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ABC's Download Pay Irks Unions

ABC's decision Monday to use the discounted, home video rate to pay residuals for iPod digital downloads has angered Hollywood's above-the-line unions and set the stage for a legal showdown.

SAG pledged to file an arbitration against ABC for introducing digital downloads without first bargaining with the union and for seeking to use a residual formula crafted more than 20 years ago to address the emerging videocassette business. That formula allows studios to retain 80% of revenue to cover manufacturing, marketing and other costs while paying residuals out of the remaining 20%.

"Today, ABC advised the guild that it intends to pay residuals to performers based on the video-cassette formula — a formula that does not apply to this new platform," SAG president Alan Rosenberg said. "ABC's actions are flatly inconsistent with our collective-bargaining agreements and with labor law obligations and fail to fairly compensate performers for the use of their work and images."

The Walt Disney Co. reiterated its position that the iPod downloads should be covered under the home video residual formula in a statement issued Monday.

"If the guilds have a different point of view, they have the right to challenge the company's determination before a neutral arbitrator. In the end, this is simply a dispute over how to interpret a provision under agreements that provide the means for resolving that dispute," Disney said.

Rosenberg said legal action would be taken against any other company that violated SAG's contract.

WGA East and West also said they will pursue legal action for the perceived violation of their contract. The writers believe that a more applicable formula would be that of pay TV, which pays a 1.2% residual rate out of 100% of revenue.

"ABC's unilateral decision to pay digital-download residuals at the home video rate is a violation of our contract and an insult to our hard-working members," WGAW president Patric Verrone said. "It is unacceptable, and we will aggressively pursue all legal options at our disposal."

Added WGAE president Chris Albers, "The members of our guilds demand the companies pay what they are contractually obligated to pay and not a paltry residual rate based on an irrelevant home video formula from the age of Betamax."

DGA also said it plans to pursue legal action over this application of the home video formula. "Such payments are not consistent with the DGA's collective-bargaining agreement, and we will be filing claims against ABC and any other company that pays residuals on video iPod downloads according to the home video formula," DGA president Michael Apted said.

The controversy started in October when Apple Computer introduced the video iPod and the ability to buy episodes of "Lost," "Desperate Housewives" and other ABC shows through the iTunes store for $1.99.

The announcement blindsided the unions, which had not been consulted beforehand. AFTRA, DGA, SAG and WGA immediately issued a joint statement saying that they had "not yet heard from the responsible employers of our members" and looked forward to discussing the formula.

NBC and other programmers followed ABC's lead in selling episodes through iTunes, while a host of other shows have been made available to watch or own through Google and mobile phone companies.

SAG officials said they had been in discussions with ABC to find a mutually acceptable residual formula and were surprised at the response they got Monday.

Since ABC broke ground in this new medium, it also was the first to owe residuals, which are only now starting to roll in.

The unions want to prevent the industry from setting a precedent, especially one that seems to equate the virtual nature of downloads with the tangible nature of such hard product as videocassettes and their successors, DVDs.

This same formula was a central point of contention in the last round of negotiations two years ago, when union members unsuccessfully sought higher DVD residuals.

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Jesse Hiestand writes for The Hollywood Reporter.

For more news from The Hollywood Reporter, click here.

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