Studios inflate production budgets so it appears the films lose money in order to cut out investors/producers/etc from net profit participation. The studios make their money on distribution and by charging exorbitant rates. A lot of money goes from one pocket to the other of the same company at these exorbitant rates. Here's how to cut:
- Studios charge production overhead fees in excess of 35% reducing significantly the amount of money spent on the actual production
- Studios charge interest in excess of 20% on all expenses incurred in development, production and development
- Producers are required by the studio to contract with vendors they either partially own or have pre-negotiated rates with the studios
- Example, Technicolor pays Universal $25 million at the beginning of the year to be the exclusive lab for all Universal productions. Then Technicolor charges inflated rates to Universal. The $25 million offsets this and the result is the production budget is artificially (i.e. criminally) inflated.
- Example, studios may make a producer pay 40 cents a foot for negative film processing vs 15 cents normally, or up to $4 per foot for release prints vs $1.50. (this data is old)
- A fair system using digital cameras and related technology (e.g. visualization, digital 3D mapping), along with digital distribution to cinemas, should reduce the production and distribution cost of a major film to a few million. +advertising
Same things happens with marketing. The studios will advertise a film through their TV network, all while controlling the prices and limiting net profit participation for the outside investors and producers. All this is a clear case of financial fraud and is known as - http://en.wikipedia.org/wiki/Hollywood_accounting
Because everyone keeps letting it happen. It's not illegal (yet) and the actors go for it. Acting is like gambling... Lots of people dream big, but only a few actually make it. Most of the dreamers are willing to risk everything for that chance. They'll sign any contract that gives them a chance at making it, and they think not signing a bad contract will mean they'll never work. (And that's probably true.)
The music industry works the same way, in regards to the actual content producers.