to the threats posed by technological advances.

Kraft stressed that technology itself isn’t the problem. Rather, he said the threat comes from the way technology is deployed.

“Businesses tend to introduce technologies in ways that ignore the interests of labor,” Kraft said. “In a better world, we could spread the negative effects of such change more fairly. Sadly, businesses that stand to benefit the most from developments like streaming have no desire to share benefits.”

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