The Evolution of Residuals: How Streaming Changed the Model

In the decades since televisions first became widely available to consumers, in-home entertainment has continued to evolve. By the 1980s, cable television subscriptions reached 50 million homes, but as the popularity of traditional cable began to dwindle, a subset of entertainment entities known as 'new media' took center stage, and they are the leading sources of in-home entertainment today.

New media refers to three types of on-demand streaming platforms: ad-supported streaming services (ADSS), electronic sell-through (EST), and streaming video on demand (SVOD).

ADSS includes platforms like YouTube, which is fully ad-supported. EST platforms allow viewers to pay a one-time fee to ‘purchase’ digital content outright, with no recurring costs. SVOD platforms require subscribers to pay a monthly fee to access the content. This post will focus on SVOD platforms, including well-known streaming providers like Netflix, Hulu, Amazon Prime Video, Discovery+, and similar services.

How new media benefits content viewers and creators

Consumers today have more freedom when deciding how and what they want to watch. When cable was the only option, subscribers paid a monthly fee to access a pre-determined set of channels. There were access tiers, but viewers were limited in their ability to cherry-pick what content they wanted to invest in. Now, consumers can build a custom content package by subscribing to a custom mix of streaming channels that own the content they like to watch.

Creatives hoping to bring their stories to life also have more opportunities to find the right production partner, thanks to SVOD. In the past, if a network didn't pick up a show, that was the end of the story with traditional media. Today, creators can pitch ideas to multiple studios, increasing the odds that they'll find a partner to invest in their vision. This scenario has played out both with brand new content and existing series that were canceled and have sine been revived. For example, the show Lucifer got cut after a run on Fox and later found new life on Netflix.

Understanding the streaming landscape

At first, there were only a handful of popular streaming platforms, but over time, it became clear that SVOD was the future of media consumption. Today, nearly every well-known network has its own streaming service; to stay competitive, each has doubled down on its efforts to create or procure buzzworthy content that's 'locked' to its platform.

Success is based on the number of subscribers a platform has, so each platform's ultimate goal is to boost the number of people willing to pay a monthly fee to access its bingeable, can't-miss content.

So how do residuals work with new content on SVOD platforms?

Let’s start with the basics. Before streaming existed, TV revenue was deeply tied to run performance (Nielsen metrics like the number of viewers and popularity) and ad revenue. The subscription-based streaming model has completely re-architected how media is consumed, creating a landscape unlike anything we'd ever seen before. As a result, the industry had to re-imagine how writers and on-screen talent get paid for their content contributions.

Types of SVOD Content

'Historical content' – any content produced after 1971 that is not brand new – has a different residual formula, which we discussed in a previous post. Today, we will focusing exclusively on 'new content,' which includes any media (movies, television shows, or series) that is brand new. Examples include a Netflix original series, an HBO docuseries, or a new season of a long-running network series.

To identify which formula to use when calculating residuals for new content, you first have to determine whether that content is considered 'high-budget' or 'low-budget.'

• High-budget content is quantified as any program that costs more than $1 million to produce a 30 minutes episode, or more than $1.7 million to produce a one-hour episode. Approximately 75% of the content on popular streaming platforms falls into this category. Residual rates for high-budget content are calculated based on a fixed formula.
• Low-budget content is low-production cost programming. The definition of ‘low budget’ varies by made-for market and by guild, but as a general rule of thumb, programming that costs less than $1 million to produce a 30 minutes episode, or less than $1.7 million to produce a one-hour episode, is considered low budget. Residual rates for low-budget content are calculated based on license fees.

Once you’ve determined whether your content qualifies as ‘high budget’ or ‘low-budget’, use the appropriate formula below to calculate residual costs for the program.

Residuals for High-Budget Subscription Video on Demand (HBSVOD) Programs

High-budget content residuals are calculated based on a fixed formula, meaning there’s a simple math equation to be done based on a set of pre-determined factors. On streaming platforms, success is based on the total number of views. As a result, SVOD rates require content producers to pay a bulk payment to cover a full year of residuals because the platform and actors aren’t making any money off of ads.

Residual rates for new content on streaming platforms are determined based on three factors: 

1. Subscription Video On Demand (SVOD) Base Rates: Base rates are arbitrary because they’re set by guilds and are re-negotiated every three years. The last rate adjustment happened on July 1, 2020, and the next will happen on July 1, 2023. 
2. Yearly Rates: With traditional media, you can track a show’s performance based on a run in real-time. However, with SVOD, the bulk of any given show’s revenue comes in during its first three years, so rates are higher during that period of time. There are also different calculations for domestic vs. international distribution.
3. Subscriber Tier Rate: These rates, which consist of five tiers, are based on the popularity of the streaming platform. The more subscribers a platform has, the higher the subscriber rate will be. 

The basic formula to calculate high-budget content residuals for new media is:
Streaming Video On Demand (SVOD) Base x Year 1 Rate x Platform Subscriber Rate.

Residuals for Low-Budget Content on New Media

Low-budget rates are calculated based on the total amount of money received from the platform via a license fee, and they change based on how long the content has been on the platform. That means lower budget shows will never end up paying more than they receive for a production, and they always pay out residuals through a one-time fee.

Low-budget episodic content gets to stream free for the initial 26 weeks on a platform. From 27 weeks on, low-budget films pay a percentage of their license fee, as defined by each guild, to each eligible recipient. Low-budget new content rates are also negotiable and are eligible to change every three years.

The current guild rates for low-budget new content are:

• Director’s Guild of America (DGA): 1.2%
• Writer’s Guild of America (WGA): 1.2%
• Screen Actor’s Guild (SAG): 3.6%

To calculate residual rates for each eligible recipient, productions must divide their total episodic license fee by two (half is free because the first 26 weeks are free). Then, multiply the remaining half by the appropriate guild’s percentage rate to calculate their total residual.

Since these rates change periodically, it’s important to make sure you’re using the most current rate for each guild to avoid over or under-payment. These payments are made in perpetuity, so it’s very important that you get the math right the first time.

How EP Ensures Accurate Residual Calculations

Our systems are deeply integrated with one other. As a result, we have access to in-depth aggregate data that takes all the manual work out of performing accurate residual calculations. By accessing employee files, payroll records, digital contracts, and more, EP is able to seamlessly build detailed residual reports and verify data to ensure you’re never overpaying or underpaying your talent, keeping your productions in the guilds’ good graces. Ready to get started? Learn more about EP’s Smart Residuals platform today.