
How A $19 Million Movie Makes $150 Million - And Still Isn't Profitable - mtgx
http://www.techdirt.com/articles/20121018/01054720744/hollywood-accounting-how-19-million-movie-makes-150-million-still-isnt-profitable.shtml
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jakejake
This is exactly how record deals work as well, I can tell you first hand. The
added kick in the nuts which isn't even mentioned is that if the project
starts to come close to the level of profit where the artists would get
payment - all the studio/label has to do is spend more money on additional,
marked-up promotion and the project goes deeper into "debt."

Why would they bother paying the artists, when instead they can invest that
same money on a 2nd round of advertising? From their perspective it doesn't
make sense to ever pay the artist. The only time they do is if the artist gets
really pissed off, has some clout and the studio/label wants to keep them
happy. If all three of those things happen then maybe they'll get some crumbs.

The moral of the story is, unless you have the kind of clout to make your own
deal, make sure you get a satisfactory amount of money from your advance (up-
front payment).

~~~
hkmurakami
I truly look forward to the day when supporting (by paying real money)
individual creators and independent teams for music, movies, animation, games,
and books will be commonplace in the general public. In tandem, I hope that
this will spur great creations to come forth that are not bound by the
traditional red tape and truly messed up business models of today's media
businesses.

Such a world will require a lot more independence and proactivity from us the
consumers (which we are frankly not accustomed to at all right now), from the
extra effort needed to engage in "discovery" and in realizing how much of an
impact each consumption & purchasing decision can have on the lives of each
creative person we choose to support; but such a world will have far more
diversity and niche options than we currently see today, which would be a
truly amazing future.

~~~
chii
I can see things starting to go in that direction - the tech industry is
always on the bleeding edge, and things like kickstarter is only going to
become more and more mainstream.

For example, a band could kickstart their own record/tour by asking for crowd
funding. These sorts of funding means that they aren't somehow tied up by
commercial record companie's business tactics which would obviously benefit
the record company, and not the actual person/group making the creative work.
This way is the way forward, as surely as water falls off a waterfall.

~~~
nnnnni
You mean going BACK in that direction. All (or most?) art used to be directly
commissioned.

~~~
dllthomas
All or most _commercial_ art, certainly. I wouldn't be surprised if most art
has always been done by amateurs.

~~~
nnnnni
Oh well yeah, that was implied.

~~~
dllthomas
Yeah, I just thought it worth calling out explicitly.

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antr
No that different from Google's, Facebook's, Apple's, et al. methods employed
in Europe to avoid paying taxes.

~~~
lquist
For those that are unaware, parent is referring to the "Double Irish" strategy
(<http://en.wikipedia.org/wiki/Double_Irish_arrangement>).

~~~
antr
Not really. I'm referring to the operating companies acting as cost centres,
rather than profit centres. Avoiding taxes at the HoldCo is another ball game
i.e. double Irish.

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aptwebapps
What I don't understand is, why would anyone accept terms that had any
relation to profits at this point? Surely this is well-known by now?

I can understand this working for a while, but it's amazing how long it's been
going on.

~~~
tomrod
I'm not sure about this specific example, but I could see a couple of reasons:

* One really wants the movie to be made, like a Clint Eastwood figure director who likes the script, regardless of the cost to self

* Director is new and potentially naive; agent is no good

* Director is new, not naive, and wants to make a brand for him- or herself in the movie world (and knows the movie isn't bound for a Saturday Syfy special... /snark)

~~~
aptwebapps
The thing is, people who are that new and naive can't demand much in the first
place. People who are in a position to take a slice worth worrying about would
presumably know better.

I guess that's not completely true, going by the Scott Derrickson example, but
it still seems strange to me.

~~~
waterlesscloud
He had done a direct to video movie before Emily Rose, a Hellraiser thing with
a budget of about $2 million. For that he likely made around $100k salary and
if he had any net, it was worth nothing.

But that project proved he could direct an acceptable film, which isn't as
common a skill as you might imagine.

So once he'd done that, he had the chance to move up to the next budget range,
$20ish million, plus or minus. For that, as I mentioned above, he probably got
in the neighborhood of $500k. Maybe a little more, but certainly less than $1
million.

Then when _that_ movie did extremely well, he went on to do The Day The Earth
Stood Still, an $80 million dollar project. Whatever he got paid for that is
highly variable, but it was likely a million or two.

As he mentions in the podcast, TDTESS did 80 million domestic, total of 240
global. Which made it a success in terms of money, but since the domestic was
so low it wasn't perceived as such in the industry.

So he didn't move to the A list after that. He said he got offers for things
like big franchise sequels, but his own dream projects weren't able to get the
greenlight. If he'd taken the hired gun route on studio sequels, he said he'd
probably make a couple million per.

So what he did instead was go and make his own film, cheap. He made the
current movie Sinister for $3 million. Again he's back in the few hundred
thousand range at most for salary. But this time, since it was his movie and
he made it cheap, he's got real gross participation.

As he says in the podcast, after the movie hits a certain breakeven point
(which it likely is very close to doing if it hasn't already), the money
starts rolling in for him and he'll be "rich". From the podcast, it seems
likely his deal on this project will let him get what would be called FU Money
here.

It's not a terrible system, really. Directors aren't completely screwed, they
do ok for themselves.

The real secret is to own the property yourself.

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cdk
It seems like the people with real leverage (i.e. movie stars) demand a cut of
the gross (pre-expenses) instead of the net.

~~~
fatbird
I was going to say: He should have fired his agent for agreeing to _any_ cut
of the net. I thought everyone at this point knew that you always demand
points on the gross just because no one every makes net points.

~~~
lquist
Incidentally, even outside of the movie business, never take net points on
_anything_ , for exactly this reason.

~~~
Rev55
Agreed, it's so easy to get screwed over.

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jivatmanx
Nothing special here, tax shelters work by generating artificial tax losses
that are written off, or by using indefinite deferments.

In this artificial losses are generated by the movie theater piling each shell
company up with faux "service charges".

~~~
azylman
The difference is that tax shelters usually aren't used to deprive your staff
of salary, they're used to deprive the government of tax revenue. This is
both.

~~~
bryanlarsen
Except that it doesn't work for avoiding taxes. If you charge ten million in
internal advertising to an account, you're advertising division is still
making a profit.

There are lots of other tricks for avoiding taxes, but what is described is
purely for screwing the artists.

~~~
kristofferR
But you don't charge your own company, you buy services from a seemingly
external company (that is actually operated by you). That's one way to
generate a loss while actually just moving money around.

~~~
sokoloff
You generate a loss for one company, but income for another company. I don't
see how this avoids taxes, just moves them from one entity to another. (so if
the second entity is in a tax-friendly jurisdiction, it's obvious how that
helps, but it doesn't simply generate a loss and that's the end of the story.)

~~~
chii
But then the shell company could just be collapsed, and all its debt
obligations (which is really to yourself) could be all moot. Thus, you avoid
paying tax like that as well?

~~~
beagle3
Such tax loopholes might exist (I am not a tax person), but generally the
answer is no:

If you take a loan, and don't return it for whatever reason (e.g. because the
person to whom you owe it has died and has no heirs; or the bank that gave you
the loan decides not to collect), the loan you previously received is
instantly converted for tax purposes into your income, and you have to pay
income tax on that.

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rickyconnolly
This reminds me of the method used by Starbucks to avoid paying tax in the UK
[1]. They set up their UK operations as a separate legal entity, and then
charge it considerable licensing fees for the use of the Starbucks brand. This
way, the UK branch appears to be making a loss on paper, when it is actually
generating considerable revenue.

[1]. <http://www.bbc.co.uk/news/business-19967397>

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MartinCron
This is as good a time as any to suggest Kevin Smith's "Smoviemakers" podcast
for anyone who is interested in the art and business of movie production. It's
really a great listen, even when he's talking to people I'm not a huge fan of
(such as Scott Derrickson --nothing against him, but I just haven't seen any
of his movies)

<http://smodcast.com/channels/smoviemakers/>

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knowaveragejoe
Meanwhile this industry is complaining it's being strangled by piracy?

~~~
sukuriant
Well, when you're paying loan-shark interest rates on loans you've made
against yourself, it's kinda pricey.

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lifeisstillgood
I just want to know what part of "Everybody knows" does everybody not actually
know. The director of a film I have actually heard of, took 5% of net.

But everyone knows you want a percentage of gross. When was this not known to
people working in the industry?

This also adds to my totally unsubstantiated belief that a large portion of
fortune 500 would be unprofitable without tax dodges

~~~
vacri
"Give me 5% of gross"

"No. We'll look for another director, there are thousands"

"Okay, I'll take 5% of net"

~~~
dennisgorelik
"Okay, I'll take 2% of gross".

"Net" should never be a part of such negotiations.

~~~
tsotha
Only a handful of people have that kind of clout. Everyone else is getting
part of the net, realizing they're getting screwed, and hoping the current
project will be so successful they join the powerful handful.

~~~
dennisgorelik
If all non-important participants are getting part of the net, that guarantees
that net would be negative.

Why even bother asking for it and putting it on a contract? Ask for tiny gross
part or for small hourly raise, but treat net share exactly as zero.

~~~
tsotha
Most of the "talent" gets a fixed amount. The net percentage is like getting
stock options as a programmer - if the stars align just right you might get
something. Maybe.

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hermannj314
Shouldn't this say, how a $19 million movie that spends $50 million in
advertising and $250 million in distribution can make $150 million and not be
profitable?

Your marketing and distribution costs are real costs aren't they? I don't get
how this is "Hollywood Accounting", it sounds like actual accounting.

~~~
HelloMcFly
The point is a lot of those "figures" aren't real or objectively driven,
they're just numbers being shuffled around within the company to make the
movie seem more expensive. There's a wikipedia article on it that may make the
concept more clear.

~~~
hermannj314
Thank you, it did seem a little more clear after reading that. Basically, no
one is claiming the movie didn't "spend" $50 million on advertising, the claim
is that the studio is inflating the $50 million advertising expense while
hardly providing anything close to that value in return.

Wouldn't that be caught in an audit? Aren't there (shouldn't there?) be laws
prohibiting corporate-to-corporate transfers that are just money dumps not
tied to legitimate verifiable expenses? I am ridiculously naive about this
topic, but it seems the directors of these movies could sue if the studio were
lying and exaggerating expenses?

~~~
Nick_C
There's no lying or fraud. Company B (the production company) agrees to pay
Company A (the studio) $X for services. Done, price agreed. Of course, both
companies are owned by the studio, so it is just transfer pricing as far as
the studio is concerned. But it is a real cost for the production company so
that that there is no profit for residuals. Intentionally.

------
fpp
It's called "Hollywood accounting":

<http://en.wikipedia.org/wiki/Hollywood_accounting>

~~~
klodolph
Did you click the link? "Hollywood Accounting" is the article title and the
subject of the first sentence.

~~~
SilasX
So someone's article is just a rephrasing of a Wikipedia article plus some
specifics?

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majormajor
So, as someone who's never been involved or close to the sale of a heavily
funded startup, this sounds on the face of it similar to taking equity in a
startup that then raised more money and diluted that equity and then was sold
in a deal where that equity ended up turning into nothing—I've read a fair
number of stories on here that toss around terms like "preferred stock" or
whatnot, but still don't really know how the sausage is made. It sounds an
awful lot like this, though: the people who put in the most money also have
tricks of making sure they get paid, while most of the people doing the work
don't have the clout to get in on it.

------
EricDeb
<http://ycombinator.com/rfs9.html>

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mistercow
While the general idea of this is obviously gross and greedy, this part makes
perfect sense:

>with some of the big studios, some of this money involves paying itself for
advertising on its own properties.

The idea of opportunity cost applies to advertising; any advertising they do
on their own properties is advertising they could have sold to somebody else.
So it's clearly legitimate to count that as a cost.

~~~
bathat
Not necessarily: If an advertizing slot was unsold and filled with self-
advertizing, then the opportunity cost was zero.

~~~
mistercow
If it was unsold, that just means the price was too high. No advertising slot
has an actual value of zero.

------
undantag
Similar thing happened to a friend of mine who worked at a game development
startup. A company was set up for that game, and the whole crew of developers
were hired by it, while the two "founders" held the parent company. Everyone
worked for low-to-no wages under the promise that they would see bonuses based
on sales.

When the game released, all the sales revenue went to the parent company and
the only ones receiving bonuses were the two founders.

~~~
Evbn
Well they certainly got the the expected value of "promises".

------
TwoBit
How is it that Hollywood Accounting is legal? The US has its problems, but
people's leal rights is one thing the US is usually pretty good about.

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randomfool
This seems like the opposite of performance-based compensation. No wonder
Hollywood sucks- no one cares how much their movie makes!

~~~
Evbn
Wait I thought the profit motive driving studios to produce safe sequels the
mass market say they want is why movies were are so bad.

Which is it?

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OldSchool
I cringe every time a movie or event is reported as having "made" its gross
ticket sales number. Typically 1/2 off the top goes to theaters themselves,
and then all these accounting games begin. Maybe the top line is the only
relatively non-fictional number but they could at least report it for what it
is: ticket sales.

~~~
adrianscott
I've read that these days many theaters only get 10% of the ticket sales for
the first week or so at least on major films, (before dropping substantially,
combined with much shorter runs. So the theaters get less than they used to as
far as i know, especially that first week or so.

~~~
OldSchool
Interesting, that's a pretty harsh deal considering how extravagant movie
theaters are expected to be these days. Considering whom they're buying from,
I guess I'm not surprised.

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andreasvc
Why isn't this stuff outlawed? To me it doesn't sound like accounting tricks
at all, it sounds like outright fraud.

~~~
noonespecial
"Outlawed" is a difficult concept at this level. All justice above "street
level" is simply politics.

The executive summary is that if you did it, it would be fraud because you
haven't made enough campaign contributions.

------
shinratdr
My favourite example of this classic accounting practice is MF DOOM simply
warning listeners right off the bat to pirate his Venomous Villain album
because his contract for it blows:

"Dub it off your man/Don't spend that ten bucks/I did it for the advance/The
back end sucks."

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ErrantX
On a related note; if you've not seen "Monsters" then you should track it
down, a great film! (it should have had a BAFTA but had the misfortune to be
released the same year as the even better "Four Lions").

------
dllthomas
I think it's amusing that the movie industry complains of piracy hurting the
artists, while at the same time charging the artists exorbitantly for things
(promotion, distribution) which piracy helps with.

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ta12121
Sigh. Yes, we know. Hollywood Accounting.

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joshuaheard
Why don't you just take a percentage of the gross revenue instead of the net?

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ktizo
One of the most egregious examples of this is David Prowse not getting any
residuals for Return of The Jedi, as it also apparently hasn't made any
profits yet. - [http://www.slashfilm.com/lucasfilm-tells-darth-vader-that-
re...](http://www.slashfilm.com/lucasfilm-tells-darth-vader-that-return-of-
the-jedi-hasnt-made-a-profit/)

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witoldc
Is there any effect on taxes?

Yes, the shell company makes $0 thanks to phantom expenses, but the main
company gets all that money and that is profit.

So the shell has 0 tax liability and the main company faces all the tax
liability.

It may screw the crew, but it doesn't matter for tax reasons. Correct?

~~~
djloche
The larger company will have losses from unsuccessful ventures, which will
offset the profits.

~~~
beagle3
But that's not a tax cheat - that's how the tax system is supposed to work. If
the total sum of losses is greater or equal to the sum of profits, they
haven't actually made any money, and shouldn't be taxed.

It's just people who are promised "net points" that get screwed, not the tax
man.

