Doubling down, they seem to have realized they could still reduce pay anyway by instead giving out net profit deals and then cook the books so they didn’t have to pay anything extra to anyone. The movie went on to gross, adjusted for inflation today, about half a billion dollars (about 30 times its original production budget). Although the terms of the deal reached with Lee were never disclosed and various figures have been thrown out, it would appear at the least that Marvel Studios decided to start paying the comic legend a yearly salary of $1 million for doing basically nothing, as well as gave him an honorary executive producer credit on every movie they produced while he was alive. Similarly, later 15 of the actors on the film would go on to sue New Line, noting they had been supposed to get 5% of the merchandise sales, which mysteriously allegedly lost money despite bringing in in excess of $100 million at the time for the studio… For example, consider the case of Winston Groom who was promised 3% of the net profits of a film based on a little book he wrote called Forrest Gump. Naturally, the frankly astounding capability of studio accountants to turn even the biggest box office smash into a failure on paper has led to a running joke in the industry that the most creative people in Hollywood are the guys who do the books.
- Here’s a fun fact for you to mull over, despite having a clause in his contract that entitled him to a share of the total net profits of Return of the Jedi, David Prowse didn’t get so much as a single thin cent from Lucasfilm from this because, on paper, Return of the Jedi then until today has been a massive financial failure… How is this possible you ask?
- In 2005, the music and movie mogul behind “Amadeus” and “One Flew Over the Cuckoo’s Nest” reached an out-of-court settlement in his $20 million suit against New Line Cinema over foreign royalties from “The Lord of the Rings” movie trilogy.
- The studio is the entity that determines who gets their payout–and in a market where everyone wants to get paid, they also want their cut.
- Any accountant would look at these overheads and laugh at loud when benchmarking the costs of these overheads against similar on the open market, outside of Hollywood.
- By including this clause in an agreement, creators and their representatives can hold studios accountable, ensuring that the terms of the contract are being honored.
- The case centered on an independent audit of three films TSG invested in, including best picture winner The Shape of Water, that revealed it’s owed at least $40 million.
Legal
Many reputable companies in the entertainment industry follow transparent accounting practices and honor their contractual obligations to talent and profit participants. Hollywood accounting has numerous impacts on different aspects of filmmaking and stakeholders in the entertainment industry. 21st Century Fox was found guilty of using Hollywood accounting practices to defraud the producers and stars of the procedural drama Bones (2005–2017) and ordered to pay $179 million in missing profits, with the arbitration ruling made public in 2019.
“…the victims of a sinister campaign of fraud and coercion that has cheated them out of continuing involvement in the production of the 1989 film Batman and its sequels. They claimed that the movie, which cost less than $6 million to make and made over $350 million at the box office, lost $20 million. That grossed at least $288 million on a budget of $35 million yet Paramount claimed it made no profit. Nobody would sign up for bonus points on the back end, based on net profits, as there very rarely are any. It is officially still a loss-making movie. We delve into the murky depths of movie money and the hidden, borderline-criminal world of Hollywood Accounting.
Say a movie studio sets up a distribution arm as a sub-entity. What is it called when people take losses in order to preserve the cleanliness of their potential profits? Recently, despite grossing $911 million against its $55 million budget, the 2018 Freddie Mercury biopic Bohemian Rhapsody was written down as a $51 million loss by the studio.
“The problem in Hollywood is that for an accidental reason, they use the phrase net profits instead of bonus pool.” But there are some cases where there are participants whose compensation is based on net profits. Major movie stars have the clout to negotiate those types of deals.
ELI5: What is Hollywood Accounting?
Another form of Hollywood accounting is a reverse tobashi scheme, in which the studio unjustly cross-collateralizes the accounting of two projects and shifts losses from a flop onto a profitable project by shifting costs involving internal operations. Hollywood accounting (also known as Hollywood bookkeeping) is the opaque or “creative” set of accounting methods used by the film, video, television and music industry to budget and record profits for creative projects. Michael Moore sued Bob and Harvey Weinstein for creative accounting to deprive him of his share of profits for the film Fahrenheit 9/11.
- These are by no means cherry picked examples, with some estimates suggesting that upwards of 80% of all major studio releases lose money according to the studios, which somehow magically manage to stay in business anyway.
- Then wrap this all up in a network of subsidiaries all charging each other what they like for all of this, and every movie can be made to make a loss on paper.
- He got nothing outside of his initial fee as the movie didn’t make any money… apparently.
- The 2005 film Sahara grossed $119 million against a production budget of $160 million, resulting in a $105 million loss for Paramount Pictures.
- At this rate I’ll get my 5% of net profits in 4830 B.C.
- Despite grossing $911 million against its $55 million budget, 20th Century Fox wrote down the 2018 Freddie Mercury biopic Bohemian Rhapsody as a $51 million loss.
“But if file-sharing leads to less spending on films, consumers have more money to spend which will completely offset these effects. Because the latter also factors in estimated losses from revenue that fails to circulate through the economy. Just to put that in context, it’s almost half the global box office revenue for 2015, which was slightly more than $38 billion. Without these numbers, nobody can know whether a movie is in the black or how profitable it truly is.
Galloway on Film: Challenges From Amazon and Netflix Signal the End of the Studio System
This ensures in a given year they aren’t making a cash profit, or at least making less of one. As one industry insider noted in an interview with the New York Times, “Everything, just everything, is deducted. This distributor can then charge hollywood accounting the parent company really anything they want to distribute the film. In this way, the studio, or vice-versa, can charge pretty much whatever it feels like for any service.
Will Smith Sued by Tour Violinist For Wrongful Termination, Retaliation
Fox not only gave the streaming rights for the show away practically for free by industry standards, but, says Lichtman, “perhaps the most shocking piece of evidence related to the Hulu issues… Fox actually signed both sides of this agreement. In this case, it would appear the companies involved were simply keen on avoiding the bad publicity that would come from shafting one of the more popular people in the industry. In some cases, if they can combine this into making it seem like an expense for a given film, all the better- two birds with one stone.
This is due to the wonders of Hollywood accounting. That is with a box office take worth $1,340,393,235 today. Did you know that Return Of The Jedi made a loss? But there’s yet to be any definitive assessment of the actual loss. There’s no doubt piracy significantly hurts the industry. Siwek also estimated that movie piracy cost the U.S economy some $20.5 billion a year.
Best Practices for Protecting Clients’ Financial Interests
Shares of the film or “points” may be given to producers, directors, actors, writers, or anyone who worked on or helped with the production in a significant way. The next pages will examine how Hollywood accounting works, the types of movies affected — and why the system is likely to persist. For artists and their representatives, advocating for the inclusion of an audit clause is a crucial step in protecting their financial interests.
The Subsidiary Scheme is similar and at the heart of most of these Hollywood accounting practices. Production-based schemes are frequently cited in court cases brought by various revenue enforcement agencies across the world when they prosecute tax evasion. What are the mechanics of Hollywood accounting?
You have to subtract the ever-growing amount you’re paying them from the gross. “As revenue from the movie goes up, the breakeven point goes up as well,” explained Victor Goldberg, a professor emeritus at Columbia Law School. Net profits, on the other hand, are based on a concept known as a “rolling breakeven.” (The movie was released by Touchstone Pictures, a now-defunct production label owned by Disney.)
Expenditures can be inflated to reduce or eliminate the reported profit of the project, thereby reducing the amount which the corporation must pay in royalties or other profit-sharing agreements, as these are based on the net profit. QuickBooks is the ideal business accounting software for small to mid-sized business owners. While we don’t know the payout Groom received (though it was definitely a lot), part of the agreement was that Paramount would own the right to make a film off of a sequel novel to Forrest Gump. The studio is the entity that determines who gets their payout–and in a market where everyone wants to get paid, they also want their cut.
Which is basically the opposite of how most shell companies work–they’re more often used to hide losses in an effort to make a given company seem more profitable. At its base, Hollywood accounting reports a bunch of costs that functionally do not exist. After all, why are you investing in movies if they keep losing money? Despite that, Paramount reported zero profits, which doesn’t really add up. When it comes to how much money movies make, you may find numbers that simply don’t add up.
Miramax, he argued, shouldn’t have deducted $17.5 million of theatrical advertising expenses, since the money also benefited the home entertainment release of the movie. Zaentz claimed Miramax, then owned by Disney, had padded expenses to reduce the profits — thus reducing Zaentz’s percentage payout. In June 2014, Miramax Film Corp. and the Saul Zaentz Company settled a $20-million lawsuit over profit sharing on Zaentz’s 1996 Best Picture winner “The English Patient.” The celebrated film earned $232 million at the box office and a reported $75 million in video sales. So what exactly is Hollywood accounting and how does a profit become a loss? Apparently it’s called “Hollywood Accounting,” but it makes no sense to me how record profits can be a loss.