Residual Effects
How the "creator economy" failed to pay out. A deep dive on the regret and reality of royalty payments in the digital ecosystem.
I wanted to expand on my previous post about Vertical Agreements. During the 2023 SAG-AFTRA+WGA strike, one of the biggest confusions from outside the industry was the royalty payments or “residuals” that are paid throughout the lifetime of entertainment product, based on its exhibition and performance. To keep the upfront cost of low on a speculative project, arguably the majority of our compensation is paid over time, based on the success of the content against tickets, advertising, subscribers, and downloads. In an effort to be “reasonable,” we’ve spent the last decade diminishing the formula and threshold for these payments in what were supposed to be “ancillary” or secondary forms of distribution. (Look it up, online streaming video companies originally claimed digital was just a way to create promotional or bonus content to drive viewers to traditional sources like television, cinemas and DVD sales. Whoops!)
No one knows the future but we can look backwards on what did and didn’t happen. As streaming has effectively replaced the viewership habits of all television and cinema audiences, we have never introduced a proportional compensation structure. And when it comes to influencers and creators, there is effectively zero profit sharing.
Meanwhile base compensation has declined drastically so performers get paid less for the same work, again, because working for these digital companies was supposed to be supplemental to the traditional projects where the average person could earn an actual, livable wage. And this has caused the industry and its labor forces to collapse and exodus.
But we don’t have to re-invent the wheel. There are good formulas in place that we could build upon (and actually enforce) as we develop common sense contracts that work for everyone, including producers in the new vertical of Verticals.
How it Worked
Television used a fixed, run-based residual. The first time an episode aired on television, producers paid 100% of compensation via the performer's wages. Essentially, an actor was hired to work on a television episode with the understanding the company was going to air the television episode and sell advertisements. But if the company could just re-air the television episode forever, it would economically de-incentivize them from making new television episodes and hiring the actor again. On the other hand, the company couldn’t get the same value from advertisers to air old content so it would be unreasonable to pay the actor 100% of compensation each time (and after all, the performer’s initial base wages also included the time and labor of the recording process).
Thus, a middle ground was established in the 1960’s where each time the content aired, it triggered a new residual, diminishing slightly each time. This formula was different for different content, networks, times of day and other factors, but let’s oversimplify on a step-down chart below:
Run #1 Initial Airing 100% of Fee Paid as Salary / Session Fee
Run #2 1st Rerun 45% of Fee Paid as Residual
Run #3 1st Rerun 40% of Fee Paid as Residual
Run #4 1st Rerun 35% of Fee Paid as Residual
So in an ad-supported ecosystem like television, we have decades of success where companies are able to run the content as much as they wish (or as is profitable) and have a clear formula to determine the value of the advertising that needs to be sold against the content. I would argue this model is one of the greatest economic engines the arts have ever seen. Union residual obligations, in fact, gave these companies the leverage (and a scapegoat) to command massive spends from advertisers that we, frankly, have never seen again.
Where it struggles: Streamers have begun to insert ads in their programming which frustrates consumers who were promised the could “cut the cord.” Big Tech prioritized user adoption, courting advertisers with far cheaper rates for far more eyeballs. Even television advertising today has reduced budgets so a fixed, run-based model is difficult for a company to maintain. If we take YouTube as an example, creators would be unable to afford a fixed payment every time the video played.
Regardless, here we are, back in the ad-supported business model, and there is no reason (except unsustainable greed) that we shouldn’t go back to the residual formula that was designed (and worked) for this model. It’s almost like you shouldn’t, “move fast and break things” unless you remember that, “if you break it, you buy it.”
Subscriber Models
To date, streaming companies have yet to make their complete streaming numbers publicly available so this entire model is on the honor system while the viability of companies shifted from the value of their product to the value of their stock (which is not how capitalism works). It is worth noting that many of these companies boasted quarter over quarter growth for years… right up until unions began asking for residuals on that growth. Somehow, suddenly these same platforms were experiencing financial hardship and could not afford such payments. Anecdotally, as an investor or shareholder, one might worry about the health of a company that projected limitless growth without detailed reporting and then cried poor when disbursements were due.
Nevertheless the unions have attempted to adapt a formula for this marketplace:
The performer's base compensation to work on the series is considered payment for the first 90 days of on-demand streaming. One would think if the base compensation now covers 90-days instead of 1-day of initial airing, the base compensation would be much higher. One would think that, wouldn’t they. But instead, streaming video-on-demand rates are, on average, much lower than comparable television rates. This has less to do with the employment contract and more to do with the employment classification. There is a growing trend by employers to consider all non-celebrity actors “Co-Stars” - a colloquial term for a “day player” working at the minimum possible wages and working conditions. I need to be quite clear that one can (and most do) work on a “day player” contract for more than one day. A contradiction one would think would speak for itself. One would think that, wouldn’t they.
So what we have is a diminished classification of initial compensation combined with a further diminished classification for residual compensation. Again, there are nuances to the formula, but we can oversimplify this as a “window-based formula” where after the first 90 day window, there are fixed annual percentages of initial pay that diminish after each yearly window.
First 90 Days 1st Window 100% of Fee Paid as Salary / Session Fee
First Year 2nd Window 45% of Fee Paid as Residual
Second Year 3rd Window 40% of Fee Paid as Residual
Third Year 4th Window 45% of Fee Paid as Residual
It’s important to note that this is only on High-Budget subscription-based companies. There are practically no residuals paid on streaming content on smaller platforms, either as a fraction of subscriber fees (earned on pay-wall platforms, like Patreon) or a fixed-based fee for running advertisement against the content (earned on free-to-consumer platforms, like YouTube).
Where it struggles: Its difficult to maintain a model calculated as a percentage of the original fee when that fee is mis-classified or diminished. The system becomes a race to the bottom as average workers struggle to make enough income to even be reliable customers of the company. If we take Spotify as a example, at some point the formula becomes so diminished or complicated and creators must assume the final earnings are zero and cease being both workers and customers of the company. This is an example of the larger conversation about wealth inequality in America.
Transactional Models
For the entirety of my career, people have bought things on the internet. This transaction occurs in a lot of ways, but we can comfortably oversimplify that a digital product has limitless value and profitability for consumers to spend money on something that would require far greater overhead costs if sold in a physical marketplace. As we sit here today, there is little difference between the consumer habit / transaction to watch a movie in theaters… on physical media… or digitally. But the profit margins of a digital asset for the same film are much, much higher.
When we move into the sales of physical and digital goods, we pivot from "run-based" or "window-based" to “units sold.” Effectively, the union has carved out a percentage on the “Distributor’s Gross” for each unit sold. The formula is a bit more complicated because each actor is not being compensated personally on each sale - instead it’s a “pool” for everyone who worked on the project.
So first we define the “Pool,” which the union does as 20% of the Distributor’s Gross. Then out of that Pool, the group of actors access a percentage which is then split into individual residuals based on one’s role in the project. In indie filmmaking, we refer to this a “Waterfall” where money comes in at the top and gets funneled / flows down to different groups or individuals.
Like television and streaming, there is an initial hold back where the first 50,000 units are calculated at a lower rate to help the producers to recoup the initial budget. From unit 50,001 and beyond; a fixed percentage is applied to all additional units sold. Using a quick oversimplified example:
First 50,000 units 20% of Gross Sales ⤳ 5% of Pool ⤳ individual residual(s)
Beyond 50,000 units 20% of Gross Sales ⤳ 10% of Pool ⤳ individual residual(s)
In theory, this ought to be the simplest and most fair model. A company reports its revenues / sales to multiple entities, including the government and investors; so it should not be complicated to also submit a monthly or quarterly statement of transactions to the union. Twenty percent of the total revenue they receive is placed in a side pot for each group to receive their agreed share (Investors, SAG-AFTRA, IATSE, WGA, DGA, Teamsters, etc). Those groups are then responsible for making sure the individuals receive their piece of the payout. This should be satisfactory for producers as anyone complaining about “only” receiving the remaining 80% of the gross revenue of a perpetual passive income source is not a serious person.
In today’s banking, there are several tools that can actually automate a lot of this. Think of the way employees can withhold a certain amount from their paycheck for retirement contributions; or apps like Acorn that round up every daily transaction to deposit a few cents at a time into an investment account.
The SAG-AFTRA Credit Union or Entertainment Partners or another third party could be used under a collection account management agreement (CAM agreement) to receive all gross sales revenue in an account owned and operated by the Signatory Producer, with “Split Direct Deposit” features to automatically distribute each transaction into various accounts for each Pool. This would keep a clean record of accounting and allow each group to access the appropriate balance and funds. In the event of an audit, the records would be easy to reference and report.
Where it struggles: This model relies on accurate and complete reporting of transactions and can become a juggling act for companies with large libraries of content. There is an entire secondary calculation that must be made to distribute fractional payments to individual participants. But overall, it represents the most scalable model for speculative performance where residuals are paid on actual money received, based on the actual performance of the content.
Putting it all Together
We can’t call it the “attention economy” and not treat each view as a transaction. The hard work to create and negotiate these legacy formulas is not disparaged or undermined by building upon the past to meet the current market conditions and realities.
The majority of streamers are now adding television-style advertising to what was originally negotiated to be a subscriber based model. The business changed (or rather reverted). The model should as well. We do not need to reinvent the wheel… we need to use the damn wheel.
No one wants to prohibit these companies from making as much money as possible in as many different ways as possible. Laborers merely want to (and need to) participate in the money that is being made, wherever it is being made.
So looking at Vertical Shorts: we see a hybrid model - so let’s embrace it!
Here’s a screenshot of the disclosed in-app purchases for MyDrama on the App Store:
The core business thesis is for audiences to buy in-app tokens and spend-to-unlock as they wish to watch an episode. That’s transactional revenue on each and every view… or unit watched/sold.
Honoring the legacy of sell-through transactions and aspiring to be good partners with these Vertical companies… let’s assume we maintain the established “Pool” (of 20% of Gross Revenues) and the threshold for the “initial release” at a reduced rate to support their ability and rights to recoup and produce more content (at 50,000 views).
But look... the app also offers Full Access subscription tiers… so let’s also maintain a supplemental subscriber model…using the same standards as the transactional. Clean. Simple. Trackable. Each time a user spends money, there’s a clear series of binary questions that anyone can publicly verify:
Is the user transacting with the content? (is the title in the library or not)
Is the content in its initial release window or not? (below or above 50,000 views)
What category is the user’s transaction? (token purchase or subscription purchase)
What is 20% of the Gross Revenue the Distributor/Platform received?
Based on the conditions above, a different fraction of the gross revenue would be submitted to SAG-AFTRA, earmarked with the applicable content titles.
But wait, these apps also have social media channels where they share the first few episodes to get viewers hooked… Great! The same conditions and formula can apply to advertising revenue earned on those channels:
20% of gross revenue is set aside, and
for the first 50,000 views, a favorable percentage is offered,
after which the normal percentage applies.
This also applies to third party channels who pirate the content. Companies commit to a “Duty to Protect” and watch out for pirated versions so they can issue Content Claims to syphon the revenue earned by those channels and pay their team members. Major studios are already doing this to capture this revenue.
Again, the goal is not to prohibit anyone from making money, it's ensuring everyone is making that money.
Napkin Math
Currently the self-reporting from Vertical companies say that these series are getting “millions” of tokenized views on their app. So let's assume millions, plural, could mean, on average, $2.5M in Distributor Gross Sales.
If we use the napkin math above to imagine a 20% participation pool, earmarked internally, and then apply a SAG-style residual carve-out, the math looks like this:
$2,500,000 (sales) × 20% (pool) × 10% (max residual) = $50,000 (Residual Allocation)
...Split across 20 cast and crew (for simple illustration):
$50,000 ÷ 20 = $2,500 per participant
Remember that’s not a fixed, up-front payment. That’s profit-participation based on sales the company has actually made and received. If the series underperforms, they only pay out based on that lesser performance. Furthermore, the electronic sell-through formula already builds in a more favorable split to producers for the first 50,000 units sold.
So for the “initial release window” of either the first 50,000 views or first 30 days; they’d owe less than half the calculation above:
$2,500,000 (sales) × 20% (pool) × 5% (initial residual) = $25,000 (Residual Allocation)
$25,000 ÷ 20 = $1,250 per participantObviously my napkin math is equally distributed, while final numbers would likely be weighted based on role, but anecdotally if we assume that supporting actors earn a few hundred dollars and leads earn close to a thousand dollars (per day in base salary), this comes very close to effectively giving everyone a “bonus day” on the project as residual payment for its "initial release window residual."
This serves as a pretty compelling “north star;” and one that positions Verticals as delivering more meaningful payouts to more performers than the average streamer! The good will and infusion of capital this could offer to entertainment centers like Los Angeles would only bring legitimacy, attract investment, and set up bigger partnerships for Vertical companies in an economic ecosystem that needs sustainable solutions.
Zooming out, a roughly $25,000 initial release backend payment could be framed less as a “residual spend” and more as a marketing spend. That figure is not drastically different than a publicists’ quarterly fee for a path toward buy-in and first mover advantage from the entire industry.
Final Thoughts
There’s a lot of ways this could be done. I’m not the definitive voice, nor am I speaking any of this into existence. The fact is that there will need to be some profit-sharing model and if it is not done sustainably, the companies themselves will eventually suffer. The alternative to offering a reasonable residual compensation structure is higher up-front fees. If James Earl Jones could not earn residuals on Darth Vader, he would need to ask for the lifetime revenue potential as his day rate. Performance based compensation has always been to the advantage of producers to invite everyone to bet on the future performance and avoid penalty if the project underperforms. (Shout out to one of my favorite economists Anita Elberse and her book Blockbuster if you want to read more about this.)
We only need to see what’s happening throughout Hollywood to see how legacy players can collapse when they spend more time building up their piece of the pie… rather than building the damn pie. Unsustainable systems do not sustain. So let’s build something to last.
From a wealth perspective, paying a thousand dollars to a laborer essentially just puts that money back into the local economy (rent, groceries, local business); rather than accruing millions “at the top” that sit in an investment portfolio which is never infused back into the economy or industry.
Whether through ads, sales, or subscriptions, we have worked in good faith to find a sustainable model of profit participation. Halving the payout on the first 50,000 views to let companies recoup also offers a path for independent creators to make their own speculative content but prevent companies from deleting Titles before they trigger payments. Having every dollar automatically split into its own “pool” keeps accounting transparent and easy. And this offers a model for other creative collaborators and stakeholders to participate under this formula and umbrella.
And keep in mind this post is only about the intended exhibition of this content, not secondary use or artificial intelligence ingestion or training (a topic for another post).
Perhaps creators will only see a few pennies, like Spotify. But those pennies add up. And if they don’t, that’s also useful information. Creators make decisions every single day based on what is good for their career, their craft, or their bank account. This is either a lucrative new vertical… or it is not. If it is, everybody eats. If it’s not… we have a lot of successful models from the past we can (and should) go back to.