Meta-Discussion: Hollywood Accounting and the Bizarre Financing of Movies
Over the course of this timeline, I’ve shown you bits and pieces of the wild and wacky way in which Hollywood does business. I’ve made mentions of “Hollywood accounting” and the strange ways in which a film that makes hundreds of millions in box office receipts can “officially” still lose money.
I’ve also followed the standard practice of showing the gauge of a film’s success as Box Office vs. Budget, the general assumption being that “Profit” = Box Office - Budget. Various characters in this timeline have also used this shortcut, in particular Bernie Brillstein (particularly when using it to buff his own accomplishments). But it’s not that simple.
(Image source “giphy.com”)
So how does this all really work? How can a movie make more at the box office than the cost to make it and still be considered a “flop”? How can a blockbuster still “not make a profit”?
Let’s start with the former question. First off, the studio does not get the full box office as revenue. Instead, that “gross” is shared between the many stakeholders, in particular the theaters playing the film, but also shared with other contractual stakeholders, such as cast and crew who have wisely negotiated a share of the box office gross. Stakeholders also include outside investors (e.g. Silver Screen Partners or banks), partnering production teams (e.g. Amblin), or foreign distribution partners. So, the total revenues for the studio = gross - shares to other stakeholders.
And in the case of theaters, this is particularly complicated, since the “share” of the box office is typically based on the time after initial release. The studio typically negotiates a higher percentage of the box office returns up front, and this tapers off as the weeks continue. For example, MGM makes a contract with the major chain Big Ass Movies Cinema Corp. (BAM!) such that MGM claims 70% of the box office on the opening week, 50% over weeks 2-3, and 30% after that, with BAM claiming 30%, 50%, and 70% respectively. Perhaps MGM makes a different deal with the small, local Styk E. Flores Cinema Duplex, claiming 75% on opening week, or what have you. It depends on the contract and depends on the film. Recently in our timeline Disney played super hardball with
Rise of Skywalker, demanding a full 100% of the opening week’s box office, which theaters willingly (if grudgingly) agreed to, since the real money for the theater is not in the box office, but in the concessions[1] (e.g. popcorn and cola).
So, the profit that the studio makes varies highly based on how well the cast, crew, investors, production & distribution partners, and cinema chains have negotiated, and whether the film is a big hit up front or a “sleeper” that makes money over time. The former benefits the studio the most while the latter benefits the theaters the most. But as a general rule of thumb, the studio and the stakeholders typically share about ½ of the total gross box office with the theaters, plus additional revenue from merchandise, tie-ins, product integration, and other peripheral sources of income.
As such, while on paper a film making a box office of $30 million against a $20 million budget would look like a good profit for the studio, in reality they lost money on the deal. They probably spent $1-2 million in distribution, another $5-10 million in promotion, and then split that $30 million box office with the theaters and other stakeholders such that the “true” studio revenue is more like $10 million gross minus their share of the costs to make it minus distribution and promotion. In the end they likely
lost about $10-15 million on the deal!![2]
And then you have the scam that is “Hollywood accounting”. That $600 million blockbuster film? Yep, massive failure. Lost tens of millions. How? Well, because the Shell Company that made it made no money.
You see, when a producer and studio make a film, they don’t officially make the film, they subcontract to the startup Shell Company that makes the film.
Wait, what?!?
Ok, so you’re making a film, a period melodrama called
The Wind Cries Westward. First thing the producers do when they get the greenlight is that they create a shell company, let’s say it’s called TWCW, LLC. It’s usually that on the nose. Well, TWCW then “hires” producer Joe Mutter’s Bad Mutter Films to produce (for a large share of the gross) and “partners” with Hugh Jazz Studios to distribute (for a large share of the gross) and accepts investments from various investors such as Tah-Xritoff Investment Partners, LLC (for a large share of the gross) until TWCW has only a tiny share of the gross to claim for itself (if any!).
As such, while officially TWCW spent $30 million and the total box office was $600 million, $300 million went to the theaters, Bad Mutter Films claimed $100 million, Hugh Jazz Studios claimed another $100 million and Tah-Xritoff claimed $70 million while the director, A-list cast, and the writer with a good agent claimed another combined $20 million, leaving TWCW LLC with only $10 million in revenue against their $30 million investment, a $20 million
loss, so they claim bankruptcy and close their doors forever, a “failed” filmmaking start-up. Any investors like Tah-Xritoff may even try to claim a loss on their taxes, and may even get away with it. Wash, rinse, repeat.
"I negotiated a share of the profit!" (Image source Huffington Post)
And the poor bastard who negotiated a share of the
profits with TWCW gets nothing (You lose! Good day, sir!). On a film that made $600 million at the box office.
And that’s a super-simplified case. Actual contracts are often a labyrinthine mess of legalize, subclauses, and exceptions all engineered to allow for “creative accounting” by the studios and major investors. Lawyers have fought for years to unravel the tangled mess in an often-Quixotic quest to get their client their fair share of the deal. Stan Lee, for example, had to fight for years just to gain a pittance out of Disney for the massive juggernaut that is the MCU.
This is how people like
Forrest Gump novel author Winston Groom, promised a share of the profits, can make nothing from a massive blockbuster like the
Forrest Gump movie, because the “Forrest Gump Production Company, LLC” (or whatever) that officially made it managed to lose money.
And somehow all of this is legal, or at least not enforced.
So, the moral of the story is: take every financial thing stated in this timeline with an unhealthy dose of salt.
And if you ever work with Hollywood, get a good agent and a share of the box office gross.
[1] They’re essentially overpriced snack bars that play movies as bait.
[2] In the case of Jim Henson’s
Toys, on paper it made $68 million box office against a $62 budget, but roughly $20-25 million of that went to the theaters playing it (it burned out quickly, but played when most of the box office was going to MGM), there was another $20-25 million spent in marketing and another $2-3 million in distribution, and some of that gross went to Silver Screen Partners, Robin Williams, and Terry Gilliam (though Silver Screen will also have fronted some of that budget as investors and absorb some of that loss). As such, MGM will lose about $40-45 million on the theatrical release of
Toys, and write it off as a loss. This will be mitigated by product integration deals, though merchandise will be a net loss, but the silver lining is that home video sales will help it turn a profit after a few years.