For those still largely baffled by the writers’ uprising in Hollywood – and, in particular, the reason why the Academy Awards might be cancelled for the first time in 80 years – it might not be a bad idea to consider the case of the late Lew Wasserman’s lavatory.

Wasserman’s agency MCA represented Bette Davis and a young man called Ronald Reagan, whom he later helped to become President – of the Screen Actors Guild. Wasserman went on to buy Universal Studios and pretty much ran Tinsel-town until the 1990s, when he sold out to the Japanese. And yet he remains most famous for his lavatory – or rather for his observation, possibly apocryphal, that he didn’t pay a royalty to his plumber every time he flushed the damn thing.

Lew’s Law of Free Flushes (the fact that he was called Lew somehow adds to its appeal) brings a certain blunt clarity to the thinking of today's studio bosses, and the issue over which they have fallen out so emphatically with the people who put the words in actors’ mouths: if you buy a script, the studio chiefs argue, then why should you pay the writer again every time those words are reused in, say, TV repeats, or on satellite movie channels?

Thanks to the Writers Guild of America (WGA) writers get a cheque, known as a “residual”, every time their lines are rebroadcast. Some writers live on these residuals. Others buy Aston-Martin convertibles with them.

But then along came the internet. For a while, this wasn’t a problem: or at least, not a problem for the studios. Using Lew’s Law, they paid writers a flat rate of zero for TV episodes or movie clips streamed online. And nobody really cared, until the studios began to sell advertising slots in the streamed content. This turned out to be lucrative: already, the market is worth $250 million and it’s going in only one direction. The writers, still upset about what they consider their miserly share of DVD royalties – the same formula for which has been suggested by the studios for iTunes downloads – were just beginning to get worked up about this when their WGA-negotiated contract ran out in November, and it was time to renegotiate.

The speed at which the WGA went for the nuclear option – a “pencils down” order to strike – was impressive. The union’s calculation was that with several of the studios’ other big contracts also coming for renegotiation in June 2008, in particular deals with the Screen Actors Guild and Directors Guild of America, it had the opportunity for a preemptive strike on Lew’s Law before the entire residuals system could be made obsolete by a future in which all movies and TV shows are streamed on the internet.

And so this bizarre industrial dispute began: the writers demanded to be paid residuals for anything streamed online, and the studios, represented by the Alliance of Motion Picture and Television Producers, refused. The talks broke down amid childish insults: the writers adopted cringeworthy Socialist Worker fight-the-power clichés, while one executive retaliated by describing writers as “the ugliest nerds in high school”.

Within 24 hours of the pencils-down order, all of America’s big nonreality TV franchises began to shut down, and some of America’s most successful writers had driven from their mansions in the Hollywood Hills to join their less successful colleagues on the picket lines outside studio gates. Membership of the WGA is mandatory for all writers, with the union taking 1.5 per cent of income, in return for which the writer gets free medical insurance and a pension. Not everyone loves the union, but most remain supportive – for now. At first, it was tempting to see the strike as a bit of a lark: writers, after all, don’t tend to get out much. They picketed for several hours a day, getting healthier in the process; they launched strike blogs, such as UnitedHollywood. com; they made (mostly unwatchable) short films; they ate at “soup kitchens” set-up by Alist restaurants such as Campanile; they met obsessive fans, who in one case found out where the Battlestar Galactica writers were picketing and turned up in search of answers to unresolved plot questions. Even celebrities such as Jay Leno showed up to hand out doughnuts.

Better yet, the public was generally sympathetic, perhaps because of their limited understanding of what writers actually do, and how they are paid (outside the relative $3,000-per-week poverty of being a staff writer on Ugly Betty, an Alist freelance screenwriter such as Paul Haggis, who wrote Crash, can earn several hundred thousand dollars for one rewrite).

Meanwhile, the studios began to refund advertisers who had bought space on now-cancelled shows. Aside from that, however, they didn’t flinch. And that was when the picket-line comradeship began to get a bit tired.

“There’s always the possibility that the studios don’t care if they have a year or two of no TV and no movies,” says Erica Rothschild, who was adapting the children’s book series Rotten School for Fox – owned by News Corporation, parent company of The Times – before she became a full-time picket. “Or maybe they’re just pretending they don’t care, because no one wants to show weakness.” Many writers began to fear the former explanation when the strike went into its third month. Writers with mortgages and kids began thinking about applying for payments from the WGA’s strike fund. The talent agency ICM suspended employers. Warner Bros threatened to make 1,000 employees redundant. Meanwhile, when actors realised they would have to cross picket lines to collect their Golden Globes the event became a press conference, resulting in huge losses to party organisers, caterers, fashion companies and the like.

And then, when the prospect of an actors’ strike was raised, even public opinion began to change. As popular as George Clooney and his peers might be, no one in America’s depressed economy enjoys the thought of a multimillionaire actor flying his Gulfstream to a picket line. Public opinion is also being affected by so-called “TiVorexia” – the shrinking list of shows to watch on the nation’s digital video recorders. How many more Project Runway repeats can the country take?

Moviegoers have yet to be affected, because scripts are stockpiled well in advance and rewriting is often done by nonWGA producers or even assistants. The British film industry, unaffected by the strike, is also picking up some of the slack – and some of the cheques. Still, there is talk of the 2009 release schedule being severely upset, with the sequels to The Da Vinci Code and Transformers said to be among the projects delayed or on hold.

But the movie industry may be affected in a more immediate way: the possible cancellation of the Oscars ceremony on February 24. This would be a disaster for Hollywood’s Oscars-based marketing campaigns, with a golden statue often making or breaking the fortunes of films.

So is the WGA losing the battle? Not yet, although patience is being tested. The thousands of people who perform Hollywood ’ s less glamorous jobs – catering, lighting, sound-engineering – are getting increasingly bitter about their lost wages and, in some cases, lost jobs. The WGA hasn’t helped by handing out strike waivers to some but not to others: David Letterman, for example, was given a waiver because he owns his own show and could therefore agree to pay his writers whatever the WGA wanted. His late-night talk show rivals can’t do that, because they’re employed by the studios. Now the likes of Jay Leno and Jon Stewart have been forced back on to the air – partly to save the jobs of their staff – with no writers, and a warning from the WGA not to “write” their comic monologues themselves. The debate over what constitutes writing is now so absurd as to belong in a Monty Python skit.

But there are signs that the union’s strategy is working. Tom Cruise’s United Artists mini-studio has already broken ranks and struck a “pants deal” – named in honour of Letterman’s company, Worldwide Pants – with the WGA, as has the Weinstein Company.

But most writers simply can’t afford to continue striking for very much longer. “I’ve heard horror stories about people in severe financial straits,” says Erica Rothschild. “And it’s only going to get worse.”

She adds that, by June, some might have followed John Ridley, who wrote the original script for Three Kings, and declared themselves “financial core”, a legal term that essentially means they have chosen to break the strike.

By then, of course, the studios will have lost billions. Most hope now lies with the Directors Guild of America and its British president, the one-time director of Coronation Street, Michael Apted. If the DGA can work out a deal that broadly fits everyone’s needs, then both sides of the strike could blame each other for the crisis and get back to work.

But another force might also be at work in hastening an agreement: the news that, during the first two months of the strike, viewership of YouTube – which isn’t owned by any studio and doesn’t employ any WGA members – was up by 18 per cent.

It’s hard to avoid the feeling that if Hollywood’s work-stoppage goes on for much longer, Lew’s Law could become irrelevant. The toilet handle, along with the toilet itself, will have been flushed down the sewage pipe, once and for all.

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