The thing is, these people don’t ever actually see any money from these shares. The reason net points are given so liberally is because they are, by all accounts, essentially meaningless. To ensure that there are no net profits in Hollywood, movies are contractually designed to be unprofitable, no matter how much they make. Once again, Suicide Squad was No. 1, having grossed $262 million domestically and $572.7 million worldwide.
While Warners insists the picture will be profitable, there’s plenty of debate as to what constitutes success. And how much more will Warners spend to keep the picture in theaters, pushing the break-even point into the distance — a concept known in the business as a “rolling break,” as the profit margin rolls further and further away. There are countless ways to add expenses to a film’s production, marketing, and distribution — tacking arbitrary charges onto the value chain, thereby ensuring that the money never truly leaves the studio’s own hands. What actually ends up happening is the studio inflates the calculations of their overheads to the point where no amount of money at the box office will ever make the film hollywood accounting technically profitable, and thus eliminates the liability to compensate net participation.
He took the project, It’s a Crude, Crude World, to producer Alain Bernheim, who in turn sold it to Jeffrey Katzenberg, then an executive with Paramount. That’s one of Hollywood’s more egregious myths, along with “The camera never lies” and “You’ll get a cut of the profits,” both liable to draw howls of disapproval from anyone in the know. Whatever the instrument of choice, Hollywood accounting strategies have only become more and more sophisticated throughout the years. The only consistent throughline is that when it comes to avoiding responsibilities on the balance sheet, the studio can’t seem to miss.
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Men In Black, on the other hand, grossed nearly $600 million on a budget of just $90 million and spawned three sequels. This sort of behaviour is surprisingly prevalent and isn’t exclusive to now-disgraced producers or studio heads. Though, the one you’re probably thinking of was definitely guilty of it. In response to all this, the Fox lawyers were bold enough to note that Bones, despite being one of the most successful shows in the networks’ history, was only a, to quote them, “middling show with middling ratings”. Or maybe the smug among you will smile and say that it’s clear that I, the writer, don’t understand this kind of accounting.
- If there is any lesson to be learned here, it’s that Hollywood Creative Accounting will always be a standard practice as long as there are pieces of the financial pie to share.
- So creative accounting may be a common practice, but is it legal?
- Reporters like myself spend hours each week trying to get the real ones, and then often fail miserably to decipher them.
- There were no less than four Production companies involved with the creation of Harry Potter and the Order of the Phoenix, only one of which is Warner Bros.
- The former right-wing Texas congressman who was a longtime liberal bogeyman and big-business advocate — hardly the best source of objectivity.
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For artists and their representatives, advocating for the inclusion of an audit clause is a crucial step in protecting their financial interests. It’s a way to ensure that the creative process remains unburdened by doubts about fairness, allowing artists to focus on what they do best. Below is an example of an audit clause, which is provided for illustrative purposes only. The audit clause could be a single sentence that grants the creator a right to access the financial records of the studio, but a more robust clause, like the one below, will do more to enshrine a creator’s audit rights. 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. Well, it’s all thanks to a wonderful concept known colloquially as “Hollywood Accounting”, or more accurately “How to Lose Friends and Screw People”.
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In spite of the $790 million in profits, Warner Bros. claimed that amount was actually minus $167 million. Any percentage of a negative number is a negative number (even if Time Warner’s own cut was not so negative). Thus the film that earned $940 million at the international box office was actually a financial loss for the company of a whopping $167 million. Another look at that ledger shows $130 million allocated for advertising and publicity. Did Warner Bros. spend almost the equivalent to the film’s entire budget in order to market this surefire hit? Well, perhaps… but it’s more likely that Warner Bros. paid itself, its properties or other divisions of Time Warner for this marketing (or a large portion thereof).
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- For the sake of this argument, let’s pretend Brandywine agreed to 30 percent of the net profits (the total revenue minus total expenses) of Alien, while Fox agreed to accept the remaining 70 percent.
- Litigation is costly and lengthy and the last thing a creator should have to spend their time and money on to make sure they are being paid correctly.
- Transactions between the studio and its subsidiary, she said, are generally eliminated when companies consolidate their earnings.
- There are a number of ways to secure funding for a film that offsets the amount a studio honestly spends on its own.
If the movie-making subsidiary makes a profit, the studio then charges the subsidiary — as in, the little company the big company owns, operates, and entirely controls — fees for distribution, advertising, and whatever else, Glaeser told me. At the heart of the biggest TV and film industry strike in more than 60 years is a dispute over how people should be paid. But the unique accounting standards that the industry has long relied on to make those calculations is anything but straightforward. “Forrest Gump” has never made a single penny for the studio that made it, despite selling over $300 million worth of tickets at the box office. “Return of the Jedi” was a similarly monumental financial flop. Nor does its number fairly attempt to estimate what a consumer might have paid for something he or she downloaded illegally.
They can also request transparency in financial reporting and conduct audits to verify the accuracy of the studio’s financial statements. There are a number of ways to secure funding for a film that offsets the amount a studio honestly spends on its own. Hollywood studios will dabble in this sort of double accounting, and hardly anyone outside of its walls will ever know how much a film truly costs to produce. Regardless of what phase they are in, striking a “deal” is always an important event in the timeline of any creator’s career. Upon receiving the deal documents, a creator’s (or creator’s agent’s or lawyer’s) instinct may be to immediately analyze the deal terms as written. While scrutinizing and proposing revisions to initial terms, it is also important to take a step back and consider concepts that may have been omitted from the document.
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Warner Bros. and Fox are definitely not the only companies in Hollywood to employ this sort of creative accounting (nor is this merely a Hollywood phenomenon, if the word “Enron” means anything to you). This suit was finalized in the early ’80s before News Corporation purchased 20th Century Fox, before there was a Fox Network, a Fox News Channel or a Fox Sports Net. By the time of Order of the Phoenix‘s 2007 release, Warner Bros. parent company owned half of the CW Network and all of HBO, Cartoon Network, CNN, TNT, TBS, HLN, Turner Classic Movies, Time Warner Cable, Warner Bros. Distributing Inc., Warner Home Video, DC Comics, Warner Interactive, Warner Bros.
Hollywood studios use it to grab profit shares and limit extra payments to other film participants. Despite all these, Hollywood accounting is not illegal but heavily criticized for its lack of transparency and unfairness. The indies exaggerate the cost of their movies; the studios lie in the other direction. Both are masters at bundling groups of films when they sell them abroad so that one movie’s loss is factored against another’s success. Studios can establish reserves for future expenses or losses by making deductions for contingencies, interest, and various additional costs that are also applied to lower the profits. They can then defer revenue recognition, get some bloke in a suit that went to Harvard to pull out an amortisation schedule, and tell you all about how your net points mean nothing.
If net profit formulas in studio contracts do not correspond to generally accepted accounting principles those same studios might face something as frightening as an audit from the Securities and Exchange Commission. And if that were to happen, the entire profit hiding scheme might become a thing of the past. Thus, Warner Bros. stood to lose a lot of profit by making (or at least, reporting) a lot of money. The smaller the net percentage, the smaller the amount Warners had to share.
I asked Stomberg whether studios would have reasons for keeping their overhead costs inflated other than avoiding paying actors and writers. Siwek also estimated that movie piracy cost the U.S economy some $20.5 billion a year. Just to put that in context, it’s almost half the global box office revenue for 2015, which was slightly more than $38 billion. Few studios ever give an accurate account of the negative cost of their films — that is, how much they cost to make, before prints and advertising are added to the mix. On the rare occasions they do, they stay mum about their marketing outlay.
As to the former question of how do they do it… Well, they have countless tricks up their sleeves, but one of the biggest ones is simply making separate companies for the various projects and aspects of promotion and production. This practice has been going on for a long time, and certainly pretty much everyone in the industry must be aware of it, but at least the lawyers and agents that negotiate the contracts. They often make payouts based on profits, and there are a myriad of ways Hollywood can reduce profits. Movies corporations manage to record a loss by maximizing costs. One oft-cited example is the 1997 hit “Men In Black,” starring Tommy Lee Jones and Will Smith. The movie grossed nearly $600 million on a budget of just $90 million.
