Timing tricky for SAG demand

As Hollywood braces for what could be its second labor walkout in a year, the fundamental contract issue dividing the Screen Actors Guild and the major studios is what the future holds for online entertainment.

But it’s what’s happening now with online entertainment that could shape the outcome. Companies that make shows to be watched online are scaling back and laying off employees, making it more difficult for actors to make the case that the Internet is Hollywood’s new frontier.

For months the sides have clashed over how actors should be paid in the digital era, especially when it comes to their appearances in programs created for the Internet. So few were surprised when last-ditch mediation efforts recently collapsed between SAG and the studios.

Although the Internet has yet to produce the online equivalent of a “CSI,” SAG anticipates that one day programs created for the Web could be as big as those created for network television.

As a result, the guild wants actors who are hired on all online shows to work under a union contract, just as they are when they appear in conventional sitcoms or dramas.

Behind the union’s hard line is the still-sore memory of how actors left money on the table in the early days of cable TV and home video by negotiating contracts that failed to anticipate the huge surge in growth of those businesses.

The studios, which are just beginning to dabble in so-called digital studio productions, argue that SAG’s demands would “price producers out of this new market.”

The studios want to limit such contracts to shows that cost $15,000 a minute or more to produce or to shows that feature actors with credits to their name. The majority of today’s made-for-Web shows -- mostly short-length series such as “Gaytown” and “Horrible People” -- cost less.

The standoff, which could help trigger a strike next year that would shut down Hollywood’s TV and movie industry, reflects widely divergent views about the future of online entertainment.

For the guild, the Internet represents a revolutionary new medium akin to the advent of cable television -- and it wants actors to share in the upside. The studios argue that the Internet is a fledgling medium and that shows created for it don’t yet make enough money.

So who’s right?

Both are. The online industry is still very much in its infancy, and even major players are struggling. The dire economy has slowed advertising revenues, which support the online shows, and dried up venture capital that backed the launch of digital studios. That’s already resulted in layoffs at companies including Veoh, Revision3, 60Frames, Break.com and ManiaTV, all pioneers in creating entertainment programming for the Web.

Yet, online viewership continues to climb. Driven by the broad availability of high-speed Internet access and faster computers, 146 million Americans -- nearly half the population -- now watch online video.

Despite the economic slowdown, analysts expect professionally produced short-form video to attract growing numbers of advertisers. Gartner Inc., a technology research firm, estimates ad spending for those shows will climb from $75 million this year to $1.5 billion by 2012.

The union says it has signed contracts covering performers on about 750 digital shows, including Seth MacFarlane’s “Cavalcade of Cartoon Comedy” and “Dr. Horrible’s Sing Along Blog,” created by “Buffy the Vampire Slayer” writer Joss Whedon and starring Neil Patrick Harris as an aspiring super villain.

In fact, the writers strike this year spawned so many Web shows -- many created by actors themselves -- that SAG became concerned that its members were working without a contract.

Under the existing SAG Internet agreements, producers don’t have to pay union salary minimums but must contribute 14.8% of any compensation to the union’s health and pension plan.

In addition, after a show has been on the Internet for six months, the producer must allocate 6% of the program’s revenue to the actors.

Some Web producers, however, have balked at signing SAG contracts. Paul Kontonis, chief executive of For Your Imagination, which produces and distributes Web shows, said SAG wanted his company to become a signatory because a union member stars in its Internet show “Kyle Piccolo,” about a bookstore clerk who dispenses therapy to his customers.

But Kontonis said that wasn’t an option because the cost of paying into the union’s health plan, when balanced against his $30,000 budget for the entire seven-episode series, was prohibitive. For future shows, Kontonis said he wouldn’t be hiring SAG actors.

SAG maintains that its contracts are not onerous and take the scale of the business into consideration.

“Our idea is to try to strike a balance between the business needs and protections required by our performers,” said Mark Friedlander, national director of new media at SAG.

The drive to unionize the casts of shows created for the Internet, however, comes just as the industry is undergoing a shakeout.

Investors have poured close to $1 billion into online video services since 2006, according to Dow Jones Financial Information Services, which tracks venture capital spending. But the return on that investment has been elusive.

Online video advertising is still barely a rounding error in the $17.3 billion that advertisers have spent online so far this year. Digital video commercials, those TV-like advertisements that appear before, during or after an online video, accounted for just 3% of spending through the first half of the year, according to PricewaterhouseCoopers.

“You still are in the very early days on the monetization of that content,” said Dennis Miller, general partner at Spark Capital in Boston, a venture fund that backed EQAL, the media company that produced online video phenoms “lonelygirl15” and “Kate Modern.” “And now, you put it in the context of an overall paralyzing recession . . . and what will play out will be a tremendous amount of carnage by those companies that got no traction.”

The high-profile venture 60Frames, a digital studio formed by Hollywood’s United Talent Agency and Internet-based ad agency Spot Runner, has had layoffs in recent weeks.

The studio, whose investors include Robert Pittman’s Pilot Group, has seen its share of successes, such as the “Carpet Brothers,” a series created by former “Saturday Night Live” writer Matt Piedmont about three brothers trying to save their family’s business from the massive debt left by their late father.

“This year was as much about experimentation as anything else, in terms of seeing what works,” said CEO Brent Weinstein. “Now that we’ve seen what works, it’s about replicating it.”

One success story was a fashion series called “Who What Wear TV,” a series that 60Frames financed and created with the founders of a fashion blog that previously had plenty of text and photos, but no video. The series attracted such mainstream advertisers as McDonald’s and Sprint.

As the industry matures, independent digital studios like 60Frames are forming partnerships with the major TV networks, which have created their own digital studios to incubate possible TV shows and find new ways of capturing advertisers that are moving online.

Walt Disney Co.-owned ABC has launched its own digital studio, called Stage 9, to create original Web programs.

So has NBC Universal, whose digital studio recently joined with 60Frames to market and distribute a series of Web shows. And just last week Crackle.com, Sony Corp.’s online video network, unveiled a 13-week season of programming.

Advertising sales have remained strong, says Sean Carey, senior executive vice president of Sony Pictures Television. “The fundamentals of this business are still very much in our favor,” Carey said. “We view Crackle as our TV network, it just happens to be on the Internet.”

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