Editorial: How A $19 Million Movie Makes $150 Million... And Still Isn't Profitable

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Old 10 October 2012   #1
Editorial: How A $19 Million Movie Makes $150 Million... And Still Isn't Profitable

Quote:
"e've written about the wonders of Hollywood accounting before. It's a series of tricks pulled by Hollywood studios to make most of their movies look unprofitable, even when they're making a ton of money. The details can be complex, but a simplified version is that every studio sets up a new "shell" company for each movie -- and that company is specifically designed to lose money. The studio gives that company the production budget (the number you usually see) and then also agrees to pay for marketing and related expenses above and beyond that. Both of those numbers represent (mostly) actual cash outlays from the studio and are reasonable to count as expenses. Then comes the sneaky part: on top of all that, the studios charge the "movie company" a series of fees for other questionable things. Many of these fees involve no real direct expense for the studio, but basically pile a huge expense onto the income statement and ensure that the studio keeps getting all of the movie income -- rather than having to share the profits with key participants -- long after the movie would be considered profitable under regular accounting rules.
"

"Over on Kevin Smith's (really, really, fascinating) Smoviemakers podcast, Smith recently interviewed filmmaker Scott Derrickson, who has made a name for himself in the horror film world. The whole interview is fantastic and well worth listening to, starting with part one. However, right at the beginning of part two, Derrickson reveals how he effectively got shafted on one of his most well known films, The Exorcism of Emily Rose.
Scott Derrickson (SD): It made $75 [million] domestic and $150 [million] worldwide...

Kevin Smith (KS): Nice. You're a true filmmaker, you know exactly what your movies made everywhere...

SD: Hellllll yeah.

KS: It's a badge of honor.

SD: And to all the young filmmakers listening, I had 5% of the net of that movie. That was in my contract. And it cost $19 million. And it made $150 million worldwide. There's no net. That's how movie math works.

KS: So even you were not above being screwed by the system.

SD: I told my attorney, the next time you're negotiating my net profit for a movie, ask for a ham sandwich instead.

KS: 'Cause you'll get something.

SD: 'Cause I'll get something [laughter]"

http://www.techdirt.com/articles/20...rofitable.shtml
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Old 10 October 2012   #2
There's a reason why the net profit participation is called getting "monkey points". They're worthless.

Of course, if you can negotiate yourself getting a piece of the gross profits, then great. But that isn't going to happen unless you're a top tier actor, producer or director.
 
Old 10 October 2012   #3
I remember an episode of Freakazoid that touched on this -
http://youtu.be/bHL91HQzhuc

Score one for educational programming mandates!
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Old 10 October 2012   #4
Whilst i am certainly not in favour of piracy - I have mentioned this type of BS when playing devils advocate.

Very interesting.
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Old 10 October 2012   #5
yes, Hollywood, the masters of "pencil whipping". Always gross, never net.
 
Old 10 October 2012   #6
Just out of curiosity, what is the point of doing this? Just so the people who do have contracts with net profit sharing don't get any money? Are there other benefits to this?
 
Old 10 October 2012   #7
Originally Posted by th3ta: Just out of curiosity, what is the point of doing this? Just so the people who do have contracts with net profit sharing don't get any money? Are there other benefits to this?


There's a few episodes of the Critical Path podcast where they discuss the how's and why's of Hollywood book keeping...its REALLY interesting stuff... Check out this episode , there's also a few episodes after that one where they discuss similar topics.
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Old 10 October 2012   #8
Originally Posted by th3ta: Just out of curiosity, what is the point of doing this? Just so the people who do have contracts with net profit sharing don't get any money? Are there other benefits to this?

I am not an expert, but wouldn't that also mean they don't pay any capital gain taxes?
 
Old 10 October 2012   #9
Originally Posted by th3ta: Just out of curiosity, what is the point of doing this? Just so the people who do have contracts with net profit sharing don't get any money? Are there other benefits to this?


You pay taxes and get benefits (or rather don't) based on your net.

Setting up a network of offset gain keeps all the incomes in the lowest brackets and gets you financed and discounted in many ways, at the price of a minimal stock loss and slightly higher insurance fees.

It also means you retain full control of the liquidity because it's not really liquidity, but rather transactions between entities you control, and yes, it saves you a little bit of money in not paying net slices to anybody but the absolute biggest shot directors who have their own production companies and can feature in the loop you set up through those.

Also from Kevin Smith, rent Red State, beside being an awesome movie, it has an interesting extra of his speech at Sundance about production, marketing, offsets and distribution, and the difference between indie filmmaking with studio backing and pure indie all the way to dist (which is extremely rare for B prods, and almost unhead of for A prods).

edit: corrected mis-quoting.
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Old 10 October 2012   #10
You know, I'm not even in the film biz and even I know about the whole "Net Math is Zero" system.

Scott Derrickson should cross-reference his agent. There is no way his agent didn't know about this.
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Old 10 October 2012   #11
Originally Posted by BrainFreeze: I am not an expert, but wouldn't that also mean they don't pay any capital gain taxes?


no, but its' a pretty interesting "shell game"
 
Old 10 October 2012   #12
Originally Posted by tswalk: no, but its' a pretty interesting "shell game"

Can you explain the "no" part?
 
Old 10 October 2012   #13
Im mostly surprised neither he nor his agent knew about this, isnt it fairly common knowledge that every movie made will have the numbers massaged to ensure it doesnt turn a profit?
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Old 10 October 2012   #14
At last,... that explains all those crazy company names and strange logos. I always wondered what they were for.
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Old 10 October 2012   #15
Actually I'm doing the same when freelancing.
I pay taxes of what I earn, minus business expenses.
So every year I'm figuring out how I can maximize business expenses, like buying new computer, buying software, etc.

The whole thing is also related to why musicians get next to nothing from money that goes through their record company, as album sales.
 
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