Slashdot Mirror

A substantial portion of the direct cost of a film produced on a studio lot is charges for the use of the studio's facilities, including the sound stages, vehicles, equipment, etc. Although the studio incurs no out-of-pocket expense for providing these facilities, it insists that the charges are proper because they comply with the SPD language defining production cost. The charges made for using these facilities are substantially in excess of the actual costs... For example, a studio will charge a motion picture for the use of a vehicle at a rental rate based upon the rental rate being charged by the leading rental-car companies, typically $45 per day or more. This charge, which includes a profit rate equivalent to the rental companies' profit rate, will be made even if the vehicle has long ago been purchased by the studio, and even if the cost of the vehicle has been charged against other films...

I would think this would keep them rolling in money without having to deal with inconveniences like paying taxes or profit percentages.

It's a very rare actor that can demand millions up-front. Most have to settle for a percentage of the profits. However, due to accounting practices "considered odd by any normal business standards", 95% of movies, even box-office hits, somehow fail to make a profit - as defined by the studio, anyway. This article lists many of the ways in which this is managed, including spreading of gross receipts amongst poorer-performing pictures, "distribution fees" far in excess of reality, a 10% "overhead" fee to be applied to all marketing expenses, tax breaks that are kept by the studios & not counted for the picture, and many others.

Stan Lee got nothing from the Spider-Man movie, because the studio claimed it did not make a profit, at least as defined by his contract. My Big Fat Greek Wedding was produced cheaply and was a huge success, yet somehow "lost $20 million". Even Babylon 5, which took in $500 million in DVD sales alone, is apparently "$80 million in debt". As the creator, J Michael Straczynski said, "Basically, by the terms of my contract, if a set on a WB movie burns down in Botswana, they can charge it against B5's profits."

Steve Vai says very similar things about the record labels' own standard contracts, not least their various bogus deductions for digital download sales. As the saying goes, the really creative people are the accountants.

AC: there has never ever been a movie that made a true profit

Red Flayer: Your post makes no sense, but I am interested in hearing what you have to say.

Believe these:

• Google: hollywood creative accounting
• Wikipedia: Hollywood accounting
• Hollywood Law CyberCenter: Less Than Zero
• Movie Money by Daniels, Leedy, and Sills (ISBN 1879505339)

It's a pretty standard deal for films, no matter how successful, to fail to make a "profit". There are a wide variety of ways that the studio manages to orchestrate this. There is a nice article here that outlines most of them.

Reading through all the little tricks and traps is a little frightening - things like the legacy "only 20% of actual home video receipts are booked, the remaining 80% goes to the studio as 'costs'", or the blanket exclusion of 50% of gross reciepts for merchandising and music are pretty blatant scamming. The rest is more subtle, but really just as bad. Read the whole thing, it's worth it.

Jedidiah

Marvel's argument has been that they made no money on the film. All the money made on the film was spent on production or marketing.

Actually its even more cunning than that. Take a read of how studio accounting actually works. It's an endless array of scams to make sure the end result is that practically no film ever makes a profit... for accounting purposes anyway.

An example, from the link, is how they organise accounting of profits from Video (which includes DVD these days). In the old days when video was new independent video distributors payed a flat 20% of revenue to the studio for the right to produce market and sell the videos. Now the studios all have their own video distributors, and the video marketing is simply an arm of the studios full marketing division. Oddly, for accounting purposes the "profits" the studio makes from all video and DVD sales is still recorded as a flat 20% of video revenue. Whatever profits the independent distributors used to make while paying 20% to the studio (probably more because the studio already has marketing etc. integrated in) now happily goes to the studio as profit that never gets recorded in the official net return for the film!.

Such accounting tricks (or flat fraud if you're honest) is carried out in all manner of diffeent areas nibbling more and more off the final "profit" earned by the film till it amounts to a net loss. Read the link. It's frightening.

Jedidiah.

Of course the reality is that there are practically no films at all that make a profit. Certainly every big budget film is guaranteed to make a loss. At least, according to the movie studio accountants.

And in the end that's actually a reasonably large part of where all the real profit comes from. Take a read of this and just look at all the amazing money shuffling methods they have to sweep any semblance of profit under the carpet. Just look at how the account for video and DVD sales for gods sake! Dodgy, dodgy, dodgy.

Jedidiah.

There may be things wrong with the way the movie people do business, but thin margins are not one of them. "somehow the expenses almost exactly match the costs" also happens in your neighborhood grocery store. A box of cornflakes marked $0.99 costs the store about $0.98 for the product, the shipping, heat and light in the shop, and labor to put it on the shelf. In a competitive market (which is so popular here on /.) margins are driven toward zero.

That's when you're offering something at a fixed price, films have variable returns. some films bomb, some films are roaring successes. According to movie studio accounting, everything finishes below the point of actually turning a profit.

Still not convinced there's something fishy going on? Try reading about the details of exactly how how movie studio accounting works. To call it dodgy is a vast understatement.

They have very fat margins, it's just that the margins become very thin (and usually slightly negative) for accounting purposes as soon as it comes time to share those profits with contracted parties who were offered a share.

Jedidiah.

Once the studios have gotten some sap to accept payment as a percentage of net, it can cost billions (according to Hollywood Accounting) just to buy the tin for the can.

The breach of contract challenge to the SPD of Paramount Studios in the Buchwald case revolved around a theory of unconscionability. Art Buchwald and his partner, Alan Bernheim, sued Paramount Studios for breach of a written agreement to pay for the use of Buchwald's treatment It's A Crude, Crude World as the basis for the Eddie Murphy film Coming To America. Buchwald's contract with Paramount called for him to be paid a portion of net profits, using Paramount's SPD. The case was tried to Los Angeles Superior Court Judge Harvey Schneider in three phases. In the first phase, the court found that Paramount had used the Buchwald treatment to make Coming To America; in the second phase, the court found that portions of the Paramount SPD were unconscionable under California law; and in the third phase, the court awarded damages in favor of Buchwald and Bernheim of $900,000, based upon its reformulation of the contract after finding portions to be unconscionable.

From this article about the practice (written from a legal perspective) called "Less than Zero".

Anyone considering this "deal" should make him or herself very familiar with the terms "net" and "gross".

"Net" means what's left AFTER GarageGames pays ALL expenses. That might seem reasonable, but you really need to look at some of the horror stories that (e.g.) musicians and film actors/writers tell about "net" deals. Things you couldn't even imagine get counted as "expenses". To hear Hollywood tell the tale, there hasn't been a movie that made a "profit" in the last 50 years! If you're signed to a "net" deal they have no motivation to keep expenses down (quite the contrary).

There's a reason why anyone in Hollywood with any clout insists on a "gross" deal rather than a "net" deal. Gross is a lot harder to play games with.

So, from where I'm sitting, here's the deal:

1. You pay them a hundred bucks to use their (heavily-encumbered) property.

2. You do all the work of developing the game.

3. Once you've developed the game, they get exclusive rights. You can't sell it anywhere else, but they can choose to sell it, or not, as they see fit. They can sell it to another company for 10 cents a copy, then claim $5 million in expenses. You can't do squat about it.
A fair deal usually involves sharing the risks and the rewards. In this deal they face NO risk (in fact, they're guaranteed to collect at least a hundred bucks), yet take a hefty chunk of the rewards. Sounds like a bad deal to me.

I am not a lawyer, but if you're considering this perhaps you should read an article from someone who is.

Pay careful attention to the sentence that reads " The accounting provisions which are contained in the studios' SPDs [Standard Profit Definition]make it difficult, if not mathematically impossible in many cases, for net profits ever to be achieved."

I find it rather laughable that Jack Valenti says "...because making movies is so expensive, only two in 10 films ever retrieve their production and marketing investment from domestic theatrical exhibition." The problem I have is that Hollywood is notorious for cooking the books... take for instance the concept of "Net Profit". Take a look at here for a page that shows how Hollywood calculates "net profit" so that a movie like Coming to America can show no profit.

Don't stop at those two pages... look here or here or here... or if you don't mind reading a PDF file, try here

from the article "Because making movies is so expensive, only two in 10 films ever retrieve their production and marketing investment from domestic theatrical exhibition."

That is not true, check out Studio Accounting Practices in Hollywood By Joseph F. Hart, Esq. and Philip J. Hacker, C.P.A. if you want to see how they do their accounting.
It seems like many more than 20% are making money, they just use "funny" accounting, ala enron.