Motion Pictures: Legislation Affecting Payments for Reuse Likely to Have
Small Impact on Industry (Letter Report, 01/31/2001, GAO/GAO-01-291).

The Digital Millennium Copyright Act was enacted to ensure that members
of actors', directors', and writers' unions were paid residuals when
motion pictures were reused in such media as television and video. GAO's
analysis of motion picture industry data found that, in the three years
leading up to the 1998 legislation, at most, about 2 percent 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
GAO's review of films made under contract with an actors' union between
1996 and 1998, GAO found 771 films for which residuals had not been paid
or obligations assumed. About 87 percent 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. While there is no observable impact on
the motion picture industry 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.  Although the legislation's impact on the overall motion
picture industry may be small, certain individuals working on low-budget
films could experience substantial losses.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  GAO-01-291
     TITLE:  Motion Pictures: Legislation Affecting Payments for Reuse
	     Likely to Have Small Impact on Industry
      DATE:  01/31/2001
   SUBJECT:  Television broadcasting
	     Labor unions
	     Payments

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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, 1998 1 , 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:

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

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 and i 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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