Why Are the WGA and SAG Striking?

The recent decisions by the Writers Guild of America (WGA) and the Screen Actors Guild (SAG) to strike has unified approximately 175,000 members working across the entire content creation ecosystem. SAG and WGA have identified specific issues that are the most divisive and that they seek to address with the Alliance of Motion Picture and Television Producers (AMPTP), and other organizations representing motion picture studios, broadcasters and streamers. 

Briefly, the combined WGA and SAG demands include three core issues: 

1. Minimum rate increases
2. Residual increases 
3. Protections relating to the use of artificial intelligence (AI)

The demands extend beyond these three issues, some of which are included below in the AMPTP’s response.

Although the AMPTP has responded to many of the demands, the two sides are far from what might be considered a compromise. As outlined below, agreeing on monetary percentages for residuals is somewhat straightforward in the calculation. However, just in AI, there are several details which must be discussed to reach an agreement. 

How Will the WGA and SAG Strike Affect the Future of the M&E Industry?

At Alvarez & Marsal, we believe this strike represents a game-changing event for the industry and will require a broad and holistic perspective to thrive in the future. While the threats for the industry are clear and include an indefinite halt to scripted content production, we believe the centrality of AI to the strike provides insight into what will be pivotal, long-lasting effects that could dramatically change the way we produce, consume and monetize entertainment content going forward. Both the consumer experience and economic impacts will be profound, which is at the underpinnings of the current conflict. 

The Media & Entertainment Industry Before the WGA and SAG Strike

During the last five years and through the Covid-19 pandemic, there have been significant macro challenges throughout the media industry:

Film Theatrical: According to both CNBC and Indiewire, for the first half of 2023, U.S. box office revenue is 25 percent lower than in 2019 while audience attendance has decreased by 50 percent in the last four years. 

Pay-TV Cord Cutting: After decades of growth, cable service providers experienced an 8.5 percent decrease in their Pay-TV subscribers in 2022.

Decline in Linear TV Viewing: According to audience measurement firm Nielsen, U.S. TV-viewing time as of May 2023 was led by streaming services, the first time this has occurred.

Shifting of Advertising Spend: As viewing patterns have been evolving, the makeup of advertising spend has also shifted. Advertising dollars spent on digital are increasing and the format of these advertisements has also significantly changed to emphasize short duration content in the five to 10 second range.

Digital Streamer Services: Streamers have spent billions of dollars on original content production and content acquisition. Lucrative licensing revenues dried up as streamers sought to keep their content on their own services. As a result, most streamers are experiencing significant operating losses and are responding by decreasing their budgets for original and licensed content in order to reach profitability.

Access to Capital and Low Interest Rates: Favorable interest rates and unfettered access to cash and debt has been a luxury for the last decade in the M&E industry. Rising interest rates and investor activist actions, combined with the other macro trends cited above, have caused the M&E industry to significantly reassess all aspects of their operations. Studios, broadcasters, streamers and the infrastructure providers are implementing layoffs of personnel and shutting down non-essential operations and investments.

In short, the M&E industry has faced the following macro trends over the last five years—well before the current WGA and SAG strike:

• Changing viewing consumption patterns
• Increasing costs in content production and licensing
• Shifting advertising spend
• Declines in both film attendance and linear television viewing
• Decreased access to inexpensive capital

What Happens While the WGA and SAG Strike Persists? 

Lost income and revenue for both union and non-union members will be the result. Given that the WGA strike started on May 2, 2023, and SAG has joined and there is no obvious end in sight, there may be a possibility of an extended period without content production.

From a historical perspective, the 1980 SAG-AFTRA strike lasted three months and the 2008 WGA strike lasted 100 days. While film and television productions are shut down, there is a significant ripple effect to individuals who are neither members of SAG nor the WGA. For example, workers supporting the production process, such as cinematographers, set designers, painters, construction crews, makeup artists, etc., are also out of work. Without new content in production, there is an entire network of individuals who are essentially off the active payroll. On the union front, according to The Hollywood Reporter, during the 1980 actors strike, of the 24,000 union and guild employees, approximately 50 percent were eventually laid off and there is concern that this could happen again given today’s media environment.

Which Regions Will Be Impacted by the WGA and SAG Strike?

While one may think this lost income and revenue is concentrated in small areas of the country, the reality is that the impacts of these strikes are far reaching—impacting states throughout the nation that will experience adverse effects of this action—not to mention international implications such as on-hold international productions. Caterers, surrounding restaurants, electricians, drivers, clothiers, etc., are all bracing for the effects of these strikes.

Using historical figures and taking into account local tax credits, if a film spends $10 million in a state, the contribution to the local economy is approximately $7 million, while the remainder is usually returned to the production in the form of tax credits.

It is important also to recognize the public sector implications of the strikes—state and local budgets that are adversely affected by this loss of revenue and whether there are public and community services that have to be suspended or eliminated altogether as a result.

Comparing the Past to the Present: Typical Strike or Fundamental Threat?

If we remove the issue of AI from the list of SAG/WGA concerns, one could argue that this strike is much like those in the past—that is, centered on minimum rates, residuals and other benefits. However, the subject of AI has brought with it a number of items that the unions have clearly decided must not be delayed in terms of discussion and agreement.

A sample of AI-related issues that have been identified as concerns of SAG/WGA are shown below and additional issues are likely to emerge as the negotiations resume:

• If copyrighted material is used by large language models (LLMs) and AI-driven products are used to create scripts, will the copyright owner be acknowledged, compensated and have the ability to deny usage?
• If a performer’s likeness (facial, body, mannerisms, speech pattern and voice) can be replicated, how will the performer be compensated or have the ability to agree or deny permission?
• If a performance in a film 20 years ago is being brought forward with AI-assisted “de-aging” techniques, what rights will the performer have? Creating a “new” performance from a performance created decades earlier creates a series of issues.

These items are just a sampling of the topics under the banner of AI. One of the most vexing discussion points is if AI can be used to create original scripts and how that may impact individual members of the WGA. Will members of SAG agree or disagree to appear in productions that were written by AI and not WGA members?

Opening the Aperture on the M&E Industry

The combined WGA and SAG strike is not limited to motion picture studios. This is an entertainment industry-wide issue and impacted areas extend throughout the media ecosystem across the United States. Very few areas will be immune to this stoppage as it impacts film and television production, streaming services, ad sales, Pay-TV services, telecommunications (telco) and satellite providers and assorted infrastructure providers (e.g., brick and mortar production houses and cloud-based solution providers).

Not every major constituent will be simultaneously impacted. The magnitude and immediacy of the impacts vary greatly.

Theatrical film: There is sufficient content for the present and possibly for the next one to two years. Beyond that, however, potentially at risk are the “tentpole” pictures associated with summer and holiday release patterns. Further, smaller budget films which provide content throughout the release calendar are halted and there are, typically, fewer of these which are in a finished, unreleased state.

Streamers: Streamers have quite a lot of content already produced along with unaired content as well as deep content libraries for both domestic and international audiences. They are somewhat insulated for a longer period of time.

Linear Broadcast Networks: Scripted content is certainly at issue. Reality shows require writers. Advertisers, who have already been moving a majority of their spend to digital outlets, may now escalate this trend. However, major brand advertisers want to know what programming is going to be available for the fall television season before committing hundreds of millions of dollars. This is an area that is highly at risk in terms of advertising spend due to the unknown nature of content availability.

Talent: It is becoming readily apparent that performers are taking the stance that they will not promote programming across various venues, such as red carpet film premieres, television shows, radio appearances and so forth. These marketing-centric activities are proceeding without the presence of the actors. 

If there is any immunity, perhaps even short-lived, it is likely to be found for those content providers and digital services that hold sports rights and a library of content that supports domestic and international audiences—in other words, completed content that is yet to be released, the library of released content and unscripted events.

The immediate impact of the strike to those entities will be relatively minor in the near-term—in fact, it may even result in upside as the desire for such content increases demand and additional revenue opportunities. However, for other undercapitalized entities with smaller, fewer assets or a significant debt structure, some form of downsizing or restructuring will almost surely be required.

Summary

The M&E industry has been in a state of transition and transformation for the past century. Disruption and the introduction of new realities is business as usual. Over the last 15 years (post the 2008 WGA strike), there has been relative calm and overall growth. What is new is the magnitude and sheer velocity of changes in technologies; user access; content proliferation; targeting; and social, legal and ethical implications.

As new realities emerge in the M&E ecosystem, there will always be winners and losers, and the most enduring players in this current evolution will be the companies that demonstrate the greatest organizational agility to respond to the effects of the strike and to the lasting changes of the previous decade.

Perhaps, in the most positive light, this striking action and accompanying discussions can benefit the entire M&E ecosystem as it re-evaluates the best strategies for all constituents to arrive at a conclusion which is both mutually acceptable and, most importantly, sustainable. These opportunities will likely be in restructuring, cost containment, mergers and acquisitions (M&A) and private equity as some of these media companies and production houses will look to offload and shut down non-core assets.

As outlined above, there are three main components of the combined strike. Two are historically repetitive: rate and residual increases. However, the fact that the third main component concerns protections relating to AI is very revealing. AI, automation and machine learning will continue to transform the M&E industry. How these technologies are utilized to provide greater creativity should clearly be balanced with the concerns of misuse.

As AI permeates various industries, including education and corporate sectors, AI’s influence on the M&E industry will provide important data points. A comprehensive approach is required that safeguards intellectual property rights, talent, the evolution of the creative process and the business realities of rapidly evolving content distribution patterns.

For the M&E industry, implementing AI properly with protections for the concerns of the striking members is imperative. It is obvious that AI and automation can provide increased efficiencies not only in job tasks but in overall workflow pipelines. There is a false narrative that suggests that AI decreases employment opportunities. However, consider that lower paying jobs can be transformed into higher paying jobs by virtue of the complexities of AI and harnessing it appropriately.

As the strike progresses and as negotiations inevitably occur, it is important to understand that there is no framework that yet exists to properly balance the historical issues (pay, residuals) with new far-reaching issues (AI and automation) and the realities of the business effects of digital on the distribution process, timing and viewing patterns (release windows, streaming and mobile consumption).

Eventually, there will be resolution to the WGA and SAG strike and a framework will need to be created as the industry responds to the entire value chain of content creation to consumption. It will, decidedly, not be business as usual. There will be new aspects that have yet to be encountered across the board—strategic, operational and technical.  

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The M&E practice at Alvarez & Marsal is comprised of senior leaders across the M&E ecosystem and is adept at analyzing, creating and executing a balanced strategy in all these areas and for all constituents within the M&E industry. In doing so, A&M can meet the objectives of our clients to thrive in the new realities of the M&E industry.

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The M&E practice represents a demonstrable and proven resource for the most challenging and rewarding transformational opportunities and our team is able to provide invaluable strategy and seasoned operational execution.

Sources:

https://www.hollywoodreporter.com/business/business-news/actors-strike-picket-lines-day-one-1235536429/

https://www.cnbc.com/2023/04/05/box-office-almost-back-to-pre-covid-levels.html

https://www.indiewire.com/features/general/2022-box-office-2023-1234795871/