GAO-01-291

Report to Congressional Committees

United States General Accounting Office

GAO

January 2001 MOTION PICTURES

Legislation Affecting

Payments for Reuse

Likely to Have Small

Impact on Industry
Page 1 GAO-01-291 Motion Picture Reuse Legislation

January 31, 2001

The Honorable Orrin G. Hatch

Chairman

The Honorable Patrick Leahy

Ranking Member

Committee on the Judiciary

United States Senate

The Honorable Howard Coble

Chairman

The Honorable Howard L. Berman

Ranking Minority Member

Subcommittee on Courts and Intellectual Property

Committee on the Judiciary

House of Representatives

Each year motion picture producers and distributors pay hundreds of

millions of dollars in residuals—additional compensation for the reuse of

motion pictures in such media as television and video—to the members of

actors’, directors’, and writers’ unions. In 1998, the unions alerted the

Congress that millions of dollars in residuals were going unpaid because

some producers, who had entered into contracts with the unions agreeing

to pay residuals, had not transferred this obligation to distributors when

selling the motion picture rights for reuse. In response to this concern, the

Congress enacted legislation, effective October 28, 19981

, making

distributors of motion pictures subject to the obligation to pay residuals if

the distributor should have known that the motion picture was produced

under a union contract.

Pursuant to a legislative mandate for a GAO report 2 years after the act,

we are reporting on (1) the extent to which residuals owed had not been

paid prior to the legislation and (2) the impact of the legislation on the

motion picture industry. Appendix I provides a description of the scope

and methodology used in this report. Appendix II provides details of our

econometric model of the relationship between various film

characteristics, such as production budgets and paid residuals. Using data

 1

Contained in Section 406 of the Digital Millennium Copyright Act (P.L.105-304).

United States General Accounting Office

Washington, DC 20548
Page 2 GAO-01-291 Motion Picture Reuse Legislation

on the 1,573 films under contract with an actors’ union from 1993 through

August 2000, we estimated the magnitude of unpaid residuals.

Our analysis of motion picture industry data found that, in the 3 years

leading up to the 1998 legislation, at most, about 2 percent (or an

estimated $35.2 million) of the total of over $1.7 billion in residuals owed

went unpaid. The unpaid residuals accrued when production companies

did not require distributors to assume the obligation to pay residuals upon

reuse of the film. In our review of films made under contract with an

actors’ union between 1996 and 1998, we found 771 films for which

residuals had not been paid or obligations assumed. About 87 percent (or

668) of these films fell into the category of low-budget films—films with

production costs under $2 million. Because these low-budget films

typically generate little in the way of earnings on which residuals are

based, the amount of lost residuals is relatively small.

Our analysis indicates that the legislation’s impact on the motion picture

industry will be limited. While there is no observable impact to date, the

legislation could most likely affect the profitability of low-budget films.

The payment of previously unpaid residuals could increase the production

and distribution costs of low-budget films, thereby diminishing the profits.

However, even if the legislation caused some low-budget films to become

unprofitable, gross revenues in the motion picture industry would fall by

less than 2 percent, precipitating a similar reduction in industry

employment and income because these films’ earnings constitute a small

portion of overall industry revenues. Although the legislation’s impact on

the overall motion picture industry may be small, certain individuals

working on low-budget films, such as producers, union actors, writers, and

directors, could experience substantial losses, according to industry

representatives.

Legislation requiring the transfer of contract obligations with motion

picture rights grew out of concerns that actors’, directors’, and writers’

unions raised before congressional committees. These unions, called

guilds, represent many of the writers, actors, and directors employed in

the motion picture industry. In 1999, the Screen Actors Guild had over

97,000 members; the Directors Guild of America, about 11,500 members;

and the Writers Guild of America, west, Inc., about 8,100 members.

Results in Brief

Background
Page 3 GAO-01-291 Motion Picture Reuse Legislation

American motion pictures are produced by either one of seven major

studios or one of a number of independent production companies.2

 The

major studios typically finance, produce, and distribute their own pictures,

and own substantial libraries of previously produced films. In contrast,

independent producers often obtain financing from third-party sources,

such as private lenders, and contract independent film distributors to

release their films. According to the American Film Marketing Association,

which represents independent producers, distributors, and lenders, the

major studios generated about 36 percent of the 430 motion pictures that

the American film industry released to theaters in 1999, while independent

producers accounted for the remaining 64 percent.

The contracts that film producers sign with the guilds include provisions

that establish minimum salaries and working conditions for guild

members. These contracts also require producers to pay residuals for use

of the motion picture beyond its initial theatrical release. Residuals

generally correspond to a percentage of the producer’s or distributor’s

gross receipts from the reuse of a film in secondary markets, such as video

and television.To put total residuals payments in the context of industry

earnings, films generated revenues of $10.6 billion from theatrical

box-office receipts and concessions, video sales and rentals generated

$21.2 billion, and cable television generated an additional $36.7 billion in

1999. 3 Residuals paid to members of the three guilds during 1999 totaled

$681 million, or less than 1 percent of the industry’s total revenues.

The contracts also require producers to have the distributor assume the

obligation to pay residuals for reuse upon selling film rights to a

distributor. According to the guilds, they became aware of the scope of the

problem of unpaid residuals when some small, independent production

companies went out of business after selling the rights to independent

distributors without transferring the obligation to pay residuals. Unable to

 2

According to the Motion Picture Association of America, the seven major studios are

Metro-Goldwyn-Mayer, Inc.; Paramount Pictures Corporation; Sony Pictures

Entertainment, Inc.; Twentieth-Century Fox Film Corp.; Universal Studios, Inc.; Walt

Disney Company; and Warner Bros.

3

Other industry revenues come from movies shown on free and pay television and

merchandising of movie-related goods, but we were unable to obtain amounts.
Page 4 GAO-01-291 Motion Picture Reuse Legislation

enforce the collection of unpaid residuals, which they estimated to be

worth tens of millions of dollars,4

 the guilds approached the Congress.

In response, the Congress drafted a legislative remedy that was included in

the Digital Millennium Copyright Act. After incorporating changes that

addressed some concerns of the American Film Marketing Association, the

Congress passed legislation, effective October 28, 1998,5

 requiring a

distributor, or other party obtaining motion picture rights, in most cases,

to assume the obligation to pay residuals for motion pictures produced

under a guild contract. The Congress also required GAO to report on the

extent of the problem and its impact.

At most, about 2 percent of the residuals owed prior to the legislation

went unpaid because the obligation to pay them was not transferred to the

distributors. Of the more than $1.7 billion in residuals owed in the years

1996 through 1998 by the three guilds, we estimate that unpaid residuals

accounted for, at most, $35.2 million. The problem of nonpayment of

residuals was largely attributable to small independent producers of lowbudget films.

To estimate the amount of unpaid residuals owed prior to the legislation,

we developed an econometric model of the relationship between

generated residuals, domestic box-office earnings, film budgets, and

contractual provisions existing between producers and unions. (See app. II

for details of our residuals estimation model.) Using data for films that

paid residuals, we estimated the impact that box-office revenues, budgets,

and contract type had on the amount of residuals generated. We then used

the results of the model to forecast what residuals the nonpaying films

would be expected to generate. We adjusted this estimate to reflect the

fact that not all nonpaying films were actually released—some

productions were never completed, while others never found a market

outlet.6

 According to our model, at most, $35.2 million (or 2 percent) of the

$1.7 billion owed in residuals over 3 years had not been paid. Although our

analysis of films released from 1996 through 1998 captures the bulk of the

 4

The guilds based this estimate on their review of bankruptcy records of those owning film

libraries for which assumption agreements had not been signed.

5

Codified in 28 U.S.C. Section 4001.

6

In a random sample of 250 films, we found that 29 percent of the films had no record of

any secondary market earnings.

Unpaid Residuals

Represent a Small

Portion of Owed

Residuals
Page 5 GAO-01-291 Motion Picture Reuse Legislation

unpaid residuals, it does not include unpaid residuals from older films

included in libraries that sometimes change hands without passing on

assumption agreements. According to guild officials, the amount of

residuals for most films drops off significantly 5 years after release. Thus,

the sale of older films in a library would not result in a substantial loss of

residuals in any given year.

The problem of unpaid residuals was confined largely to low-budget films.

Of the 771 films not paying residuals from 1996 through 1998, 441 (or 57

percent) had budgets of less than $2 million and 227 (or 29 percent) had

budgets under $0.5 million. In contrast, about half of all films made—those

produced by members of the Motion Picture Association of America—had

average budgets of $51.9 million in 1999. Films that paid residuals typically

had much larger budgets than nonpaying films, and these larger budgets

generally achieved higher earnings in secondary markets. Our econometric

analysis also indicates that larger budgets are associated with greater

residuals generated in secondary markets.

Our analysis indicates that, at most, the 1998 legislation will have a small

impact on the motion picture industry—primarily in the low-budget film

sector of the industry. To date, there is no observable impact on this

sector. Even if there were a negative impact on the industry, it would be

confined to the sector of the industry that owed, but did not pay, residuals

prior to the legislation, and this overall impact would be small.

Specifically, gross revenues in the motion picture industry, if affected at

all, would decrease by less than 2 percent, creating a similar reduction in

industry employment and income. Although the legislation’s impact on the

overall industry would be small, the impact on the specific segments of the

industry most affected—producers of low-budget films and those union

actors, writers, and directors who work on such films—could be

significant.

There has been no observable impact on the industry to date of the 1998

legislation. Any impact would be most likely to appear in the low-budget

sector of the film industry because this sector accounted for the bulk of

the problems surrounding unpaid residuals prior to the legislation.

Representatives of the American Film Marketing Association stated that

some independent producers might not be profitable if they have to pay

residuals, and independent producers produce most of the low-budget

films. However, the low-budget sector of the industry has not shrunk since

the legislation was passed. In fact, the share of low-budget films in the

Legislation Likely to

Have Small Impact on

Movie Industry

No Observable Impact to

Date
Page 6 GAO-01-291 Motion Picture Reuse Legislation

total number of films under contract has actually increased slightly—from

56 to 57 percent of all films—in the first 18 months following the

enactment of the legislation. The absence of an observable effect on the

low-budget sector suggests that the legislation may not have a significant

impact.

The ultimate impact of the legislation, however, may depend on how the

courts interpret it. Although 2 years have passed, the guilds stated that this

is not enough time for the legislation to have been tested in the courts. The

process before litigation is lengthy. It begins with signing the contract to

produce a film; continues through production, theatrical release, and

secondary market releases; and ends with the unions identifying the

responsible parties and then taking action against them. The guilds said it

typically takes 18 months to 2 years from the start of film production to

when residuals come due. In the meantime, the legislation contains several

ambiguities. For example, representatives of the American Film Marketing

Association questioned whether the legislation applied to films transferred

to foreign distributors—which they believe to be the major source of the

problem. Also, the guilds are uncertain whether the legislation applies to

subsequent transfers of obligations, such as film libraries resold after the

legislation.

Even if some low-budget films became unprofitable, the impact on overall

industry revenue would be small. This legislation might cause some lowbudget films to become unprofitable to make under guild contracts

because the requirement to pay residuals would effectively raise the costs

of producing these films. This could in turn reduce guild member

employment and future residuals income as some of these producers seek

alternatives to making films under guild contracts—for example, making

films in foreign countries or perhaps not producing films at all.

The impact on the industry, if any, would be small, because the potentially

impacted films—those similar to films not paying residuals prior to the

legislation—account for a very small percentage of total industry revenues

gained from domestic box-office and secondary markets. These types of

films—chiefly low-budget films—account for a small proportion of those

industry revenues. For example, the domestic box-office earnings of all

nonpaying films under union contract from 1993 through 1998 accounted

for less than 1 percent of total domestic box-office earnings for all films

under union contract during this period. These nonpaying films were far

less likely to have any box-office earnings; and when they did, they

typically earned far less than other films. Only 74 of 1,112 nonpaying films

Impact on Overall Industry

Revenue Would Be Small

Even if Some Low-Budget

Films Became

Unprofitable
Page 7 GAO-01-291 Motion Picture Reuse Legislation

had domestic box-office earnings, and of these the box office averaged

$2.8 million. In contrast, 928 out of 1,573 films for which residuals had

been paid had domestic box-office earnings averaging $28 million.

Similarly, nonpaying films earned only a small fraction of total secondary

earnings in the years preceding the legislation. As previously discussed,

we estimated that unpaid residuals amounted to, at most, 2 percent of total

residuals owed. Since secondary earnings are proportional to residuals

owed, nonpaying films earn, at most, 2 percent of secondary earnings.

When the small proportions of box-office and secondary earnings

generated by nonpaying films are taken into account, the total share of this

group of films in the industry is significantly less than 2 percent.

Therefore, even under the extremely unlikely scenario that all nonpaying

films could not be made under the terms of the legislation, the overall

reduction in the size of the industry would be less than 2 percent.

If the legislation is effective in enabling the guilds to collect residuals that

otherwise would not have been paid, union members who worked on

those films will clearly benefit. As mentioned previously, the amount of

residuals that were unpaid prior to the legislation is small relative to total

residuals collected. However, for guild members working primarily on

low-budget films, this amount may have a significant impact on their

income. The guilds said that residuals constituted a significant part of a

union member’s income, with some members relying on residuals to

support them during periods of unemployment.

On the other hand, according to representatives of the American Film

Marketing Association, if some low-budget films became less profitable,

some independent producers might find it more difficult to obtain

financing. Thus, some films that would otherwise have been made under

union contract would either not be made or be made under different

conditions, such as going overseas or using nonunion employees. In this

case, residuals would not be paid to the unions, and guild workers

typically employed in these films would lose these employment

opportunities.

We discussed our findings with guild and association representatives of

the primary parties affected by the legislation, and they agreed with the

overall message and methodology. Where appropriate, we incorporated

their comments for technical accuracy. As the legislation required, we also

Impact on Specific

Segments of the Industry

May Be Significant

Agency Comments
Page 8 GAO-01-291 Motion Picture Reuse Legislation

consulted with the U.S. Copyright Office, providing periodic briefings on

our planned work, status, and findings.

We performed our work from April through December 2000 in accordance

with generally accepted government auditing standards. We are sending

copies of this report to Marybeth Peters, Register of Copyrights, U.S.

Copyright Office, Library of Congress, and to William Daniels, President,

Screen Actors Guild; Jean Prewitt, President, American Film Marketing

Association; Jack Shea, President, Directors Guild of America, Inc.; and

John Wells, President, Writers Guild of America, west, Inc.

If you or your staff have any questions about this report, please contact me

at (202) 512-3841. Key contributors to this report were Robin Nazzaro,

Frank Rusco, Anne McCaffrey, Sandy Joseph, Bert Japikse, and Jonathan

McMurray.

Jim Wells

Director, Natural Resources

 and Environment
Appendix I: Scope and Methodology

Page 9 GAO-01-291 Motion Picture Reuse Legislation

To get an understanding of the transfer provision and our mandate, we

reviewed the legislation and its history. We also reviewed a Congressional

Research Service report on the act. Moreover, we contacted former

congressional staff involved in the legislation. As required by the

legislation, we also consulted with the U.S. Copyright Office, Library of

Congress. We also contacted the Department of Commerce regarding its

review of the movement of U.S. motion picture productions to foreign

countries.

To better understand the motion picture industry and develop our

methodology for the two objectives, we contacted the numerous parties

that the U.S. Copyright Office cited as having participated in the

legislation. We interviewed representatives, and in some cases the legal

counsel, of the American Film Marketing Association; the Screen Actors

Guild; the Directors Guild of America, Inc.; the Writers Guild of America,

west, Inc.; Time Warner Inc.; Viacom; the Motion Picture Association of

America; and a financial institution. These organizations represent various

segments of the motion picture industry affected by the legislation. We

also discussed our methodology, analyses, and results with academic

experts in the motion picture industry.

We obtained and reviewed numerous documents and information from the

motion picture industry. For example, we obtained and reviewed

background information on the guilds and associations, including their

web pages and literature. We also reviewed the guilds’ collective

bargaining agreements, modified low-budget agreements, and assumption

agreements, focusing on provisions related to residuals. In addition, we

reviewed selected audit reports of bankruptcies that involved unpaid

residuals on film libraries, claims files, and arbitration records and

decisions. We also obtained publicly available and generally accepted

information on motion pictures and reviewed books on making and

financing films. Moreover, we reviewed specific residuals and other data

that the guilds provided. We did not assess the reliability of the data.

However, the data are what the guilds rely on for their purposes or are

widely used by outside experts. Furthermore, we used credible

corroborating evidence, when available, with which to test the data.

Appendix II contains detailed information on these data and the

econometric models we used to assess the extent of the residuals problem

and the legislative impact.

Appendix I: Scope and Methodology
Appendix II: GAO’s Residuals Estimation

Model

Page 10 GAO-01-291 Motion Picture Reuse Legislation

This appendix describes our methodology for estimating the amount of

residuals that were owed but not paid prior to the enactment of the

copyright legislation. In particular, we discuss (1) the conceptual

development of the model used to estimate residuals owed, (2) the data

used for the estimation, (3) the estimation results of the model, and (4) the

final estimates of residuals owed by nonpaying films.

The amount of residuals owed is determined by the amount of a film’s

earnings in secondary markets. To know precisely how much in residuals

is owed but not paid would require knowing the exact amount generated

in secondary markets by films that did not pay residuals. However, this

information is not available—for films that did not pay residuals, no

earnings were reported to the unions nor did the unions have a systematic

and accurate way to acquire this information. Therefore, we developed an

econometric model to estimate the extent of the unpaid residuals problem.

To estimate the amount owed by films that neither paid residuals nor

reported secondary market earnings, we first examined films for which

residuals were paid. For paying films, we estimated how various factors

such as domestic box-office earnings, budget, and contract type affected

how much in residuals was actually paid. We chose budget and domestic

box-office earnings as explanatory variables because these are the best

available proxies for a film’s characteristics. For example, the budget is a

proxy for the quality of acting, directing, and writing talent, and box-office

revenues indicate the degree of market appeal of the film. Contract type

may cover other intangible characteristics of films—for example, whether

a film aims for an identified audience rather than for the general public.

We expect films with box-office releases to generate greater secondary

market earnings than films that go straight to secondary markets without

box-office releases. Similarly, we expect that higher box-office revenues

lead to greater secondary market earnings and thereby greater residuals

payments. Larger budgets are also expected to lead to greater earnings and

residuals payments. After estimating the model using paying films, we then

applied the results to the films that did not pay to forecast how much they

owed.

We obtained data on every film under union contract from 1993 through

August 2000 from the screen actors’ union. We divided the films into two

groups, according to whether or not residuals were paid. For films on

which residuals were paid, our database contained the amounts collected

in each year for each secondary market. We collected domestic box-office

Appendix II: GAO’s Residuals Estimation

Model

The Conceptual

Model

The Data
Appendix II: GAO’s Residuals Estimation

Model

Page 11 GAO-01-291 Motion Picture Reuse Legislation

earnings data from several other sources for those films that had theatrical

releases.

We were able to get budget figures only for films that paid residuals,

making this variable useless to predict residuals owed by nonpayers.

Therefore, we chose contract type as a proxy for budget size. There are

three types of contracts in the films we examined. “Theatrical” (TH)

contracts are the standard collective bargaining contract between the

unions and major studios, and most of the films that eventually make it

into the theaters are made under this type of contract. There are no budget

limitations for TH films. More than half of all films are made under either

“Limited Exhibition” (LE) or “Low Budget” (LB) contracts. These latter

two contracts have budget limitations—LE films must have budgets under

$500,000 and LB films under $2 million. The LE and LB contracts also

allow producers to pay “below union scale” to actors and have several

other features that differ from the TH contract.

We chose the years 1993 through 1995 to estimate the model because we

wanted to capture the bulk of the films’ residuals payments, which

required having 5 years worth of payments history after the year of the

film’s release. Using the union’s data, we constructed a present discounted

value of residuals paid in the year of each film’s release plus the first 5

years following the year of release.1

 This discounted value of residuals

paid is the dependent variable in our model.

To determine the precise specification of the model, we examined the data

set comprising all films that paid residuals from 1993 through 1998 and

looked specifically at the interaction between the contract types as

proxies for budget size and box-office revenue. Tabulations for these

variables are presented in table 1.

 1

For example, for a film released in 1994, we summed the residuals paid in 1994, with the

present discounted value of residuals paid in each of the 5 years, 1995-1999. We used the

1994 3-year Treasury bill rate as the discount rate because it was the rate that was closest

in maturity to the 5 years of residuals we were summing. For consistency, we discounted

each film to 1994, whether the film was released in 1993, 1994, or 1995. We also put

box-office revenue data into 1994 dollars using the same discount rate.
Appendix II: GAO’s Residuals Estimation

Model

Page 12 GAO-01-291 Motion Picture Reuse Legislation

Table 1: Number of Films by Contract Type and Box-Office Release

Box-office earnings?

Contract type Yes No Total

Limited exhibition (LE) 8 9 17

Low-budget (LB) 108 424 532

Theatrical (TH) 812 212 1,024

Total 928 645 1,573

Source: GAO analysis of Screen Actors Guild data.

Table 1 shows that among films that paid residuals, TH films are more

likely to have box-office earnings than are either LE or LB films.

Specifically, only about 47 percent of LE films had box-office earnings

compared to about 20 percent for LB films and about 79 percent for TH

films. Table 1 also shows that there are very few LE films in the data set

for which residuals were paid. On the basis of the observed differences

among contract types, we chose a specification that would allow for

differences in the intercept and slope of the residuals equation with

respect to box-office revenue and contract type. Because of the small

number of LE films in the data set, we chose to treat LB and LE films as a

single category.2

 In the regression model below, LB indicates either LB or

LE. When we restricted the data to films released from 1993 through 1995,

there were 471 observations in the data set.

Using the data for paying films described in the previous section, we

estimated the following model using ordinary least squares:

RES =α + β BOX + β HASBOX + β LBNOBOX + β LBHASBOX + β LBBOX + ε 1 2 3 4 5

The variable definitions are as follows:

RES is the present discounted value of residuals paid for a film, in 1994

constant dollars. We included all residuals collected in the year of release,

plus the 5 years following the year of release.

 2

When we restricted the data to only 1993 through 1995 in order to capture the bulk of

residuals paid by these films, we only found three LE films that had paid residuals. Such

small numbers of observations would be insufficient to generate statistically significant

distinctions between LE and other contract types. Therefore, we combined LE and LB films

into one category for the purposes of estimation.

The Estimation

Results
Appendix II: GAO’s Residuals Estimation

Model

Page 13 GAO-01-291 Motion Picture Reuse Legislation

BOX is box-office revenues in 1994 constant dollars.

HASBOX is an indicator variable for box-office revenues and is equal to 1

if the film had box office revenues and zero otherwise.

LBNOBOX is an indicator for LB films with no box-office revenues.

LBHASBOX is an indicator for LB films that had box-office revenues.

LBBOX is the interactive term for BOX and LBHASBOX and equals BOX if

LBHASBOX equals 1 and is equal to zero otherwise.

The terms α and βi

 are the parameters to be estimated and is an error

term, assumed to have mean zero and finite variance.

The results of the regression are shown in tables 2 and 3.

Table 2: Regression Results for Residuals Payments (RES)

Coefficients Standard error t Statistic P-value

Intercept 109351.5159 52133.2674 2.097538124 0.036485236

BOX 0.01365632 0.000365003 37.41429809 2.4499E-142

HASBOX 137959.4262 55212.53656 2.498697484 0.01280909

LBNOBOX -87160.09932 58172.36486 -1.498307651 0.134731863

LBHASBOX -242013.4191 59143.61871 -4.091961641 5.0424E-05

LBBOX 0.014189617 0.017170332 0.826403219 0.408999224

Notes: Adjusted R2 = .81

 N = 471

Source: GAO analysis of Screen Actors Guild data.

Table 3: Analysis of Variance

Degrees of

freedom SS MS F Significance F

Regression 5 1.34199E+14 2.68398E+13 395.0109452 8.0321E-165

Residual 465 3.15953E+13 67946939256

Total 470 1.65794E+14

Source: GAO analysis of Screen Actors Guild data.

The results presented in tables 2 and 3 indicate that the box-office and

contract type variables explain a great deal of the variation in residuals

payments. As expected, higher residuals payments are associated with

higher box-office revenues and budgets (or contract type as proxy).

Specifically, the marginal effect of an additional dollar of box-office

revenue is to raise residuals payments by about 1.4 cents—perhaps more
Appendix II: GAO’s Residuals Estimation

Model

Page 14 GAO-01-291 Motion Picture Reuse Legislation

for LB films, although the estimated coefficient for LBBOX is not

statistically significant. Similarly, as expected, LB films have smaller

intercepts than TH films for both cases of films with and without

box-office revenues.

We also ran regressions using variation around the median rather than the

mean as a check of the robustness of the standard Ordinary Least Squares

estimates. There was no change in the significance of any of the variables

and only very slight changes in the magnitudes, indicating that the original

results were not being driven by a few extreme values. We also estimated

the model using “robust standard errors” and again found no change in

significance levels.3

We used the results of this regression to forecast the expected residuals

owed for films that did not pay residuals, under the assumption that the

paying and nonpaying films come from the same distribution. To do this,

we multiplied the estimated coefficients from the regression by the

relevant variable values for the nonpaying films and added up the results.

This gave us the amount owed to the actors’ union, which we multiplied by

a factor of 1.875 to estimate the total owed to the three unions (actors’,

directors’, and writers’ unions).4

 The results of these calculations for all

films under union contract from 1996 through 1998 indicated that unpaid

residuals were as much as $53.9 million dollars, or about 3 percent of all

residuals owed in the 3 years leading up to the legislation. However, the

assumption that paying and nonpaying films are identical except for the

act of paying is inappropriate and tends to bias the estimate of unpaid

residuals upwards. Specifically, nonpaying films differ from paying films in

ways not captured by the regression. For example, some films in the data

set were never released or never found any buyers. These films have no

secondary market earnings and therefore owe no residuals. Running them

through the model would treat them exactly the same as a film that was

released and had secondary market earnings (but no box-office earnings).

Thus the estimate of $53.9 million is too high. Another difference is that LE

films make up about 30 percent of all nonpaying films compared to only 1

percent of paying films. LE films seldom have box-office releases and have

 3

See White, Halbert J. (1980), “Heteroskedasticity-Consistent Covariance Matrix Estimator

and a Direct Test for Heteroskedasticity,” Econometrica, 48:4, May, 817-838.

4

This factor reflects the fact that total residuals collected by the directors’ and writers’

unions equal 0.875 of the residuals collected by the actors’ union.

Using the Model

Results to Forecast

Unpaid Residuals
Appendix II: GAO’s Residuals Estimation

Model

Page 15 GAO-01-291 Motion Picture Reuse Legislation

significantly lower budgets than either TH or LB films, and yet in the

simple estimation of owed residuals, we treat LE films the same as LB

films. This treatment will also bias the estimate upwards.

To correct for the upward bias of the estimate of residuals owed and to

identify the differences in the paying and nonpaying populations, we drew

a random sample of 250 films under screen actors’ union contract from

1993 through 1995. We then asked the directors’ union to use its secondary

market activity database to identify which of the films had secondary

market earnings. There are two ways for a film to show up as having

secondary market activity. It can either have paid residuals to the actors’

or directors’ union, or it can show up in the secondary market activity

database maintained by the directors’ union. Of the 250 films in the

sample, 72 films (or about 29 percent) appear to have never generated any

secondary market activity. Table 4 shows the break down of films in the

sample, with and without market activity by contract type.5

Table 4: Number of Films by Contract Type and Market Earnings Drawn From

Sample Data

Secondary market earnings?

Contract type Yes No Total

Limited exhibition (LE) 4 21 25

Low-budget (LB) 52 39 91

Theatrical (TH) 121 12 133

Total 177 72 249

Source: GAO analysis of Directors Guild data.

Table 4 indicates that LE films are the least likely of the three contract

types to have secondary earnings. Specifically, only about 16 percent of LE

films have any market activity compared to about 57 percent for LB and

 5

We removed one film from the sample when we found an Internet movie database listing

its expected release date in 2001. Because this film has yet to be released, we cannot

determine whether it will generate any secondary earnings in the future.
Appendix II: GAO’s Residuals Estimation

Model

Page 16 GAO-01-291 Motion Picture Reuse Legislation

about 91 percent for TH films. When these weights are applied to the

forecasted residuals owed, the estimated total amount unpaid in the 3

years leading to the legislation falls to about $35.2 million, or about 2

percent, of $1,707 million in total residuals owed.6

 6

The $35.2 million is arrived at by weighting LE films by 0.16, LB by 0.57, and TH by 0.91.

(141429)
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