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EXCLUSIVE: Signing a deal that makes anyone a net profit participant in a Hollywood movie deal has always been a sucker’s bet. In an era where studios have all but eliminated first dollar gross and invited talent to share the risk and potential rewards, guess what? Net profit deals are still a sucker's bet. I was slipped a net profit statement (below) for Harry Potter and The Order of the Phoenix, the 2007 Warner Bros sequel. Though the film grossed $938.2 million worldwide, the accounting statement below conveys that the film is still over $167 million in the red. (Text continues below...)
I ran the data above by several attorneys and agents, who are so accustomed to seeing studio accounting wave magic pencils over hit movies that they weren't surprised even a Harry Potter film that grossed nearly $1 billion would fall under the spell. Dealmakers say studio distribution fees are a killer, as are incestuous ad spends on studios' sister company networks. They also cited the $57 million in interest charges, an enormous pushback on profitablity. Since Warner Bros didn't invite in a co-financing partner on the Potter films, has the studio borrowed money from parent company coffers? Are they paying that interest to a bank, or to themselves? Bottom line: nearly $60 million in interest for the estimated $400 million required to make and market Harry Potter, charges carried for about two years, is a high tariff.
As one dealmaker tells me: "If this is the fair definition of net profits, why do we continue to pretend and go through this charade? Judging by this, no movie is ever, ever going to go to pay off on net participants. It's an illusion to make writers, and lower-level actors and filmmakers feel they have a stake in the game."
And yet Warner Bros isn’t doing anything differently here than is done by every other studio. Clearly, nothing has changed since Art Buchwald successfully sued Paramount over the 1988 hit Coming to America when the subject of net participation was scrutinized, and a judge called studio accounting methods “unconscionable”.
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WOW. The amount of money spent on P&A needs to drastically drop or movies will never be profitable!!!
Agreed. I’m a bit shocked the number is that high. I mean…hello, this is the fourth sequel in the series. The fact that it exists should pretty much speak for itself, no? Audience interest, at this point, is already built in and obvious, why invest that much $$ in to advertising and publicity?
I guess you’re not getting it.. They paying that to partner network companies, or to themselves.. 20th Century Fox might pay Fox television network a ton of money to advertise the movie.. or maybe they pay it to themselves to have it shown as a preview at the beginning of other movies.. Either way, they keep the money and the movie shows a loss, so they can complain that illegal downloaders are taking away all of their profit, and they also don’t have to pay any profit sharing money to the actors etc in the movie.. Their advertising divisions sit back and rake in all of the money, and somehow the execs upstairs continue to decide to make movies even though the poor old studios are bleeding money like crazy for making them.. They don’t like to mention that they’re bleeding all that money into their own advertising departments or partner companies that agree to bleed their own money back..
They’re paying that much because they’re paying it to themselves. The studios own TV networks, where they run the ads. Since it’s going in back in their pocket, it’s not surprising that they wouldn’t bat an eye at spending a million dollars on a single 3am spot, especially not when it means that they take away from the bottom line, which is where they pay net points from.
Why invest that much in P&A, needlessly?
Simple – To siphon off (to a sibling broadcasting/cable subsidiary) revenue that would otherwise fall to the net profit bottom line.
I would *love* to see what kind of CPM’s were charged to the sibling theatrical subsidiary – my guess is that they had to be insanely high or the month of Phoenix’s release in the US would have been non-stop Potter commercials…which it wasn’t…
They are profitable. This shows it. The companies simply shift money within themselves to make them appear not.
WOW!!! That’s all that can be said… And these are the guys that don’t want to pay the talent and
crew…
They don’t usually pay the crew in net points. Even extras will simply get handed a check for $100. The people that they are screwing is investors and actors who accept contracts with net points (percentage of the PROFIT). Most big-name actors accept only gross points, which is a percentage of the REVENUE, not the profit, which is all but impossible to hide without doing something illegal.
Mike. What you say about paying the crew in net points is true but the studios use these numbers when they go to the table to make the deals with the Unions for pay and fringes. They have always said that they are broke and need to take something away from the previous contract because they are not making any profit because of the outragious labor costs! They always point to these Numbers!
Well here’s the problem…they released it on video cassette (line 9 under DEFINED GROSS). Hasn’t Warner Bros heard about DVDs???
I thought the last film released on VHS was David Cronenberg’s “A History Of Violence”. I’m pretty sure that any HP movie since the first one wasn’t released on VHS.
Just a made up reason for WB to claim more loss.
To clarify –
The point I was making is that studios are so out of it they are still using a profit/loss statement written before the advent of DVDs (c. 1993).
Pretty much explains how they missed out on capitalizing on the web. They make their profit there by just not paying the creatives.
You bet your buttocks The WB Studios knows DVD. Hell, they fucked Warren Lieberfarb, the Warner exec who practically created the DVD business model, out of his job a few years ago.
They’re probably sittin’ back with Bewkes and counting that loot.
How could releasing to video tape be the problem? if it earned 86 million? Moron. The reason these companies get away with these things is that idiots like you, distract the focus away from the real issues. ($211 Mil for distribution, 130 Mil – P&A and 315 Mil – UNKNOWN)
I can assure you that WB and ALL THE REST NEVER EVER EVER EVER show a net profit.
I will prove it —- get your hands on ‘The Hangover’ profit/loss sheet. It shows a loss.
The Guilds don’t give a shit.
The Guilds?!!
Not only don’t they give a shit but they assist the studios is stealing. They get the real numbers but won’t share them with their own members because they are “confidential.”
What a fuckin’ joke they are.
Really? Why would the guilds be given the numbers in the first place if these nefarious dealings were going on? Seriously, this made me laugh out loud and I had a terrible day. Thank you!
It’s a wonder the poor studios can stay in business.
They’re obviously using democRat accountants. ‘Rats hate profits.
Either that or corRuptlican accountants. Rupts just love to hate.
Clearly they are in the business of money laundering, and have been since the beginning. Why do you think Joe kennedy invested in RKO back during Prohibition? To bang Gloria Swanson? That was a fringe benefit.
Same thing going on today. Will untill someone with a spine faces down these crooks.
Hey Mike,
Why are you singling out Warner Bros. as ‘phony baloney accounting’?
There is a long history of studio accounting practices and various lawsuits challenging the process.
And guess what Mike, rarely IF EVER do the studios lose.
Nice to see some numbers regarding Harry, but this story about studio accounting is very old news, indeed.
It maybe old news, but I have never seen a profit and loss statement before, and it is a safe bet I am not unique. Single out WB? He specifically mentions Paramount as well. Did you not read till the end before calling out the blogger?
Where the hell is SAG is any of this? Why isn’t there a class action suit against the parent company Time/Warner – Hit ‘em where it hurts… the stockholders! If the stock falls 10%, its a helluva lot more than what they would have to pay out. Yes, audits are expensive, but if the FBI came in, I guarantee the bean counters would spill like a mafia hitman and Time/Warner would take a gigantic hit for all of the profits they would have to pay back… I know. Dream on. But things change. Its about time someone challenged these crooks once and for all.
If Warner Brothers let the film show a profit they have failed as a studio.
Wait, so Paramount and Warner’s(close) are both reporting a BILLION dollars in profits, but a movie that made almost $1B is not producing net profits???
Who’s in charge over there?
They’re reporting a billion in 2010 domestic box office GROSS – not profits.
do SAG and WGA etc get residuals from this film franchise?
SAG and WGA always get residuals IF it’s a SAG and WGA film. Their participation is on a different basis.
And, BTW, the first “Teenage Mutant Ninja Turtles,” which cost just about NOTHING to make, didn’t turn a profit either, according to New Line. Lying bastards.
We are auditing another big studio for similar situation. Its out of control and there needs to me more oversight.
MGM Television still owes me foreign residuals on a show that sold 22 eps but only paid me for 12. And I was All Shows Produced.
MGM owes you money? See that ridiculously long line over there to the left? Join it.
I wonder what JK Rowling gets up front for those movies. Assuming her agents are too smart to take any backend deal.
She gets gross.
Gross points, I mean.
Interestingly there’s no gross participation according to the line item. But the “negatrive cost/advance” goes up each period. hmmm…
J.K.Rowling gets 75% of what her publisher got for the subsidiary rights – that 75% will be deducted from the advance against royalties that she got for the book. Of course, her publisher is playing this game too, and her book may never earn out and she may never see dollar one from the movie rights…
She’s not getting this type of net profits statement. She’s no doubt getting paid based on gross and a simplified deduction by the studio that she’ll still have to audit to make sure it’s accurate.
Winston Groom wrote Forrest Gump and got swindled by the studios into a net points deal. on the same movie, T. Hanks took no salary and made about 40 mil on gross points. Mr. Grooms reported got 300,000 for movie rights and a bad taste in his mouth for movie studio crooks. research what Clive Cussler got for “Raise the Titanic.” And the studios say movie piracy is killing them! Pay your talent you crooks!
The Justice Dept needs to get involved more in movie making accounting…
I feel like there’s a secret room at each Studio… where all the money is counted, packed, and sent back to Kansas City in brown, nondescript suit case — meanwhile phony statements like this are generated to hide the trail.
And the tooth fairy still brings you a shine quarter everytime gallons of coke you drink rot the teeth out of your thick skull.
No you’re a clown ny friend, Studio accounting fit neatly into the definition of RICO.
Yup. Go and do a bit of research, RICO has been successfully used to hammer folks who are doing a lot less than the studios are.
every distribution fee and deduction in this statement was in the agreement signed by the talent before they did anything. if they didn’t like warners charging such high fees, they didn’t have to sign and could have remained seated at starbucks.
why isn’t anyone talking about a negative cost in excess of 300 million — that’s all money that got paid to people.
are you really defending this kind of thing? yeah, everyone has to go along with it because the studio has us all by the balls. that doesn’t make it right.
This *does* seem to be the studios basic fallback line of defense:
We’re financial rapists – we are *known* to be financial rapists – you contractually *agreed* to let us be financial rapists…
so sit back and endure it if you want us to pimp your film as only we can.
Now, that said, it is still a bit of a mystery why anybody actually *bothers* with the net participation facade since only the most raw, ill-informed, horrifically represented newbie is going to get suckered into believing that net participation equals anything other than zero.
(I suppose it could be worse – “net participation” could be studio-defined to permit execs to come over, tie up/”net” and gang rape your spouse – and then add a line charge for the “service”).
So, if everybody knows that “net participation” is BS, what is the point of the facade? Anybody with leverage will get some form of gross participation.
I wonder if it all comes back to some form of (not very) elaborate *tax* dodge…after all, there is no income tax if there is no “income”…
If you are wondering where the Guilds are in all of this, they are making sure that residuals are paid via the MBAs. Based on units sold, not percentage of the net. The net points falls under an individual’s deal, which is the concern of their agent and lawyer. The agencies and law firms should be the ones to bust the studios. This is exactly why the WGA wanted the internet points based on gross and not net.
We have gotten so used to this that we roll our eyes and call it ‘phone baloney’ accounting. It is THEFT. Institutionalized, legalese derived theft. And no one should call it anything else.
Wow – maybe Hollywood needs a bailout. They seem to be very poor. Oh wait – that’s the rank and file people.
In related news the studio still plans to go ahead and make 2 more sequels despite the 170 million dollar loss.
Which is the most damning and hilariously tragic indictment of the lying.
Thank you for shedding a little more light on this horrific practice.
Where are the guilds on this, you ask? Sulking in a corner with their collective tail(s) between their legs, that’s where. SAG already cut off its own balls last year. AFTRA never had any (though they don’t mess with features much). WGA stood strong for their share of the pie, but their “leadership” has cowered as well and I believe they’re still in a lawsuit with AMPTP for back payments negotiated, what, two years ago?
These people/companies/stockholders are literally stealing from their own people – the creative people who are hired to make the entertainment they profit from. Uber-wealthy million- and billionaires taking food out of broke peoples’ mouths, people who struggle every month to pay their rent. I’d say “shame on them”, but there’s no shame to be felt – just depraved greed. (And these people believe they’re “religious”. HA!)
Why nobody can get the Feds involved in this is beyond me.
oh please. no offense but most of the the above comments are completely naive. Nobody anticipates a movie of this budget to hit Net. Every statement I’ve ever seen on a big movie shows similar losses as to the net participants. Then they make a sequel! But the net partipants like the writers, junior directors, and some cast get their backend via resids which as you can see here amount to more than $3M per guild. As to writers and directors who do not share with any other participants (or many as to writers) that’s a nice chunk of change in addition to the millions that the studio will have spent on the up front fees and credit bonuses. The neg cost here seems crazy as does the interest and advertising but good luck w/ trying to knock enough out such that they’re going to pay anyone net. and the wga resids are an advance on that anyway, so double good luck!
You’re an ass. The conversation isn’t about your cowardly belief that nothing can be done. It’s about the outrageousness of this thievery.
People like you don’t even realize what suck-asses they are. You start with the premise that the studios have a right to defraud people and then go on to say we can’t touch them.
We can do something but it will take a monumental effort and every time someone tries, the studios buy them off, then pay for confidentiality,
They are thieves plain and simple and if this business wasn’t so racist and incestuous, we could so something about it.
In the end that is the real problem here. Hollywood hasn’t changed since the 1920’s.
you look for justice in the oddest places.
well said. not sure why anyone trying to make a living in hollywood would defend the more egregious studio practices– it’s almost like they have stockholm syndrome or something; unless of course they don’t work in hollywood, which in that case they should probably just stay out of it.
Unless, of course, you work for the studios and have a vested interest in those more egregious practices…
And people say that Wall Street is crooked?
Movies are expensive to make, employ hundreds and thousands of people. Studios create the auidence for the films with all this help: ie publicity, advertising etc. They take ALL the risk. Sorry that’s how it works. Just ask any indie film producer – there is NO indie audience that goes to see films based on WOM anymore. The audience is created using studio money. Would anyone have seen Paranormal Activity if Paramount did not turn their corporate machinery on and pump millions into marketing it? Answer: NO.
If you believe that PARANORMAL ACTIVITY, one of the most successful movies of 2010 that cost the studios little more than a pickup fee and P&A, is still running in the red, then you and reality aren’t on speaking terms. i
You are a bit out of touch. PARANORMAL had a ground-breaking method of inflating the demand for the film by having an incredibly lost-cost grass-roots online campaign to generate interest in the film. The DEMAND IT! experiment worked incredibly well for the studio, as it generated a ton of interest for a very insubstantial amount of money.
Sometimes films don’t need a tremendous amount of advertising expenditures for it to become a success. This is exactly why they made an entire sector in the company for distributing these small films, likely using the same manner of distribution, ie slow expansion. It increases demand.
The trick seems to be in the ever-increasing negative cost – I see box office mojo says the production budget of this film was 150 mill.
Whoa, whoa, whoa, whoaaaa. Before everyone goes crazy, why don’t we actually take a beat and actually understand what we’re looking at.
Whoever cut the deal reflected by the above statement KNEW EXACTLY WHAT TYPE OF DEAL THEY WERE CUTTING — a deal that would not kick in except at the most extreme levels of profitability. To say anything different is ludicrous. If you think anything different, then your agent or lawyer is probably an idiot.
The deal articulated by the studio statement above is not the type of deal that talent is cutting in lieu of first dollar gross. To say so is utterly ridiculous and extreme. What we’re looking at is a typical “net” deal cut by a writer.
Let’s walk through the statement.
Note the following:
- Distribution fee of 30% on theatrical
- Extremely high staged fees (probably royalty rates?) on Video and Television
- Fairly aggressive interest calculation on negative cost
These are VERY high loads, but they are TYPICAL loads for writers, who very rarely receive “cash break” or “studio breakeven” type deals. To repeat, nothing has changed under the sun: the “net” deal articulated above is fairly standard for writers. Typically writers are compensated up-front with a kicker if a film is absurdly profitable. Writers rarely, if ever, get gross or “studio breakeven” or “cash breakeven” — i.e., a share of the revenue from the first dollar of revenue, or a share of the profits from the first dollar of profits. When the studio cut the deal above with the writer, I can’t imagine they told the writer: “Once we breakeven, you get paid! We all win!” They probably said to his agent/lawyer: “We’ll give you the standard “net” kicker”, which is exactly what he got.
I think people who don’t work with these concepts every day get caught up in the semantics of “net” or “breakeven”. Those are defined terms, not literal terms. “Net” is slang for a deal that occurs after the studio has broken even. It doesn’t mean such deal kicks in exactly when a studio breaks even.
I am not arguing whether the compensation scheme for writers is fair or not, all I’m saying is that the above is nothing new: it’s consistent with how writers have been compensated for as long as I’ve worked in this town.
Last point: The definition of “net” that someone would get for giving up gross is MUCH more favorable for the talent than the statement above. In those deals, the studio would say, “you give up your share of revenue from the first dollar of revenue, in exchange for a higher share of the profits from the first dollar of profits”. So if you were to look at a profit statement that reflect that sort of deal, you wouldn’t much, if any, distribution fees, and the interest would be much lower to reflect the studios true cost of capital.
Great explanation. I completely agree.
Well said. Whichever Net participant is being reported to in this statement signed off on the terms (including how interest would be calculated and at what rate). WB didn’t just pull a bunch of shit out of thin air and throw it together.
Then why does this exist AT ALL? To say it always has been this way doesn’t mean it’s not an intentional snow job. It should be held up to the light as such. Think of all the time wasted every year on this kind of nonsense. If there’s no way to ever get paid from this kind of deal, then this kind of deal should not exist. Period. The deal might as well say you get a bump if the movie is released on Mars. To defend it as SOP is silly. It’s like the Monty Python “No Claim Insurance.” “It’s a very good deal as long as you never make a claim.” Get rid of it.
What bullshit.
No writer or director has a choice as to the kind of deal they make. It’s take it or leave it and you know it. Spielberg makes a better deal because he can.
All of your blah blah blah is studio propaganda and false intellectualization of this thievery. Studio collusion and attorney and agent cooperation forces artists to take these shitty deals. As a man said above it’s textbook coercion, racketeering which is only legal because no one in DC has the balls to stop it– yet.
These studios are no different that the Wall Street Bankers who create phony profits and steal from people. Shills like you make me sick. Take the studio dick out of your ass.
Thank you, Anon.
I very much appreciate the analysis here, and I think the point that people’s contract terms can differ widely is very well made. But while I have neither Hollywood-insider nor finance-expert credentials, let me see if I understand one of the central premises correctly…
…namely, that the amount the studio actually spent on various line-item expenses — distribution, royalties, interest, etc. — is not, in fact, necessarily the amount stated on the line-item entries as listed here?
I mean, presumably there’s a real amount paid by the studio in interest, for instance — and whereas I can certainly see why a studio would jigger contract terms to favor paying some “net” participants sooner than others based on arcane ways of calculating “net”, I would think the line item for interest ought (in an honest world) to reflect the actual figure.
Yes, this is probably hopelessly naive and optimistic. But it really would be nice if there were enough genuine numbers on movie balance sheets for rational observers to be able to discern where the money is going.
John, I think the point he’s making is not that these numbers aren’t real, but that in a deal where “net profit participation” was a real goal, some of the items being deducted here would not be included. This deal is one where neither party EXPECTS to get into net profits, it’s just the way this deal is commonly structured.
The point is that this writer likely got paid very handsomely upfront and knew going into this deal that he would never see net profits because of the way the terms are defined. In a situation where net profits were a legitimate negotiation interest, the deal would have been structured differently.
And I get that point — I’ve seen enough print publishing contracts to know that there are immense differences between the boilerplate and what leverage and a good agent will get you.
But my question stands, because the analysis “Wait a second” is using to make his point seems to illustrate a key difference between the print-publishing world I’ve dealt with and the Hollyweird landscape. In print, it’s often very difficult to drill down and pry sales figures or other hard numbers out of a publisher…but if you can manage it, the numbers you get are generally reliable.
By contrast, what the upstream poster (and the balance sheet itself) seem to suggest is that in Hollywood contracts, it’s much easier to get numbers — only the numbers you get may bear little resemblance to whatever the real-world income and expenses for the project may have been.
As an aside: I don’t think I believe that this particular balance sheet belonged to a screenwriter. As far as I recall, there’s only ever been one primary scripter attached to any given HP film — and only the lead writer could negotiate any sort of profit-participation deal, even a weak one. That being the case, if this were that writer’s balance sheet, he might as well have left his name in bold letters at the top…and I can’t see a Hollywood veteran being quite that suicidal.
The participation statement above is not a “balance sheet,” it is at best, an income statement. I know you’ll prob say I’m playing at symantics, but this confusion illustrates what is wrong with most of the posts on this site regarding $ and cents (sense) – with few exceptions you people don’t know your ass from your elbow.
But if everyone who is anyone knows that net is meaningless (because “everyone” has agreed contractually to allow “expenses” to eat up all revenues) what is the point of the exercise?
Is it simply to beat the IRS out of hundreds of millions in tax revenue each year (no income tax if no “income”)?
Thoughts from those in the industry?
(sound of crickets chirping)
There are so many profit centers for the studio within those numbers/categories as well.
Plus they get rebates from their advertising agency, labs, duplicators, and other vendors that were more than likely not credited back to the movie.
Most of what they do with their accounting is legal; however, there are many gray areas, let alone moral issues, and one could say a certain amount of fraud as well.
People on here claiming thievery have no concept of large corporations.
Those dollars on the ledger that are “spent” go largely to related companies all under the corporate umbrella. So, yes, HP has not turned a profit. It never will. The money went to a different division. It’s legal. It’s not thievery.
You’re just plain moronic to accept net points on a picture and expect big (or any) money.
Meanwhile, that money that is going into other corporate affiliates is keeping a hell of a lot of people employed at those affiliate companies.
So, you kick and scream and say the studio is stealing money! Yet, they are keeping people employed when they spend that money.
What you really want is for the money to go to the artists who took “net points” instead of negotiating a better deal for themselves. That is the failing of their agent/attorney.
Beyond that, it is business as usual. Get used to it.
Thank you for comments kind sir. Now please return to your job in the WB PR dept.
Less than year after the release of this film — and your presumed investment of theses profits in their own company — WB announced massive studio-wide layoffs:
http://www.hollywoodreporter.com/hr/content_display/film/news/e3i1472d5304a5c1a50d3dbecb27cb811b2
Sincerely,
A Plain Moron
I can somewhat rationalize the $200m P&A spend, but 34% distribution fee PLUS 18% interest on the entire production budget… looks like robbery.
The studios are NOT engaging in anything fraudulent or nefarious here! This is a “DEFINED” net profits statement, so it represents the contractually agreed upon definition of net profits. The definition most likely states that video is accounted for on a 20% royalty basis (i.e. 100% of HV receipts are not included in the gross, but rather only 20%), there are high distribution fees on all revenue streams ($212M to date), a 10% Ad override on theatrical marketing, interest on production cost ($58M and climbing), plus all the other distribution expenses and negative cost (which includes all the salaries, perks, etc. for talent both above and below the line). This is standard stuff in this business and the “participant” who collected a healthy fee upfront should have read and understood the agreement before they signed. If they don’t like the terms they can do one of three things: 1) opt out of this “phoney” system and not waste their creative energy 2)they try to negotiate new terms or 3) they themselves can raise the $200M+ in negative cost, the $150M+ in p&a and millions more on salaries for the people that do the distribution, etc. Otherwise, this is so much ado about nothing.
FORCED CONTRACT YOU ASSWIPE!
There’s talk in DC about exposing/regulating some of this fraud. You heard it here.
Further, WB execs on this board spinning what is blatant theft should come clean and stop treating us like we’re fucking idiots.
Re: Interest.
No clue what WB specifically intends, but typically “interest” in such reports refers to the amount of interest that the financial investment would’ve made had it not been spent in the first place. I.e. if you spend $100 mil on a movie that isn’t going to be released for a year, how much would you have made in that year had you just put that $100 mil into an interest bearing account?
Even if you eventually make back your principle, but not enough to make back the principle plus interest, then you’re still considered in the red…
At least, that’s how most businesses treat interest. Who knows what WB wants people to believe…
Nikki
You’re right on the bullshit interest charges. But there is another glaring trick.
Look at the fine print. WB expensed $211MM for a distribution fee. Correct me if I’m wrong but the parent company gets that fee! Yet it’s deducted from profit participation financials on the actual film and paid to another in-house department for the conglomerate.
If you are going to take the distribution fee out of the equation, shouldn’t you take the P & A costs out as well???? It’s the same business activity (marketing/distribution)
That’s how you cheat people out of money.
Anytime the money of film making is the topic of conversation on this site, the dipshits come out in full force. Get a clue reTards.
Fools & the money, call it corporate business as usual, but you are ignoring the fact that in a year of record profits, there have been record layoffs. The money made is going to an increasingly narrow group of people at the tippy top, and making it nearly impossible for the majority to make a living.
This is something that needs to be regulated, but the push back from lobbyists for the studios is almost as brutal as the banking industry. It may take a disaster, like the U.S. losing traction in the global entertainment market, to see real change. The studios always blame the greedy unionized labor, not the CEOs whose bonuses are larger than the collective union fees. Maybe when the distribution model shifts entirely online, the economics will change, but for the time being it is repulsive, it is like the tobacco business..
Thanks for putting this so intelligently.
I’m shocked, shocked to find that gambling is going on in here!
LOL! Excellent one my friend.
I think it’s been common knowledge that profit participation has been a joke for the last 30 years or so. Everybody knows, or should know, that they’re not going to get anything out of it. Film studios aren’t the only large corporations that pull this kind of accounting. Apparently the Yankees have been losing massive amounts of money for the last 10 or so years – it’s amazing they’re still in business! But of course, they haven’t. Profits get hidden in other divisions, or in distribution networks that are technically separate entities but are owned by the same people, or get paid out as consultancy fees, etc. Or they just pay the people at the top a ton in salary, trickle out small fixed amounts so the shareholders stay happy, and life goes on. The business in and of itself may not be “profitable” but it sure is for the people who run it.
Following the comments of other responders to this vivid example of slick accounting (thievery) by the studios, WHERE ARE THE GUILDS in all this?! Shame on SAG, WGA and DGA. Why aren’t they, individually or collectively, holding the studios accountable to this since-Hollywood-began, shameful pracice?
Where are the Guilds? They are collecting residuals based on Distributor’s gross. So the net statements don’t mean a thing to the Guilds. Residuals are based on actual distributor’s gross. No deductions, no interest, no fees. Also, the majors are independently audited every two years by a third party on behalf of the Guilds so if they are messing with the grosses it will come out in the audits.
ALAKAZAM! Where’d All The Money Go???
But herein lies the rub; the studio system doesn’t support making these kinds of micro-budget films.
Old school business practices like these will drive a new generation of creatives to the web and elsewhere for distribution and profit. It will take time, but no one can argue that the democratization of media isn’t already underway.
I’m confident that in the very near future we’ll see a micro-budgeted film, marketed and distributed on the web, which will become a breakout hit. Let’s say a million downloads @ $4.99 for a film that costs 100K or so to produce. This will be the proverbial “game changing”, “killer app” which will set the whole business on its head.
Lj, that would be pretty cool to see happen. It”s amazing what all the new and emerging technologys can do for filmmaking. What worries me is that all this new technology could turn around and bite hollywood right on the ass. The way I see it most people get involved with this industry for two main reasons, number one is that it’s a fun thing to be in, BUT, making some pretty decent money doing this stuff is the other main reason people get involved in it. What if all the technology makes things so cheap to do, that fewer and fewer people are attracted to filmmaking ? As far as the creative accounting goes, maybe somebody should take a good hard look at that too.
Rich, I see your point and agree to a certain extent. I for one, got into filmmaking for several reasons including the ones you stated. However starting around 2001, little more than 10 years after digital technology started turning the entertainment industry upside down, things stopped being as much “fun” and surviving in this business really started to get ugly.
One of the reasons was there was such an influx of new people into the workforce that almost everyone I know professionally started to see their quotes get slashed. It was just a simple matter of supply and demand. And of course now with the “economic downturn” (a shitty euphemism for investment banker and Wall Street theft) it’s worse.
Not to get too heady or anything, I’m sure I’m not surprising anyone by saying that our industry, along with almost every other industry GLOBALLY, is going through a paradigm shift of epic proportions. Without trying to sound too hyperbolic, the effects of the digital revolution on society parallels events like; the fall of Rome, Guttenburg’s press, the industrial revolution, etc, etc. The web has accelerated this transformation and it’s probably going to be a while before things settle down again.
All I’m trying to say is that William Goldman’s famous line from Adventures in the Screen Trade is more true now than ever; “Nobody Knows Anything.”
What will happen in our happy little corner of the globe? Well, we are starting to see new profit models emerging. Like it or not iTunes is one example. Newspapers, magazines and video content sites like Hulu are going to start experimenting with paywalls. Will this work? Your guess is as good as mine. But I think we can safely agree that people will continue to want to be entertained and distracted from the drudgery of their daily lives.
I’ll tell you though, I’m honestly very scared that if the powerful artists, guilds and associations in this town don’t start putting aside their petty grievances and really start coming together as a cohesive whole too address these issues; I’m talking actors directors writers and all the other crafts. We are all in for a royal fucking. I guess we’ll see what happens?
You really think a million people are going to pay $5 for a micro-budget film?
Lemme guess: You’ve never been to a film market.
Maybe they’ll pay $1. But you don’t make Harry Potter on that kind of money.
“It’s legal. It’s not thievery.” Then cast my vote for Al Capone.
I’m just amazed at how many industry weaklings have come to accept this criminal behavior. You are only as strong as the weakest link in the chain. Martin Luther King understood that well and, when told, “That’s just the way it is”, responded, “Not any more”.
Until some people with balls emeger to say “We’re mad as hell and we’re not going to take it any mpre”, and do everything imaginable to force these CRIMINALSl to learn how to count, the writers, et. al. will always get screwed.
But when they stop writing, and stop working for the studios in every other critical discipline – and DEMAND that Congress DO SOMETHING about this thievery – then it will stop.
The problem is the weak links – and no leadership to inspire them to grow a backbone.United we stand, divided we fall.
This is sad. They should just stop the HP series of films and cut their loses.
No one has mentioned the biggest studio accounting gimmick which is reflected in this accounting statement. Do you see the number in the statement for worldwide video gross receipts? A meager $87.9 million? That is peanuts for a film of this blockbuster status.
The real video gross of this film was either $439.5 million or $351.6 million. How can that be? In most agreements between studios and net profit participants like screenwriters and many actors, the studio’s video revenue gets reported and accounted for on a so-called royalty basis. The typical “royalty” is 20% or 25%.
So, for example, if the video “royalty” in the agreement with the recipient of this accounting statement was 20% and the actual video gross of the film was $439.5 million, the studio “reports” as video gross receipts in the statement only 20% of the real video gross. 20% of $439.5 million is $87.9 million. That $87.9 million is what goes into the statement as video gross (not the real gross of $439.5 million). So, presto change-o, the studio takes $351.6 completely off the table which amount never gets reported to the profit participant and never goes into the gross receipts pot. The studio keeps that $351.6 million all to itself and as far as the participant is concerned that money was never received.
And by the way, two points in the studios’ defense. One, when the studios issue accounting statements they are just enforcing the contracts that they and the talent negotiated and signed. The studios are not making up these accounting formulas in a back room somewhere. Second, the studios can and do lose hundreds of million dollars on failed films. Talent always get paid a salary even on a failed film and talent is not putting up the money for production (the studio is taking all that risk on its own or shared with Wall Street or some other other co-financiers). So, the studios need some ability to make money on profitable films when they come along in order to pay for the losses the studios incur on a host of other films. Otherwise, the studios would simply go under and no one would work in Hollywood. The problem is that in these highly profitable films like Harry Potter, the studios take too much profit and it gets out of whack. That is sometimes due to poor negotiating by talent or the lack of enough negotiating leverage generally or a system that is off kilter and needs correction.
Look above for a comment by “muchado”. He covered that one already.
The $87 Million is what they netted — another nice accounting trick. Apply the costs against net numbers.
If the video is being accounted for on a royalty basis (which it almost certainly is), the $87M represents XX% of the “net video receipts” the studio gets. That “net” does not mean that manufacturing and marketing expenses (costs) have been deducted, but rather, the gross $ are less any returns, reserves for returns and “placement costs” (many retailers – Walmart, etc – make studios pay for shelf space). So I think you are misinformed when you suggest that trickery is going on.
Any person who feels entitled to backend in a film should fight for box office bonuses and skip silly contigent comp deals that include any kind of defined breakeven or net proceeds terms. Unless you are big enough to get 1st $ gross, then take BOBs and skip all the other vanity.
wow is right. Maybe Warner should file for 501(c)(3)
I’m a small time player, and even I know that the “participant” deal to get is one that gives a box office bonus tied to a multiple of the film’s production budget. That way you know just how well you might do, so long as the film does a certain amount of business. Just make sure the language specifies that the box office and budget figures to be used will be “as reported in the (trade publication of your choice).” Believe me, if I’ve gotten that deal, a lot of others are getting it, too. It doesn’t always pay off, but if the film does well enough it can.
The worst part about that news is it’s actually one of the cheaper Harry Potter films. The last one had the highest budget at $250 million.
I say blame movie pirates and illegal downloading. This, like everything else in showbusiness, can be blamed on them.
At least if http://www.boxofficemojo.com/movies/?id=harrypotter6.htm is accurate, anyway.
Soooo… why do we even do the net deal, again?
So they can walk around saying they have a piece of the backend.
My wife’s a Hollywood exec. She only lets me get a piece of the backend on my birthday.
There are business professionals from Wall Street and education who have watched Hollywood accounting for almost 20 years. We know the majors don’t make money. Why do you think the Multi-national corporations like Seagrams, Vivendi, Coca-Cola, etc got smashed with these studios when they owned them? Top grossing films are used to pay for losses from all the other films.
A very senior studio lawyer once told me he wrote the net profit definition so as to assure that no participant would ever see a dime in net profits and that he felt he would not be doing his job if it were otherwise.
It has been ever thus and everyone is wise to it. It’s why net profits has been a meaningless participation for as long as I can remember. Not saying it’s right or moral. It isn’t. But is well known that’s the way it is and has been all along.
Let me start by saying I’m not pro-studio by any means. In fact I left the studio system with the knowledge that the model is broken. When one model is broken you can choose to be a part of it or build a better one. I once told some people within the studio I worked for that that the studio was nothing more than a vanity tax credit for mulitnational conglomerates. As a standalone business unit none of these could survive. Any prudent investor would not invest billions to receive such a low return. The conglomerates make much bigger margins from the cable companies, networks, websites, even magazines.
That being said. The article says the film made 940 million, however the statement only claims 610 million. I don’t think that’s a fraud, I think it’s a timing issue. If the statement showed 940 million, in fact there would be net profits to be split.
Interest begins compounding when the money is being spent. Therefore, I don’t think it’s fair to just point out the final totals as it’s misleading. It doesn’t matter where the money comes from a bank or the parent, as that is a practice done by all studios and lending institutions.
Can we stop it with the studios not paying anyone. I wish there was a budget right next to this profit statement. I think those not familiar with the industry would be shocked just how much people were being paid.
Can we stop with the argument for gross point deals. That as well as the first look development fund deals are too of the dumbest things I have seen. Gross point deals, please tell me when we can tell an investor, thanks for taking the risk, however, before we begin paying you back, we have to pay X, even before you’ve recouped your costs. Oh, and they’ve already been paid 5, 10, or 20 million. As for development deals that’s another story, but the bottom line is the studios are forced to accept crap or just throw some of these people a bone and put them on as producers where they aren’t needed.
Ok, now let me get to what’s wrong with this statement.
Where are the tax credits from the UK. The only reason Harry Potter is filmed in the UK is the great tax credits. This has become a billion dollar for the studios. I’m guessing they received no less than 50 – 100 million back from the UK, especially since the UK has a cultural test, therefore most of the actors, director, crew etc will count towards the credit as they are local hires.
As for audits and feds argument, more often than not, there is nothing unethical being done. The only thing the auditors would see is way too much money being spent on too many things that do nothing for the profitability of the film (marketing/advertising being one of the biggest culprits). The bigger crime is that they spend too much, not that they make too little.
So, in conclusion, I’m not going to solve the studio problem. Unfortunately, they and their exorbitant 30% distro fees are still the necessary evil. So until someone emerges with a better model how do we all coexist or just exist. Me, I’m going to keep trying to make films with justifiable lower budgets with good casts that have any opportunity to recoup the investments and share real profits with some cast and even some crew. Hopefully, agents and managers and their 10/15% fees keep allowing there clients to keep working.
I watched “Cyrus” yesterday. I hope that’s a great example of filmmaker, producer, and talent can do when they are working together and where the paradigm if shifting. Budget of 7 million with that cast, and I’m guessing even the lion’s share of that 7 million went to the cast because while I liked the film it could have been made for a lot cheaper. I do hope it shows a profit and everyone shares in it.
IF you read this whole thing it was more a rant. It’s my first real post on here so we’ll see how it goes.
It’s always amusing to me to read the “outrage” of observers (usually either not in the business or at the fringe of the industry) upon reading “net profits” definitions or accounting statements. What most people fail to realize is:
1. These are contractually-defined bonus formulas. Nothing more, nothing less. Everyone who negotiates these INCLUDING THE TALENT SIDE knows this.
2. Net deals are offered pro-forma as an ego point to people who don’t (and shouldn’t) share in profits. Everyone who negotiates these INCLUDING THE TALENT SIDE knows this.
3. Why should someone who is getting paid a market-negotiated salary but not investing any of his or her own money in the financing of the project receive ANY share of profit, fair or otherwise?
Bottom line, no one expects or intends a net participation to result in real money except in the rare case of a studio film with low talent and marketing costs that unexpectedly does well at the box office or an indie film with a low negative cost that also exceeds expectations. Stop evaluating these definitions and the statements they produce as if you were investing your money in the stock of the corporation. That is both silly and intellectually dishonest.
I generally agree with The Accountant, although the Studios don’t get a free pass for their historically archaic deal structures (and slow residual release).
Note that all the numbers on the statement here are probably net (i.e. total box office gross – exhibitor cut).
What is clear, is that the current studio system doesn’t make a lot of sense for a lot of the players.
1) Movies are essentially projects that require short-term contractors. However, unlike most mega projects (i.e. IT, infrastructure, etc), the revenue streams are highly variable (Johan Hex vs. TS3).
Studios are essentially building “spec” projects with each movie. If you want to see the volatility of another “spec” business in play, check out Toll Bros. or Lennar. Yet, input costs are huge and everyone wants cash up front+ (incl studio chiefs!).
2) What is the correct solution for compensating talent (or even studio execs) for hits, but also lowering payments in misses? Often, there are no penalties for failures, which only kills the film business model (Stallone got how much for “Assassins”!?).
Net/Gross is only meaningful, when there’s real skin (i.e. – little/no cash up front).
3) The most salient items on the Income Statement were the negative cost and P&A. If these 2 numbers continue to spiral out of control, the entire industry will implode, due to #1. Every few years a studio/prod co. flirts with disaster (Fox, Sony, MGM, anything related Kassar or Samaha)
4) What’s the solution? Don’t know. But right now, fewer movies are getting made and jobs are disappearing. Studios will only give you perks on net deals, but talent doesn’t want to reduce front-end quotes.
As to your #3: The “market negotiated salary” you speak of is not 100% of what the creative person gets paid over the long-haul. For instance, directors get most of their salary up front, so they don’t balk at their lack of profit participation on the back end. Writers and actors, however, receive much less total pay up front, making the back end potential a large part of their/our income. In other words, we’re paid a much smaller percentage of our income based on this “market-negotiated salary” you speak of. (And let’s not start the what the work is worth argument here. Don’t knock it ’til you’ve tried it.) We agree to this lower up front payment/salary because we’re promised something on the back end when the film makes money.
Creatives (actors, writers & directors) don’t invest their own money – they invest their creativity which has a high commodity value, and therefore those values are [supposed to be] reflected in profit participation on the back end. Producers/studios don’t want to pay these people for their talent and work out of the net profits? Okay fine – pay us up front in total. They don’t want to do that either – meaning that they don’t want to pay us at all for our varied talents.
Not only is the “negotiated salary” a lie, what the studios are calling “net profits” is the biggest lie. Call it “semantics”, call it “legal”, call it “accepted practice” – it’s a cooked-books lie.
Look up Art Buchwald vs. Paramount (“Coming to America”).
Thank you for pointing out that capital investment is NOT the only investment. The studios say, ” but we take all the risk” investing, we deserve all the profits. But every artist risks and invests the time and talent they put into any project. If the artist could make money doing ANYTHING else — another project, writing a book, working at a bank, whatever — the value of the artist’s risk can actually be quantified. It’s called “Opportunity Cost” or “Cost of Foregone Opportunity.” If Steve Zalian could make three million dollars writing a sequel to something, but instead takes a risk on something else, that’s the cost of his INVESTMENT. He’s RISKING losing something valuable — his valuable time. He deserves a cut of whatever he invests in, same as the financiers, even of first dollar. If James Taylor writes a song and performs it on stage, he gets a direct cut AT THE GATE. The promoters and advertisers and stage owners get a return on their investment, but so does he. So should any artist. The studio propaganda machine has erased our brains, causing us to think we’re lucky to get what’s left after they pay themselves obscenely. I think the key is fighting to retain copyright, as stage authors do.
After years of what is considered accounting fraud, why haven’t the SEC and the IRS investigated the studios? If they are cooking the books, it also affects their tax liabilities and manipulates their stock price. Come on Federal government, get your ass in gear and clean up this mess in Hollywood.
People always blame the accountants and finance guys–it’s really the lawyers that muck it up. Also, who ever was in it for net profits under this definition had a terrible lawyer on his side—or just terrible leverage.
The only way to EVER solve this is to find an ambitious district attorney of state attorney – a politician – who realizes he can make great political hay and a killer rep out of going after this organized thievery – and applying a large percentage of the recovered money to public education or parks maintenance. In other words, make the studios pay up out of fear.
A different kind of shakedown, sure, but one the studios deserve.
Or, there’s always RICO.
Pay out the usual suspects!
(seriously, though… as long as there are enough Mary Sue “creatives” who work for next to nothing on othr people’s proerties, nothing will ever change. Only if you create yourself, do you have leverage. Like… Ms. Rowling)
Why do you think Hollywood keeps its hands in the pockets of politicians? To keep the IRS from coming after them for taxes on these “hit movies” that are shown to be losses using voodoo accounting practices.
Matt Stone & Trey Parker were the first I heard speak of this – in one of their DVD commentaries, they said Paramount claims their South Park film never made money, which was an obvious lie.
It’s important to recognize that movies are considered separate businesses outside of the studio. These new businesses then do business with the studio, hence even though the film technically has made a negative profit the studio has made money. All the profit goes to the studio, who took on the risk, and the losses go to the movie because it doesn’t matter if the film (IE the newly created business) makes money or not. Unless you have a great agent and are somehow key to a film being made, like Arnold S. in Terminator 3, you will not see net points profit.
You guys act like the creators aren’t getting paid. They are. It’s in the negative costs.
I really don’t see the big deal here and calling this “theft” shows a level of silliness as not to be acknowledged.
“I’m confident that in the very near future we’ll see a micro-budgeted film, marketed and distributed on the web, which will become a breakout hit. Let’s say a million downloads @ $4.99 for a film that costs 100K or so to produce. This will be the proverbial “game changing”, “killer app” which will set the whole business on its head.”
————————
I am also confident that one day day an indie movie released entirely online will garner millions of downloads. Whether or not the majority (or even half) of those downloads are paid-for is another question entirely.
Like what does it even mean that Lady Gaga was downloaded 200 million times on you tube? She’s not making money off of that. (she’s making money elsewhere)
Porn ain’t even making money off of $4.99.
Hard to imagine Hollywood executives being money-grubbing and dishonest, I always think of them as being generous and not that concerned w/ money. I guess that’s why you can’t stereotype
Theft! Liars!
I don’t understand how some people can defend this.
‘You knew what you were doing’, blah blah blah when you signed your deal.
Are these people genuinely saying that the studio did not make money – no-one made money on top of their fees?
They cut out people and if Harry Potter can’t make money…
With the Potter pictures performing this poorly, one would think it incumbent upon the Warners executives who’ve overseen these projects to forego or return their salaries and bonuses to help make up for the shortfall. I can’t believe heads haven’t rolled over the decision to go ahead with the sequels.
Pretty irrational comment there. Full of hate and toxic bitterness.
Everyone involved gets paid upfront. Nobody is taking any risks….except the studio. And they are monumental risks. While I certainly don’t think these numbers would stand up under the examination of the green eye shade types, as a previous poster said, it probably wouldn’t change the outcome.
Charges for things like association fees seem nutty. And the promo costs and negative cost seem very high. But in the end, the studio is frankly entitled to a decent return on its capital investment. When you see how few films in a release slate actually do well, it’s even more important for the studio to score big time on the one or two films that are blockbusters. And that doesn’t include failed development costs.
All this whining and complaining and intense breast-beating fails to take into account that everyone who works in this town can thank their lucky stars that the studios have been consistently healthy and successful as a rule. Every new job someone gets on a film is a direct result of reliable prior studio success. Ever try to get financing for a non-studio film?
Try getting hired at Carolco. Or even MGM.
Krumhorn – “nobody is taking any risks except for the studios”??! Really? The writers who spend months/years of their lives developing a project at the expense of other projects, the actors that turn down other jobs because they were hired for this one, the director who is only as marketable as his last film and who’s career rides on the success or failure of the current film, EVERYONE above/below line who turned down other jobs so they could work this one? Are you telling us there was no financial or career risk involved in ANY of those people’s decisions?
“The studio is entitled to a decent return…”?? Ergo every major investor in every business is ENTITLED to a decent return on investment simply because they put up the money? What if you make a bad investment/film? Are you still ENTITLED simply because you’re the money man/woman/business?
If a studio needs to prop up 30 failed films/investments with the only 2 or 3 successes they have, shouldn’t some exec heads roll at developing and pushing 30 failed films? Because in your analysis, they should get bonuses for picking the 2 successes and we should just ignore the 30 bad judgement calls, which is probably the kind of thinking that got us where we are today (in entertainment AND banking).
I love the mindset that because studios invest money, they should be the only ones that matter because without that dough, hey – no film.
1. they don’t HAVE to invest that money, no one is twisting their crooked arms.
2. yes, if not for their money, the film couldn’t be made. Neither could it be made without a director. Or actors, or writers, set dressers, make up artists, etc.
“Everyone… can thank their lucky stars studios have been consistently healthy… every new job is a direct result of reliable prior studio success” Hmm, to what can we attribute the studios’ consistent general health? Hmmm…. maybe… um… EXTREMELY MARKETABLE, MULTIPLATFORM PRODUCTS AND PROPERTIES CREATED AND DEVELOPED BY CREATIVES??? We should shoot those ungrateful creative fucks for not shutting the fuck up and enjoying their ever-dwindling piece of pie. Once those leeches are gone I suppose this business would run nice and smooth. We’ll just make movies with money. We’ll get the money to write the movie, the money will cast it, produce it, act in it, direct it, edit it, etc. Cut out those pesky middle men, y’know? It’ll be great.
As for new jobs being the direct result of prior successes, tell that to the hundreds of former WB & Disney employees who can’t pay rent because they were laid off because their companies are “streamlining”. While you’re at it, tell it to the hundreds of folks in town who are fired/replaced every day because the last guy/gal wasn’t working out. That is, if they’re not too busy thanking their lucky stars that the business is so healthy and vibrant.
Again, like all studios argue, this studio self-serving exec assumes the talent’s investment of time and talent is worthless and we’re lucky to be paid, and crazy to expect a portion at the gate.
Tell that to The Rolling Stones when they perform. Or to any author on Broadway. They would laugh at you, and go work at another venue (Full-tilt Internet distribution is months away!)
It’s talent that keeps the studios making money, not only marketing and distribution. Soon they will see.
You can even cost out in numbers the talent’s investment. It’s called “Opportunity Cost”. See above. Talent deserves a proportional return on investment, AT THE GATE.
Hollywood accounting is so confusing to me…
JR made a very important point that a lot of people here don’t understand. Every film that is produced is established as a business of its own… but it is unique from other businesses in the sense that there is a limited lifetime to the film and its revenue streams. The GOAL of a film business is to make money for the investors (companies or individuals) regardless of whether the film’s own balance sheets show a profit or a loss.
Besides, a lot of the posts getting fired up about “Hollywood stealing people’s money, bribing the SEC IRS etc. etc.” clearly show a lack of understanding about WHAT they are even looking at. This is NOT a company’s financial statement. This is a film’s PARTICIPATION statement specifically calculated in the manner contractually agreed upon by the participant. Even the gross numbers are not technically gross, but “pre-defined” gross…
Basically, this statement was intended for (what appears to be) a very minor writer on the “Order of the Phoenix” team. The writer already was paid a salary (which falls under “Negative costs and/or Advance”) and probably already receives residuals through WGA ($10.2 million in Guild, Unions, Residuals payment). The net points are really a bonus that neither the talent nor agents actually expect to receive.
Every film that is produced is established as a business of its own… but it is unique from other businesses in the sense that there is a limited lifetime to the film and its revenue streams.
As I’ve said above, I’m a long way from being a Hollywood insider — but this much I did know; a number of years ago I put a bit of spare money into a friend’s very tiny indie film project, which came with a prospectus and various other bits of finance-industry disclaimer paperwork. [As you might expect, and as I fully understood at the time, the project never went anywhere.]
This is NOT a company’s financial statement. This is a film’s PARTICIPATION statement specifically calculated in the manner contractually agreed upon by the participant. Even the gross numbers are not technically gross, but “pre-defined” gross…
Fair enough. But even so, the numbers used to make the calculation ought to be grounded in something resembling reality — even if this isn’t a formal balance sheet, the data it uses ought to be derived from an actual balance sheet, and it ought to be possible for a third party to look at the balance sheet and the participation sheet and reconstruct the formula used to make the agreed-on calculations.
The writer already was paid a salary (which falls under “Negative costs and/or Advance”) and probably already receives residuals through WGA ($10.2 million in Guild, Unions, Residuals payment). The net points are really a bonus that neither the talent nor agents actually expect to receive.
I’m still skeptical that this was sourced from a writer (though I’ll admit I have no hard evidence one way or the other). But yes, clearly the recipient will have long since been paid per the fee structure mandated by the relevant Guild. But this begs another question: if (a) this is such a weak “net” deal, as folk above have said, and (b) nobody on either side expects it to pay off, then (c) why bother spending expensive lawyer and agent time dickering for it in the first place?
Shell Game – but they don’t call it Show Love, do they?
So it would seem the studio apologists’ main defense is that this is for net so it’s okay. The studios pull the same kind of bullshit for gross participation too. It’s more likely that you’ll see profit with that kind of deal, but there’s still some seriously creative accounting that goes on that would never fly in any other industry, and often you still have to audit to even get it.
Hard working “creative”/ union types,
You can participate in “net profits” for the films you work on, as soon as you start participating in “net losses” too.
(Suddenly that BATTLEFIELD EARTH gig isn’t looking so good, eh.)
Let me know when you start writing checks back to the studios for all those pieces of shit you worked on, then I’ll start putting together the lawsuit to get you paid for the one or two that actually did well.
Fools.
Krumhorn,
You say my comment was irrational and full of hate and toxic bitterness (bitter? maybe, toxic?, never!)… and then prove what I was saying point by point with your checklist. I’m just saying pure and simple how can you believe anything the studio says when they come up with numbers like this – on a series as successful as this? And I know of whence I speak having been on both sides of these cases. Chill, bro!
Someone send this to the MGM Lenders and just write “Welcome to the rest of your Entertainment Lives”
From,
Every Studio that’ll distribute your movies through Spyglass.
If they lost money on let’s say the first HP- why keep making the series . Of course it’s all BS
How do you know this person hasn’t already gotten paid 20MM?
Answer: You don’t, because this shit is supposed to be confidential.
Why doesn’t someone require the studio to submit an itemized list of expenses along with receipts to prove that they actually paid the amount that they are claiming?
re: bobfromaccountemps
It’s called an audit.
I’m a writer making a living in the industry. Yes, I sign contracts regularly that permit this kind of shit. You know why? Because I love my work, it pays well, and there are plenty of people who will fill my shoes if I choose not to sign those contracts. But the fact that I and countless others have no choice but to sign these bullshit deals doesn’t justify their behaviour. The fact that it’s perfectly legal – and I suspect some of it isn’t – doesn’t make it right either; it just means the law needs to change. Fact is, the studios behave on a daily basis in a way that, in my opinion, way out-sleazes anything we’ve ever seen from Wall Street. The only difference is that Wall Street is more regulated these days.
What nobody seems to be excited about here is that maybe, just maybe, regular news outlets will run with the story ‘Studio claims Harry Potter made a loss!’. And maybe, just maybe, that might draw attention – beyond the ranters, lawyers and execs all screaming at each other on Nikki Finke – to a whole big scam that is, legal or not, daylight robbery.
That statement is NOT saying that HP made a loss.
The statement is saying that based on YOUR DEFINITION OF NET THAT WE HAVE CONTRACTUALLY AGREED UPON, HP is at a loss.
Don’t like it, don’t sign. When you front half a BILLION dollars to put out a movie, you can call all the shots you want.
They didn’t front it. They borrowed it. Hence the $57 million interest charge.
@numbersguy
‘Don’t like it, don’t sign???’ Please research the labour movement and repost something intelligent.
Knowing a film’s box office gross and knowing a film’s production budget does not provide enough information to determine whether a film is in profit. The film’s distributor receives a percentage of the box office gross that is the negotiated “film rental” fee. (If anyone wants to start another conversation about corporations that own studios, which these days are mostly film distributors, and also happen to own theater chains, that’s fine but it’s a different “off topic” conversation about vertical integration.) These days P&A can be more costly than the film budget’s bottom line.
I’ve personally experienced the joy of writers receiving net profit checks from studio-distributed feature films. It is possible, and it does occur occassionally.
(Dedicated to Art Murphy, former and still respected journalist and box office analyst, who was also a founder and leader of USC’s Peter Stark Producing Programming.)
And if Rowling is found guilty of plagiarism in London’s High Court – a most likely scenario, if she doesn’t pay off the victims ? What happens then? Does anybody know?
And if Rowling is found guilty of plagiarism in London’s High Court – a most likely scenario? What happens then?
HH: As a writer/director of two indies, I GUARANTEE you “a lot of the 7 million dollars” was NOT spent of salaries.
Mojo: So talent should PAY studios for THEIR losses on a film. Interesting. I’d be happy as a clam to see gross percentage across ALL contracts for talent; it is the obvious upgrade unions need, especially SAG, but that would require transparent accounting, and LIARS and THIEVES have, uh, a difficult time with that.
This is old news. Financing a film, studio or independent, does not in any WAY absolve you from dealing fairly, front and back end, with the people who MAKE THE FILM: writers, actors, directors, crew.
This is the oldest racket going and these people should ALL be frog marched out the door, straight to jail.
I’m curious why you would think it didn’t go to the actors. I’m in the indie world and have produced an full length feature. I would normally agree, but if you watch the film, it was filmed on the red camera, not too many locations, and almost all the shots are tight. Where did the 7 million go, if it didn’t go to the actors? Did they have really expensive craft services? Unless, you’ve seen the budget your guess is as good as mine. Regardless, my comment was I liked the movie and would wish our industry would make more movies like this. I also said I hope the filmmakers (including writers and directors of course), talent, and hopefully even some crew share in the real profits of a film with recognizable talent and a reasonable budget. Best of luck.
I wonder if J.K.Rowling and her attorneys have seen this?
Or is she a Gross Participant? Alan Horn surely wouldn’t give her the shaft……or would he?
As far as “How true” are these things? Let’s see Alan get his salary based on the Net Profits of the Harry Potter films! Now THAT would be something — bet’cha Al wouldn’t make even 99 cents, the ol’ bat.
Well done, Deadline. Well done.
Wow, there are so many studio Uncle Toms in here today. Are you all earning the gross points or just hope to in the future?
I love the fact that so many of you (lawyers I suspect) have jumped on the “share the risk, the share the rewards” argument. Let me explain something about creatives. When you work on a movie as a creative, you are risking ALL of your capital. Your name, reputation and future earnings hinge on the success or failure of a project. Writers, actors and directors rarely have complete control over the finished product that will have their name on it.
It is a precarious leap of faith when you enter into a deal and that is the capital that creatives bring to the table. So yes, they share in the losses as well. If a project doesn’t do well on account of a bad marketing campaign, bad timing, whatever, that person will not be able to look at the slate and say, “let’s move on to the ten other projects we have” and continue to collect a salary. The gross deals have gotten out of control because the net deals, aka monkey points, were such a sham.
And it’s not like the studio execs are investing their personal money in a film. They’re getting paid a salary and, I suspect, bonuses. So the “share the risk” argument fails on every level. To argue that corporate risk is ultimate and sacred is either rhetorical or naive. This thread is simply a microcosm of the macrocosm. Corporations (read: top 5 % of management) don’t lose money, ever. They take zero risk.
The posting by “accountant” above is correct. These are NOT normal net profits they are in fact defined BONUS deals that are negotiated by very high priced lawyers and agents.
Any item of the defined net profits can changed in the up-front negotiations assuming the talent has the negotiating power to do so.
Talent often accepts these defined terms in exchange millions of up-front dollars or other considerations to them. Studios can/do change the defined terms for certain reasons e.g. the talent reduces their up-front payment. It’s a give and take negotiation. But in the end both parties agree to the defined terms. But after the fact tries for re-negotiation of salaries or defined terms are common in the industry.
That said, if there is an actuate accounting for any item under the defined terms there is recourse for that error.
Regarding the Art Buchwald vs. Paramount (”Coming to America”) item mentioned above, please read the trial records not just newspaper summaries.
ART MURPHY was the greatest! I audited his class — he threw a chair at me — but let me stay and gave me a free pass to SC film school. Best teacher ever. he wouldve slapped these monkeys with his sausage
The main Studios have become money laundering businesses for organized crime. If Ford continued to produce mainly Pintos wouldn’t you wonder how it stayed in business. Same thing in Hollywood, how does a studio make movies like Water World, Lenard Part 6, Pluto Nash, etc etc etc and stay in business? Simple the corporations loose money and filter money from other groups. Only people who make any money are above line Producers, Directors, Actors (The Launderers). Everyone else is happy to get a check. The studio bosses are puppets who loose money for the studio owners but launder for other organizations who stay around when the owners leave.
no wonder studio wind up sooner or later getting sued over profits of films. they do stuff like that wonder how long before Jk Rowling is having a nice talk with Warners over what profits the harry potter films really made. not to mention it was stuff like this that almost made Peter Jackson not be part of the hobbit one would think holly wood wound want to make profits better
I think you’ll find the $300m negative costs number includes Rowlings cut of the gross, along with all the major players cut of the gross.
They are probably changing the wording of it slightly so it does not get reported under Gross Participation – painting it as a kicker of some sort.
The idea that she’d be in for a cut of the net is pretty entertaining though!
almost every dollar a studio pays out in expenses is to a company or corporation it either owns outright or is in partnership with. this is to say that almost every “expense” incurred is an expense being paid back to itself.
that’s what nikki is implying, but can’t say.
we can talk about contracts all we want, we can talk about structure and how “it’s always been,” but the fact remains that regardless of our “sophisticated” expectations, or lack thereof, of corporate ethics, the numbers reported above are lies, and lying on a financial statement like this is illegal and should land anyone who had a hand in it in jail for a long, long time.
regular people go to jail for a lot less, you can look it up.
At least half the commentators on here badly need some basic understanding of finance, interest, the movie industry etc.
First, the studio paid up $300m to those involved (negative costs), they didn’t get nothing, nor did they get swindled out of all their cut by this accounting method, they got $300m. (note the tax credit is reflected in this)
Up front, before the studio made a cent.
Second, the interest – 57m.
Go to your bank & ask to borrow $300m for 2 years. Ask how much the interest will be. At 10% compounding monthly this is $36.6m in year 1.
Money invested has a cost, if you tie up $300m + another $191m in a film before you even get a cent back, this costs. Same way a bank charges you if you want to tie up their money in your house. Unless you live in pixie land where you can borrow cash at 0%. Obviously the writer & many of you do.
Even if its WBs cash, it is cash they could have just put in the bank earning x%, so by not doing so they are losing x% of interest – which they need to reflect in the accounting.
If you have $1,000 & you can invest it in the bank at 10%, but I ask to borrow it for 2 years & pay you no interest at all, does that sound like a good deal? Are you planning on being in business long? I have a bridge I can sell you too…
FFS, the failure to even grasp this most basic concept is why hundreds of thousands of US homeowners are sitting in negative equity & zero value pension pots right now. It is highlighted best by people not understanding gross receipts in this statement & gross box office (940 v 612) are 2 utterly different things.
Really, if you cannot follow that bit punch yourself in the face now.
3rd, the distribution fees. How exactly do you think a movie company makes any money? They make / buy a movie, they distribute it, they take a fee to distribute it – typically either a mid range fee, with all costs recoupable, or a royalty where they eat the costs from their share. You think they distribute it for free? Like the way if you hire a plumber in the pixie land you live in he charges you for parts but no fee for expertise? Really? Can I have the number of your plumber?
And my offer re the bridge still stands.
4th, the idea the studio made a loss, repeated over & over. Even a vague reading of the statement shows this is rubbish – and they are not saying this in the statement.
The studio are un-recouped, this is not the same as a loss.
Again, if anyone on here actually has any involvement in the industry at any level they understand this, alas many do not. I recommend “The Movie Industry for Dummies” or even “Why Can I not Balance My Cheque Book” as a starting point.
It works like this, WB put up 300m to make the film. They put up 191m to advertise it. They are now in a 491m hole.
They take a fee for distributing it (30% ish), so of every $ in they take 30% as a fee, this helps pay their overheads & makes them a profit, so to “recoup” they need to make back the 300+191+their fee.
Once they cover the 491 they are no longer making a loss, but they are not recouped until they make back the 491 + their fees.
You guys kill me. The comments are so naive as to be truly funny. No professional sports team ever turns a profit. None. Zero. Almost all corporations do not show a profit.
The problem stems from definition of profit. Do you mean profit margin, operating profit, gross profit, net profit, etc.?
Almost all businesses need to show a positive operating profit. A negative operating profit means the company is likely to go out of business.
As to projects, no company ever shows an accurate profit/loss statement. Try to calculate what Microsoft really spent to develop the Xbox. Good luck with that endeavor.
Most companies spread costs around to various projects. Harry Potter probably paid for a lot of bad deals done by WB. Why is anyone surprised by this behavior?
I am more surprised that the various guilds in Hollywood do not strike over the issue. The studios are fucking you and you are not even asking for a reach around. Until the guild members ask for a cigarette and some Astro Glide, the studios will never change.
The statement of another 5%er jealous of the hitters pay day burried in the $316MM production cost
I just wanted to say how much I enjoyed this article and the subsequent banter. I really wish their were more forums for this type of exchange. In addition, I wish there were forums that could really affect change. There is way to much mistrust in this industry. We are all very fortunate to pursue our passions in an industry like this. The rules and powers that be are slow to change, but as we’ve seen by every lethargic ruler, empire – they’ve all collapsed eventually due to their laziness and content.
Thanks DH and Nikki for providing at least a small parcel where this seed can grow. It may not before they’ve made version 16 of every trilogy, or every sitcom from the 70’s on, and everyone that says they are a comic book, but it’s broken. The studio execs are collecting their checks while they still can but accountability day is coming.
keep making films everyone. We’ll find an audience (well find your audience first) and then make sure they justify your budget.
I bet their shareholders are surprised to learn that the studios are strictly non-profit organizations.
There’s only one solution for this…class action lawsuit against all the big studios by the injured parties. That’s the only way they’ll ever change their ways.
“Always ask for a piece of the net, never the gross, the net is fantasy”
Freakazoid
I’m shocked, SHOCKED to find gambling going on here at Rick’s…
How else are they supposed to get bailout money from the Obama administration. They need to show a loss on a lot of these movies. In effect they are using a pyramid scheme by shifting profits to subsidiaries and partners and expensing it. Then their partners expense the cost of advertising (which is free) etc…
Bottom line is this is all about excuses to raise ticket prices, dvd prices and bailout funds.
They would not even make these films if they didn’t make a profit. This accounting is dark magic indeed. It’s like a profit horcrux.
The RIAA and MPAA are bigger crooks than even the professional pirates who illegally distribute their wares. The studios have been screwing limited partners for decades, but the apologists conveniently forget this.
“I love my work, it pays well, and there are plenty of people who will fill my shoes if I choose not to sign those contracts. But the fact that I and countless others have no choice but to sign these bullshit deals doesn’t justify their behaviour.”
Actually, I rather think it does. This isn’t the mining industry, ffs. Most skilled staff in Hollywood could find perfectly good jobs outside Tinsel Town if they wanted to. They choose not to because they themselves put a very high value on the associated benefits of working in the movies — as demonstrated by the fact that they sign these deals.
I’m curious about two things:
* After “Coming to America,” how come no one sues?
* How can there be a “different” net for above-the-line vs. below-the-line talent?
Top studio executives should receive a salary based directly on how much their product brings back in terms of profit. That would change things really fast.
Oh, one other question: How could the negative cost here be $315 million? Does that mean the movie cost $315 million to make?!
(And $4 million for “freight”? WHAT?)
Didn’t I read that Hollywood types were bilked by Bernie Madoff?
What goes around comes around. It’s just the same game for these folks. If they’re not being screwed by outsiders, they’re screwing themselves.
As someone pointed out earlier, others have gone to jail for less than this. Amazing that it is allowed to continue.
18% Interest on all borrowed money… cripes. What, were they financing this thing on their Visa Cards?
Note to the IRS:
1) When the FEDS couldn’t nail Al Capone, they brought in the IRS. That’s the only way this mess can be cleared.
Note to regulators:
2) Heard the word: ENRON
Studios don’t need to set up separate SPVs to make films like indie producers do. But they do because you can show the profit in one, the loss and expense in the other (where the net points are doled out) and pass on the profits to the congloms who own the studios (profit side). This way everyone wins and the creatives who get TOLD they they will receive net don’t.
Note to the morons:
If you tell someone I will steal from you, and then steal from them, it’s still stealing because you have the power to hire someone else.
Note to the agents:
Don’t you commission points also so you have a stake in changing terms
Note about the lawyers (on the creative side)
Lawyers representing clients know that every “hack” writer or little actor will certainly call the agent after the movie is out and complain about not getting net point checks. The lawyer will bill hourly to research this and the report that nothing can be done. Lawyer’s time is compensated.
Note to the flacks:
Go F yourself.
Note to everyone else:
Write to the California legislature as profits siphoned off from tax-payers affect the state’s bottom line.
Note to Deadline:
You rock. Thank you for not being THR (The Hollywood Reporterless)