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Hollywood Accounting — How Harry Potter Loses Money
An anonymous reader writes "Techdirt has the details on how it was possible for the last Harry Potter movie to lose $167 million while taking in nearly $1 billion in revenue. If you ever wanted to see 'Hollywood Accounting' in action, take a look. The article also notes two recent court decisions that may raise questions about Hollywood's ability to continue with these kinds of tricks. For example, the producers of 'Who Wants To Be A Millionaire' now have to pay $270 million for its attempt to get around paying a partner through similar tricks."
This is a very old trick, and I can't understand why people still fall for it.
Winston Groom had to learn the hard way when his deal involved a percentage of the net profits from Forrest Gump. Unfortunately for Winston, Hollywood accounting always makes sure there isn't any net profits.
This is why the big actors and producers always ask for a percentage of the gross revenue.
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Peter Jackson had to sue New Line Cinema to get paid for LotR. New Line claimed they lost money on the trilogy.
Indeed, on top of that I recall the Tolkein Trust suing New Line for hundreds of millions after New Line only paid them $62,000 for the rights to the movies. New Line apparently claimed that was 7.5 percent of the gross of the films. Isn't that the standard these days? (as the article notes)
My work here is dung.
It's been the standard for years, and it's been one of the things that really pisses me off, that while the MPAA is going after movie pirates claiming theft, their members have been stealing money from investors and the tax man for decades. Even where the contract stipulates a percentage of gross, dirty tricks have been used to screw over directors, actors and other investors. The only reason most of Hollywood's accountants and producers aren't rotting in jail for embezzlement is because the movie industry has been this walled garden for many decades, seen as to valuable to peel back the layers to discover the crooks running the show.
In the past, what stopped folks from getting too uppety was buy offs. Most folks are pretty pragmatic, and will take 25% or 50% of what they're owed rather than going through the long, arduous and expensive process of actually moving a lawsuit all the way to the courtroom. I don't know whether the studios don't have as much money to buy off the people they've screwed, or whether some people, like Don Johnson, who just won $20 million bucks that he had been scammed out of over a similar deal for the Nash Bridges TV series are just saying "enough is enough", but if this becomes the rule, the MPAA's members are going to have bigger things to worry about than the Pirate Bay.
The world's burning. Moped Jesus spotted on I50. Details at 11.
The CEO of the company I worked for used this trick once. He was trying to get all the executives to take a temporary pay cut for one month. In order to do this he mentioned that he took no salary for the last 3 months. While this was technically true, the more overarching truth was more sinister. He had in fact shielded himself and his income from any downturn in the business by setting up a second corporation where he was the only owner, employee etc. This was a marketing company. Now the first company only got leads from Direct Mail. Guess what the second company did? Direct Mail Marketinig. So while he took no salary from the first company, he continued to get paid very well from the second company for something the first could not live without.
Tax avoidance through expense maximization and income minimization is one thing; there are rules and if you break them you get penalized, up to an including prison.
In this case, though, the rules (GAAP) are much more flexible and in some cases they can write their own rules (contract language, business procedures) and the punishment at worst might be a fraud conviction but generally the punishment is getting sued and that has a high barrier to success, let alone initiation.
It also helps that the "product" of much of Hollywood doesn't have the kind of supply-and-product chain that manufacturing or other industry has. It has a lot of soft costs and a lot of human costs that can silently and flexibly siphon money from successful projects (consulting fees, personal services (AKA "hookers and blow"), promotional costs, legal fees).
"In the past, what stopped folks from getting too uppety was buy offs. Most folks are pretty pragmatic, and will take 25% or 50% of what they're owed rather than going through the long, arduous and expensive process of actually moving a lawsuit all the way to the courtroom. "
Yeah, they've just delved too greedily and too deep. Someone might settle for half of what they're owed if the amount is tens or hundreds of thousands of dollars, but for tens or hundreds of millions of dollars, that years-long court battle might be worth it.
It's been that way from the beginning of Hollywood; was one of the main reason Charlie Chaplin and a few others founded United Artists way back in 1919.