This post was inspired by a short, two line snippet in John Lilly’s blog today. There has been a lot of press about the current writers’ strike, and it’s impact on TV this fall. I hadn’t originally planned to write anything about it here, but one comment in John’s blog made me think (italics are mine):
But it’s one of those things, i think. for the studios, this feels, to me, like their waterloo, their napster. we’re in a period of incredible creativity in the world, incredible connectedness. Putting down the hammer on the creatives — in other words, not letting them share fairly in the proceeds from the distribution of their work — isn’t likely to help the television and motion picture industry, in my own, admittedly uninformed opinion.
I’m an outsider to the entertainment industry, so my apologies if this question is hopelessly naive. But there is something about this entire strike that doesn’t make sense to me, sitting up here in Silicon Valley.
So, here is my question. A lot of this strike seems to revolve around the Writers’ Guild, and their belief that they deserve royalties (aka residuals) on versions of their content that are distributed digitally (DVDs, downloads, etc). Apparently, this was one of the big mistakes, in their opinion, of the late 1980’s agreement with the union.
(For those of you not familiar with the term, a “residual” is a micro-payment that you are entitled to every time one of your contributing works is resold. Just think of a book author getting a small payment every time their book sells another copy, or a music band getting a small payment every time they sell another album. Revenue sharing.)
Now, I’ll be the first to admit – I’m not sure why you’d deserve a residual on a re-run and not on a DVD. But my question really is more fundamental:
Why do writers get residuals at all?
I guess, to be less confrontational, let me rephrase the question this way:
Why don’t software engineers get residuals?
I don’t want to sound stupid here. I’ve heard many reasons given for why residuals are given to writers and other creative contributors to media products. But most of them don’t really hold water with me:
- Comedy is a creative enterprise, and people can go for years in between gigs. Residuals on past success are a way of funding the down times, so great writing can happen in the down time between gigs.
- Historically, authors have always been paid per-copy sold, as a form of risk-sharing between the publisher and the author. It’s a classic alignment of incentives – more books sold mean more profits for the publisher and more income for the author. This leapt from book authors to musicians to other forms of entertainment as the industry grew.
- Writers deserve their “fair share” of the profits made from their work. Residuals represent that fair share.
I’m sure there are others, but those are the big three I’ve seen in the press.
The problem is, with the exception of (2), these reasons could just as well apply to software engineers, who in general never get paid through residuals.
Software engineering is a creative process, where people with unique talent and skill create content (code) that is protected by copyright and signed over to their employer (the company). There are highs and lows in the industry, and rapidly changing tastes/technology that can lead to low times for an engineer as well as good times.
In software, it’s much more common for an engineer to get paid in a mix of salary, bonus, and stock. No residuals.
- The salary is the company recognition of the value an engineer needs to get immediately in exchange for their work.
- The bonus is the company recognition of short term goals being hit, which allow the company to share the benefits of good performance of the individual and/or the company.
- The stock is a way for the engineer to share in the long term upside of the product of their work. They become part owner in the company, and so when the company makes money, they reap some of the benefit.
The stock is really the key to alignment between the owners of the company (shareholders), management, and the individual engineer. It’s the way of saying, “If this works, we’ll all make money together.”
So, in theory, I guess you could replace the stock component with residuals. You could argue that there are too many factors that play into stock price, and that residuals are a clean way of rewarding people for their contribution to a product with long term success. (I’m not sure I’d ever trust the accounting behind residuals, but I guess that’s why lawyers and union leaders make a lot of money.)
Maybe the problem is that writers aren’t really treated like co-owners and long term employees at all, and residuals represent that broken trust. Maybe studios don’t treat writers like co-owners and long term employees because the compensation system is set up to pay them like mercenaries. Maybe there is no real concept of a studio – just an aggregation of 1000s of entertainment efforts, each with their own finances, and each writer is just a mini-shareholder of that effort.
Maybe the problem is that the entertainment industry is, for the most part, stagnant, and their isn’t sufficient growth to really provide the upside benefits provided to engineers as stock-holders.
Maybe this is the difference between a unionized approach to compensation and a non-unionized approach?
I guess I’m still at a loss to explain the difference however. Let’s take a large company like Microsoft. Should they be paying their engineers like writers? Or should the studios be paying their writers like engineers?
Psychohistory 
Adam,
Good post. As someone who came out of the entertainment industry, I might be able to shed some light on this. I’m not sure I can express it clearly enough in this space, but I’ll try.
1. Artists are not software engineers. The parallel is close (I’ve worked with both) but not exact. What matters not is how we perceive them, but how they perceive themselves. Artists believe what they do is *above* the plain of crass commercialism and that what they contribute is magic, unique, and different. This leads to the mentality of “I don’t work in a factory, I work on a piece of art.” You raise good points, and make good arguments, but artists just don’t look at the world in this way. Hence their demands for things software engineers don’t ask for.
2. The management of entertainment companies has very little credibility with the entertainers themselves. All the stereotypes about hollywood are true–ever seen “The Player?” I think in Silicon Valley, engineers are more trusting of management, perhaps because there are software engineers starting and running companies. Ever seen an actor or writer running Disney or Viacom?
3. As I wrote back in 1999 in a business school application essay, I believe the proliferation of distribution channels such as the internet and cable TV is the single biggest thing to hit the entertainment industry, ever. This proliferation is finally giving power back to the artists in a way they have never had, especially to those artists who are in the top echelons. In a world of content everywhere, it’s harder to get seen, so the highest quality content is the scarcest. In the past, the big companies controlled all distribution so if an artist wanted to be heard, they had to submit to the often inhumane and underpaid working conditions. Artists like the imagineers who work at Disney, for example, call it “Mouse-schwitz.” So now, the artists are leveraging their importance against a group of managers that have been their adversaries for a century.
I could probably find more to support this, but damn I need to get back to work. let’s talk more offline if you wish.
Melinda
Of course software engineers get residuals. They’re called “stock options”.
Hi Jeff,
Re-read my post – there are pretty big differences between stock options and residuals. Imagine actually getting a small amount for ever time an app you wrote got used. It’s different than owning a share of the company – if it wasn’t, writers would be getting a share of the overall studio, not just the product they work on.
– Adam
Hi Melinda,
Thanks for all the detail! Very helpful.
It still, however, doesn’t really answer the fundamental question to me – which is better? Even if I assume that writers are irrational and aren’t really considering the economics, I can at least assume that engineers are.
So, the question is, would engineers be better off with residuals?
If not, then I wonder why the studios don’t try to replace residuals with stock options in their negotiations. Worked for the airline industry, to a point.
Adam
Great questions. …and in my haste to jump in I neglected to tell you what a thoughtful and well written argument this was.
I will say this: artists(at least those who haven’t made it big or who aren’t independently wealthy) have very little concept about how markets work. Theatre/writing/film school doesn’t offer courses in economics. Those folks don’t usually have money to invest. The math is hard for them, and it’s hard for them to grasp that these principles affect their every day lives. when I was in theatre school, not once did we ever discuss the stock market in our late night philosophy and booze sessions. 😉 You don’t see Eugene O’Neill writing about this stuff.
So if you offered stock options to the writers of the Sopranos, they say: “Hell no. I am an independent and creative person, I want *my* work to be rewarded, I dont’ want to have to worry about the success of other HBO shows. And it’s all just a bunch of voo doo anyway.” Couple that with a predisposition to be on the fringes of society–artists usually think that way in order to push the boundaries– and you have a recipe for total disengagement with the mechanics of business.
Entertainment is a Hit driven business, and finding a hit is actually still a bit of magic, like capturing lightning in a bottle. Those artists who actually do create hits, may only have 1 in their lifetime, and the residuals help them survive, as you pointed out.
As you can see, I support the idea that residuals are better for creative people who actually conceive of and execute the “new” thing.
I think the interesting question is why engineers don’t ask for residuals. I see many software companies literally sucking the lifeblood and creativity out of the best developers for really a scant reward, when you think of the value of the patents and the scale of really good products. Why shouldn’t the development team who invented facebook get a % of their technology every time it’s used or at licensed? Why should their creativity be rewarded in the same way a marketing manager’s is?
(By the way, my actual (now not so) secret dream is to teach the principles of business and economics to artists in a way they can grasp. I’ve always had this dream of making the world safe for artists. 🙂 )
Cheers,
Melinda
Thanks again, Melinda. Very interesting.
I think you answered your own question, and mine too, about why engineers don’t ask for residuals. In a hit-driven business, where the hits are unpredictable, it’s much more stable economically to tie yourself to a diversified portfolio of projects than to the one you happen to be working on.
There is a reason why the executives at the studios aren’t taking residuals for the projects they are on… except when they can carve them out of obvious hits.
I think it would make sense for engineers to take residuals at large companies on obvious hits – but I think the company would have to be over a barrel to grant them. On the internet, the accounting would be a nightmare.
For packaged software and/or hardware, however, you could imagine residuals tied to people who worked on the Xbox 360, or the Zune. I think instead those companies tie bonuses to their success – the difference is that bonuses only help people who stay at the company.
Residuals in this case would be better for engineers, since they are very likely to move around to different companies.
I think you are right that this is a trust issue – engineers are willing to act like owners of the company and trust management and the stock market. That’s a good thing, and probably says something about the success and growth in technology over the past 30 years.
You did a much better job of articulating this than I did.
The video game industry is also an interesting case study, since it lives in both worlds: art and technology.
There, the game creators also do not get residuals. Only stock. I’ve also worked in couple game companies, and the producers are much more like artists than developers. And yet they don’t unionize or band together. They love what they are doing so much (and the supply of game developers far outstrips demand), that they’ll endure horrific working conditions to do their jobs, even know. There was a lawsuit against Electronic Arts a few years back based on working conditions. It was jumpstarted by a truly eloquent blog post by the spouse of one game developer. Here’s a link:
http://ea-spouse.livejournal.com/274.html
Also, Adam, the writer comes up with the idea/concept, gets approval and the writes the episode. In a software company can anyone even agree who’s idea it was? Product Management Product Marketing and Engineering will all claim ownership over any given idea.The whole process of software is much more collaborative. You could say all of them share the residuals… but I wonder if it will be worth it then…
The other thing is that software companies try to be profitable – it is good and it is rewarded. On the other hand, look at how Studios account for movies – which movies make a profit even when box office takes are really high? There’s too much funky accounting in the entertainment business for the creative types to trust management.
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“Re-read my post – there are pretty big differences between stock options and residuals. Imagine actually getting a small amount for ever time an app you wrote got used. It’s different than owning a share of the company – if it wasn’t, writers would be getting a share of the overall studio, not just the product they work on.”
And there’s a big difference between an engineer and a writer. An engineer remains gainfully employed and has job security, and collaborates on many projects and programs over the course of his employment. Since he’s a long-term employee, stock options make sense. Writers rotate in and out and work specifically on certain projects. Do you realize what a logistical nightmare it would be to give every single writer on every TV show stock options? And given the frequency with which shows get created and cancelled, how impractical it would be to issue and cancel stock options at that dizzying rate? That’s why it makes more sense to give writers residuals and keep their money tied into the specific product they worked on rather than give them the stock options that permanent long-term employees like software engineers have. I suppose you think actors should get stock options instead of residuals instead as well?
Hi T.,
You’re making a good point, but it feels like a symptom of the problem, rather than the problem itself. Why are writers not long-term employees? Why don’t they work on multiple projects for the studio?
You are correct that residuals are likely a better compensation method for someone working on a single project, but you must realize that high tech companies will give even short term contractors stock options sometimes. You don’t have to “issue and cancel” them at a dizzying rate – you issue grants which the person either exercises or doesn’t. Unlike residuals, you don’t have to keep track of individual show assignments and revenue sharing forever. In fact, it’s much, much simpler than a residual system to administer.
I think Melinda’s answer above gives a more complete picture – the writers do not want to work for the studios, and thus don’t want compensation or employment tied directly to them.
Thanks for commenting.
Adam
It’s a little hard to answer your question, when it keeps changing (Why do writers get residuals? Why don’t software engineers get residuals? Which is better?). But let me try and put my perspective on this.
Ultimately, I think the problem is that you’re trying to compare writers and software developers as if they are very similar. Trying to compare the two directly is bound to be a frustrating experience, since they have such fundamentally different histories and logistics.
1a) Writers/actors/directors create fixed results. It is easy to distinguish one writing project (TV episode, movie, etc) from another, and to identify the writers of the episode. Once a project is done, it’s done. It may be rebroadcast or repackaged for alternate media venues, but it doesn’t typically change once it’s in the can. Thus, the value that a writer/director/actor has put in to a particular project remains intact for the lifetime of the project.
1b) Software engineers create evolving results. A typical software project is an extension or updating of an existing software project. They may completely rewrite portions of code that were written by a previous developer. Some portions may be outsourced to third party developers, who may outsource portions of their portion in return. So over the lifetime of a project, it becomes very, very tricky to identify who the actual authors of the currently-used code are.
1c) What this tells us is that the concept of residuals is fairly easy to calculate for media projects, and makes sense, since the contribution level does not change over time. However, it would be very difficult to do so for a software project, since the project is never “in the can” and the overall contribution level of the various contributors is constantly changing.
2a) Media writers have a very wide distribution of payment. The top percentage are paid disgustingly well, while the bottom percentage are paid almost nothing. So the average writer ends up with a barely livable wage a lot of the time, and spends a good deal of their time unemployed, and relying on the union for their health benefits and pension plan.
2b) Software developers have a considerably higher range of pay. The top percentage are also disgustingly well paid (sometime by luck of the stock draw, rather than the results they produce), but even the lower percentage typically gets a very nice livable wage, health benefits, and pretty decent job security. Sure, layoffs happen. But the average software developer is able to keep their job for years at a strech, instead of losing their job and benefits every time the project they’re working on gets canceled (or even ends successfully).
2c) Media writers are therefore much more dependent on long-term residuals from their work, since they’re more likely to have long stretched of unemployment between paying gigs. Software developers have a much higher pay and job security.
3a) Hollywood wasn’t always a union town. As the Why We Fight video points out, the media industry used to work more like the software industry, where the companies owned everything and the writers got nothing beyond their initial paycheck. They had to band together under the union flag and fight their asses off to get the residuals they currently have. And they have had to continue fighting ever since, to not be left behind as the industry’s business models
3b) The Silicon Valley is not a union town, and shows no sign of ever becoming one. Developers are perfectly happy with the compensation they’re getting, and don’t have any reason to fight. And companies already value their employees and provide a wide variety of compensation tools to keep them happy.
3c) Residuals solve a particular gap in an industry’s compensation strategy. For Hollywood, it is essential. For the Silicon Valley it isn’t. Software companies aren’t going to offer it, and software developers aren’t going to fight for it, so it’s a moot point.
4a) Writers would rather have residuals than stock options. Residuals are based on the quality of work that you put in to your in-the-can projects. If you created something really great, it will get replayed and redistributed for a long time, and you’ll get the cut you deserve. If it’s crap, it sits on the shelf and you get nothing. But since you’re living your life project-to-project, with potentially long boughts of unemployment between each, you need that residual safety net to keep food on the table.
4b) Developers would rather have stock options (or stock grants). Working on a project that is never “done” leads one to look for a more long-term, stable relationship with one’s employer, where cushy benefits packages and stable living wages relieve the day-to-day worries, and 401K and stock options take care of long-term concerns. When one project ends (whether poorly or well), they move on to the next project their company has in the pipeline, instead of going back to the unemployment lines.
4c) Residuals and stock options are both compensation tools, it’s true. But they solve very different problems. Stock options are a retention tool, meant to bring the developer’s motivations closet to those of the company and keep them around for years to come. Residuals acknowledge that writers will likely work for many studios over the course of their career, and shift compensation to a per-project basis. Each makes sense in its own world, and would be silly to apply to the other.
5a) Writers, even with an excellent education and experience, have to work their asses off for years before they start earning a steady, reliable wage.
5b) With only a two year degree and a few hundred dollars worth of books, I managed to make almost as much as my father within the first few years of becoming a developer. And that was at a crappy-ass startup that gave shit for wages.
5c) Trying to compare the compensation engines for two industries that are so drastically different in so many ways is just not likely to lead to anything productive. The important point is realizing that they *are* drastically different.
Jenna Fischer (Pam from The Office) gives an interesting example. Sure, it sounds like an awesome deal when a writer sells a script for $100K. But after giving 25% to his agent, 30% to taxes, and having to live off the remainder for a few years before the next script sells, it ends up being much more comparable to a Best Buy wage than a Microsoft wage. It’s the residuals that keep food on the table in the meantime.
I am 100% behind the WGA in this strike. If my fellow software engineers tried to strike and demand residuals, I’d think they were crazy.
The video game industry is the only sector of software development that I think straddles the fence, since the software they produce *is* media, and video games are becoming more and more tied in to the Hollywood economy (as the Tomb Raider and Resident Evil franchises prove). But even so, they’re pay structure and compensation is still much more in line with Silicon Valley than with Hollywood, so it would take a pretty drastic economic catalyst to get them to unionize and fight for a different compensation structure.