Drama inside the actors' union

(Fortune Magazine) -- Hollywood's creative talent - writers, directors, and actors - could go out on strike anytime between now and next summer. On the surface the issue that has their unions - the Writers Guild of America, the Directors Guild of America (DGA), the American Federation of Television and Radio Artists (AFTRA), and the Screen Actors Guild (SAG) - up in arms is how to treat residual payments from TV episodes in the Digital Age.

But strikes tend to have unforeseen consequences. The last major one, in 1988, helped spawn the reality-TV boom. The current standoff threatens to force the factionalism within SAG, the main actors' union, out into the open and possibly tear it apart.

What's at the root of the bitter division inside SAG is the rift between actors who work and those who don't. Only a fraction of the union's 120,000 members actually work full-time as actors. As a group, the working actors are more willing to cut a deal and a lot less eager to strike than the extras, the part-timers, the dreamers, and the has-beens who currently control the SAG board.

"I think our union attracts the walking wounded," says Mike Farrell, former first vice president of SAG, who played B.J. Hunnicutt on "M*A*S*H." "The parade of lunacy I witnessed on the [SAG] board the years I was there - it really beggars the imagination."

The two factions have been beating each other up for years, but the division deepened after an attempt to merge with AFTRA, supported by most working actors, failed by a razor-thin margin in 2003. That's not how a union wants to go to war with multinational corporations like GE (Charts, Fortune 500), which owns NBC/Universal, or Sony (Charts) or News Corp (Charts, Fortune 500). - particularly when the issue they are fighting over is complex.

This problem of how to treat residuals in the Digital Age is a killer. It was simple when there were just three networks and reruns on local channels. But how do you compensate actors - not to mention writers and directors - when their work is resold on iTunes at $1.99 per episode? Or given away (with ads) on NBC.com? What about an original drama that starts off on the web with hopes of migrating to network TV? (Get ready for "Quarterlife," produced by thirtysomething creators Marshall Herskovitz and Edward Zwick, debuting soon on News Corp.'s MySpace.com.)

The voice of management in the struggle, Nick Counter of the Alliance of Motion Picture and Television Producers (AMPTP), agrees that the system is broken. He points to soaring production costs, uncertain digital revenues, and the perils of deficit financing. The average one-hour TV drama, according to industry figures, emerges from its first full season $33 million in the red; the average feature film, even after its theatrical release, is $70 million short. Without secondary revenue streams like DVDs and pay-per-view, Counter argues, the whole system collapses.

That's why AMPTP opened the negotiating season last summer with a proposal to reexamine the whole concept of residuals. Counter is pushing a "recoupment" formula whereby "residuals will continue but will be based upon a formula that would allow the company to break even before paying."

That option is a nonstarter for SAG - on that much every actor can agree. The issue for Farrell and his allies is this: Can SAG president Alan Rosenberg (lawyer Eli on L.A. Law) and VP Kent McCord be trusted to negotiate in good faith? "You want people capable of making a deal, who aren't taking a whole union out on strike and an industry down on ego and anger," says one working actor.

Maybe it was a mistake for SAG to reabsorb what was left of the failed union of screen extras, which it did in 1992. Surely it was shortsighted, during the commercial-actors strike in 2000, to award coveted SAG cards to picket-line mercenaries. Possibly disunity is just part of the guild's DNA. After all, SAG was organized in part by reputed communists in the 1930s and later led by Ronald Reagan.

All that turmoil would seem to play into the hands of the suits. Actually, it does not. As one retired studio chief points out, when unions are infighting, management never knows who's in charge, making it hard to come to an agreement: "To have a deal, any deal, you need two people who can close."

But what if the suits aren't interested in a deal, at least not right away? One notion gaining currency among studio execs is, You know what? If we're gonna have a strike, let's have a really big one. In fact, it was a very busy summer in Hollywood. Studios stockpiled scripts and sped up production of feature films. Networks ordered extra episodes of hits like "Las Vegas," "The Office," and "CSI" while hinting about filling programming gaps with non-SAG newsmagazines and reality shows. For its part, the WGA is threatening to strike as soon as Nov. 1, when its contract expires eight months before SAG's does.

For the record, everybody agrees of course that a strike would be disastrous, but for the studios and the networks, at least, there's a potential upside. Less production equals lower deficits equals higher short-term profits. Wall Street might cheer.