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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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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.