One July night, an auditor show up at my drive-in on the behalf of Sony Pictures. This women tells me that basically this is just standard operating procedure for the studios and I should not even worry. I of course worry, having heard tales of aggressive studio litigation against theatre owners who did not give them the straight goods. I was always prompt with my payment and accounting with the film companies, I was very careful because I realized those pictures were my life blood. There was no way I was going to risk my livelihood by playing “wacky accounting” with these guys.
We passed the audit, and the auditor left as quietly as she came. I was relieved that we passed muster and we would live to project another day.
It seems though that Hollywood does not practice what it preaches to the theatre owners.
David Prowse, is the tall British actor who played Darth Vader in the Star Wars films. He now makes his home in Texas. The 1983 installment of the film series, “Return of The Jedi” grossed $475 million on a budget of $32 million. To this day Prowse has not made a dime in residual money on this fine motion picture. In fact in terms of revenue generation this film ranked at one time the 15th highest grossing film in box office history. It is odd that it does not have any contracted residual revenue based on its box office performance,
Hollywood accounting practices are indeed the “Dark Side” of the movie business.
So how does a $32 million film not make a profit when it takes in $475 million. The movie studios typically set up a separate “corporations” for each movie they produce. They probably claim it is to limit corporate liability but the real reason is much more saltier. Like any company, it calculates profits by subtracting expenses from revenues. In order drain any possible profit, the studio charges this “movie corporation” a big fee that consumers the film’s revenue. Purely for accounting purposes, the movie is a money “loser” and there are no profits to distribute. But on the pages of Variety and the Hollywood Reporter, the studio blast out how well the films are doing and how much money they are raking in.
What Hollywood can’t really work like this, you’re thinking these are the people who are telling us to give them the straight goods or else. If you do not give us the straight goods an army of newly minted lawyer will descend on you like coconut oil on popcorn. But it does work like this, it is actually staggering how bold they are The website, Techdirt. revealed a balance sheet from “Harry Potter and the Order of the Phoenix”, which, under the regime of Hollywood accounting, ended up with a whopping $167 million “loss” even though it’s one of the top grossing films of the last decade. What this cannot be right , the kids were streaming to my theatre to see this Harry Potter opus. Warner Bros. charged about $350 million in distribution, advertising, and interest fees to this external corporation. Nice work if you can get it.
Now going back to the sad story of Darth Vader , again according to Tech dirt, David Prowse was quoted as saying. “I get these occasional letters from Lucasfilm saying that we regret to inform you that as Return of the Jedi has never gone into profit, we’ve got nothing to send you. Now here we’re talking about one of the biggest releases of all time,” said Prowse. “I don’t want to look like I’m bitching about it,” he said, “but on the other hand, if there’s a pot of gold somewhere that I ought to be having a share of, I would like to see it.”
What is odd is when I run a theatre I try to make money by minimizing cost, the studios do the reverse . They make money by increasing costs.
This has even become more prevalent as a result of the industry trend to look for external sources to fund monies. “The Lord of The Rings” trilogy was financed due to a lease with a German group. These films were pure profit for NewLine, having zero money at risk.. All they had to do is charged fat distribution fees and the cash rolled in.
The really odd thing in the movie business, is that most movies lose money. Bruce Jay Epstein, a business writer who has frequently opened the kimono on Hollywood business practices, lays it out in a recent article. As an example he cites the accounting for the movie “Gone In 60 Seconds.”. This Angelina Jolie and Nicholas Cage potboiler made $240 million at the domestic box office. After the studio waved its magic wand , it lost $212 million.
Now the wonderful thing about this is that Disney never really lost money, it just showed that it lost money , that’s the wonder of Hollywood accounting. Each movie is set up as its own corporation. That corporation always lose money. So the newly formed corporation, Gone In 60 Seconds, Inc. pays all these huge fees to Disney. In Hollywood, the fee’s are where the money is And the fees, Epstein says, are really where the money’s at. It’s not like for you and me, in our profits…..it’s in the fees baby.
A landmark lawsuit opened up on the truth of Hollywood accounting, the infamous Buchwald v. Paramount (1990). This was a breach of contract lawsuit filed and ruled on in California in which noted newspaper humorist and writer Art Buchwald claimed that Paramount Pictures stole his script idea and turned it into the 1988 movie Coming to America. Buchwald won the lawsuit and was awarded damages, and then accepted a settlement from Paramount before any appeal took place.
What was key, was that the court’s decision in the damages phase of the trial that Paramount used “unconscionable” means of determining how much to pay authors, which is widely called “Hollywood Accounting.” Paramount claimed, and provided accounting evidence to support the claim, that despite the movie’s $288 million in revenues, it had earned no net profit, according to the definition of “net profit” in Buchwald’s contract, and therefore Art Buchwald was owed nothing. The court agreed with Buchwald’s argument that this was “unconscionable” and therefore invalid. Paramount quickly settled the case
What the case revealed is that the accounting formulas used by the studios have allegedly been designed specifically to ensure that it is mathematically impossible for almost any movie to show a net profit. In Buchwald’s case specifically, the net profit formula in authors’ contracts does not correspond to the net profit formula of generally accepted accounting principles that the movie studios use when creating their financial statements that are reported to the U.S. Securities and Exchange Commission and to the investing public.
We all know that Hollywood plays by two sets of rule, and they both solely benefit Hollywood. Nowe let’s talk about clearances….
