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How A $19 Million Movie Makes $150 Million - And Still Isn't Profitable (techdirt.com)
196 points by mtgx on Oct 19, 2012 | hide | past | favorite | 106 comments

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).

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.

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.

Quite a few artists/bands have crowdfunded albums on pledgemusic (http://www.pledgemusic.com/). This seems to work reasonably well for established artists that already have a decent fanbase but I'm not so sure about how well it would work for a band that doesn't have a group of loyal fans to turn to.

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

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

Oh well yeah, that was implied.

Yeah, I just thought it worth calling out explicitly.

I agree completely. I've reached a point where the only music I buy is from Bandcamp, where I can choose how much to pay and the money I do pay goes directly to the artist.

Maybe someday this will become a more mainstream phenomenon and it will spread to other media. I can only hope.

What do record labels bring to the table now? They provide the capital to record an album (or at least the studio that can record it), and a complex distribution channel to get albums on shelves and tracks on the airwaves.

The distribution channel is slowly being eroded by the Internet, where a band with the right mix of music and self-promotion can get their music in front of half the planet for the cost of a Wordpress template and some solid hosting.

Getting music on radio and raising the initial capital to get a studio album made are the two missing pieces of the puzzle, but I strongly suspect the Internet will fill those gaps competently in the next few years, as crowd funding reaches maturity and old media like radio realises they don't have to deal with the major labels directly any more and can find new, popular music with a few google searches.

There is such scope for a startup working in this field. You could host and sell albums on behalf of bands, offer a crowd funding model for those who need to raise the funds to record, and build relationships with radio networks to funnel new music their way once a band has reached a certain threshold of community appreciation or some other relevant metric.

The record industry is almost universally loathed, it just seems so ripe for disruption.

What do they offer? An ungodly and unparalleled level of marketing. Any artist can put their music on iTunes but nothing organic can ever compare to a $200 million media blitz.

"Popular" music will always be predominantly influenced by deep pockets. Not exclusively, but damn near close.

But if they are pocketing all that money... what do they offer besides more exposure? You make it seem like artists get nothing out of the deal. If the labels are just providing exposure, what does the artist get?

The exposure is all they need to offer. More exposure will lead to more concert ticket sales and merch sales. With the modern '360 deals' in which the label now takes a cut of those things (because of declining record sales) exposure might not be enough anymore.

Yep, and the record company pockets pretty much every dime of the profit. As a musician you're counting on concert tours to pay the bills. Even wildly successful musicians who are still on that first contract.

Production costs are rapidly approaching zero. Both the equipment to record, and the skills to manage the recording and mixing process, are much cheaper/easier than they were. The current #2 album on the Billboard 200, Macklemore and Ryan Lewis' "The Heist," is completely independently produced.

>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.

Because eventually word gets around. Especially these days with social media, minor celebrity bands who end up with nothing have a forum for their complaints.

Unfortunately many young artists are literally begging labels to make them famous. They assume that money comes along with that, but its not necessarily the case.

I was one of those people once and got a fairly standard (crappy) deal. We're still 6 figures in debt to the label even though the records made a profit.

>> "Unfortunately many young artists are literally begging labels to make them famous. They assume that money comes along with that..."

Half of your statement is true, most if not all young musicians want to be famous (and by that I mean have lots of people listen to their music and see them play). I don't think the second part is completely true though. Most musicians do what they do because they love it and as long as they can make enough money to buy them food, a bed, and get them to the next show, they will be satisfied. People are familiar with the bad reputation labels have and are aware it is not always a road to riches. I think there are very few people who get into music for the money, frankly because the chances of you making a lot of money in it are unlikely. If you want to be rich there are much easier paths.

Well you are correct that some bands are only "in it for the music" but in fact that attitude can get you screwed even harder when you're negotiating with a label.

A lot of musicians are comfortable with a meager living - but not too many of appreciate being poor while the label is raking in cash. But, that's the reality of it. A big label has the power to get you in front of a lot of people and make you famous. It's better to build up the fanbase on your own in the long run, but that's a tough road and many, many artists are eager to accept the shortcut in exchange for a crappy deal. That's just the way it is.

Don't forget that many bands consist of kids in their late teens and early twenties who might be more naive than you are and who may not have a full understanding their chances of making it big vs getting screwed over.

Word is already around. Steve Albini laid out how record company accounting works in the early 90s in his essay "The Trouble With Music". The most cursory research would show you that as an artist signed to a major label, you're unlikely to ever make minimum wage.

That doesn't matter to the labels, because there's a sufficiently large stream of starry-eyed wannabes to keep the wheels in motion. The labels simply don't want to sign the sort of band that's happy to have a small but loyal fanbase, because they can't make any money out of it - like tech VCs, their business model is based on signing a lot of long-shots aiming for global domination.

Honestly the modern moral of the story is bandcamp or indiegogo or kickstarter or some other service. I'll be the first to say it is going to be much MUCH harder than taking a record deal but we do live in a time where its possible to stay away from the big industry folks and strike gold (or out) on your own.

I wonder what it would take to set up a "recording studio as a service" type place that would handle all the tech stuff for a band and let them do promotion themselves, free from label control?

They already exist all over the country. I know a couple of people who own full recording sets and rent it out. Many musicians and techs make a decent supplemental income, and a few make a living, off of working with bands to record.

The record companies real problem with filesharing is that they feel that not paying musicians is their own special prerogative and it annoys them for everybody else to be getting in on the act, especially in a manner so unprofessional that it doesn't even bother including absurdly written contracts.

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

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

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.

Very different, actually:

Supposedly, if you look at the big picture, then the amount of taxes actually paid matches the amount that would have been paid had the structure been simple. The IRS is supposedly not that foolish.

However, this structure can let the studios (and similarly, record companies) keep a larger share of the real profit, rather then actually do "profit sharing".


Although Google Ireland pays feck all taxes and has a tiny 'profit', they do employ thousands of highly paid (& highly taxed) employees localy.

I don't think you understood my comment/article. I'm not referring to tax loopholes/advantages, but running operating companies at a country level as cost centres.

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.

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)

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.

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.

I'm going to guess that its because there's a few "names" in the industry who do actually get a real share of the profits, probably because they have a lawyer (or more likely, a legal staff) to make sure that all the details are negotiated with their interests in mind. Like anything else, you need a little luck and a lot of work to get to that point.

I'm sure lots of people make money to varying degrees, I just don't get why anyone would agree to a share of the nominal profits when this sort of thing is so well known.

It's not like he got completely screwed. He probably got paid at least half a million up front.

Plus a success like that meant that his up front pay was much higher on his next project.

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

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.

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

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

He just wouldn't have had the job if he'd insisted on gross at that point in his career. He lacked the clout.

I can understand lacking clout to ask for gross, but I have trouble believing that he thought he'd actually get net. When someone like him gets offered net, doesn't he say "look, we both know that 'net' means 'zero', so don't blow smoke up my ass."

ETA: Also, one wonders if relative clout just means asking for a much smaller fraction of gross. Better a tenth of a percent of gross than 10 percent of net.

I've heard people who are signing deals call net points "monkey points".

Everybody knows they're worthless, but you take what there is.

Having said that, even experienced people might believe that net points would be worth something if a $19 million budget grosses $150 million. Especially on a project with no gross participants.

He might have been able to negotiate performance bonuses, extra money when gross milestones were hit. I've heard of those being a bit more common than gross points.

The bigger the budget, though, the more clout you need to get anything at all. I know of deals where gross points were offered to first timers on sub-million dollar budgets, but when you get up in the 10s of millions, it's a different game.

Why would offering share of gross revenue be a problem even on big movies? Say, expected gross sales are $100M. Studio may offer to 10 key people in the movie bonus of the size ~0.1% gross revenue per person (~$100K). Spending 1% of revenue on having the team have some skin in the game could well worth it.

Less important hires could get 0.01% gross bonus etc.

Kind of like a startup.

At a guess, there are two reasons: First, they don't need to offer gross points to get people invested in working on movies, because they already have a steady stream of people desperate to be involved in any way just to be involved or to build experience or to get their big break; and second, if they don't have to, they don't want to because it's less money for them and it establishes a norm of people taking some real money home (a norm that's unnecessary because of the first point).

I was, for a while, peripherally involved in the Canadian film industry, and even in that stunted and low budget arena, there was no shortage of warm bodies to fill any role at all, for virtually nothing but a credit or a line on a C.V.

I've heard that that doesn't work either, because then they redefine gross to mean what 'net' used to mean before.

I'm surprised using some sort of hybrid gross/net points isn't more common. Like 5% of gross over $100M. Studio doesn't lose if the movie isnt a hit, and the employee can't get screwed by creative accounting.

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".

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.

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.

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.

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.)

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?

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.

When you've got thousands of people willing to take your staff's place, there's no reason to pay them well.

I don't know many talented directors. I know a few bumblers, but perhaps that's because I don't live in CA?

Don't know if you're joking, but I don't think the directors are getting shafted by this creative bookkeeping.

I thought the article was clear on this point. The director was paid 5% of net. Net was negative -- the director got shafted.

The directors I know are unlikely getting shafted by this method, as their portfolios consist of mainly live births, cattle auctions, and high school sports. Still Art Institute graduates though.

No, the article wasn't clear on the point. It gave an example of one specific director, Scott Derrickson, getting shafted. No offense to Scott, but as a casual movie watcher, I haven't heard of him. And if casual movie watchers haven't heard of him, he can be easily replaced, and therefore easily shafted.

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

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)


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

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

Indeed. Though with a 3d printer I may well be able to download a car someday...

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

"Give me 5% of gross"

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

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

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

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

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.

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.

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.

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.

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.

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?

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.

So you can spend years in court fighting the defacto standard only to win a pittance as well as an informal blacklisting? Most filmmakers would rather just suck it up, move on, and learn from the experience rather than dwell on it and make it worse.

It's called "Hollywood accounting":


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

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

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.

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.

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

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

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.

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

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.

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

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?

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.

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.

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.

Why? The gross sales are all consumer spending going toward people in involved in getting eyeballs on content. What number is any more honest?

I see your logic in that the number is divvied up amongst everyone along the way including the theater, so you could say "The Movie" made that amount. I doubt Hollywood is going that abstract route though.

I more get an impression like those articles that call an entrepreneur who reached $1M in sales a millionaire, as though he/she had no costs and no taxes and gets to pocket all the gross. Nothing's more important in Hollywood than money and image so I just assume their intent is more along those lines. I'd be happy to "make" $9M for anyone who first gives me $10M then.

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

"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.

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."

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").

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.

Sigh. Yes, we know. Hollywood Accounting.

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

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...

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?

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

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.

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