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."

Comments

Peter Jackson

[jjohnson]

Peter Jackson had to sue New Line Cinema to get paid for LotR. New Line claimed they lost money on the trilogy.

Re:Peter Jackson

[Monkeedude1212]

They very well could have - but thats not a director's fault.

I expect to be paid for writing an application or website if I'm contracted to do it, regardless if its used or not.

Re:Peter Jackson

[eldavojohn]

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)

Re:Peter Jackson

[God'sDuck]

Wait...if they claim they are losing money on every copy they sell, aren't the pirates saving them money?

Re:Peter Jackson

[blair1q]

Saving, no. Making, yes.

Re:Peter Jackson

[Anonymous Coward]

Jackson's contract is for a cut. What's crazy is, in hollywood everyone knows to ask for a cut of the *gross*, not net. I can buy the idea of magic rings, elves, dwarves, hobbits, dragons, ents, wizards, and so forth, but a net reported profit on a Hollywood movie? That's just fantasy.

Re:Peter Jackson

[nedlohs]

That's because you contract doesn't say "will be paid X% of gross income", whereas Peter Jackson's did.

And of course he did get paid, he just got paid less than he should have because New Line sold the rights to sister companies for below market value.

Re:Peter Jackson

[mysidia]

That's why piracy has GOT to be stopped immediately. It foils the movie makers' tax dodge (and revenue sharing dodge)

Let's see them bring THAT justification to congress, on why it is imperative for the economy to make tougher anti-pirate laws

Re:Peter Jackson

[MightyMartian]

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.

Re:Peter Jackson

[OnePumpChump]

"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.

Re:Peter Jackson

[tomhath]

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.

Re:Peter Jackson

[sumdumass]

Your right, it wouldn't matter. In fact, that was part of the point, he had to sue in order to prove it didn't matter. The movie companies on the other hand, had different ideas altogether and thought it would matter and that it would allow them to scalp more of the money- which was the other part of the point with the Hollywood accounting).

Re:Peter Jackson

[HungryHobo]

I'm guessing it may have been arranged something like-

Person P has a contract with company N for x% of the gross that company N earns from the film.

Company N sells everything to company M for 1 dollar making a total gross profit of 1 dollar.

Company M then goes on to release the film and make a pile of money big enough to swim around in but person P has no contract with company M so gets no cut of that.

P is paid almost nothing.
M and N are owned by the same parent company.

of course this is just my uneducated guess.

Re:Peter Jackson

[Sponge Bath]

I saw a similar scheme on the streets of New York involving 3 cards.

Re:Peter Jackson

[sumdumass]

he 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.

I'm not sure if the reason is some walled off garden. Remember McCarthy? There is a shinning example of what can go wrong if you start digging into Hollywood too deeply. They control the media more so then any politician or political group could ever hope for in their wildest wet dreams. And being Hollywood with years of experience in making statements without making statements to sway the public subliminally or subconsciously instead of directly, their power is almost unrivaled by any other threat that any politician would see in their lifetime.

If you don't believe me, just look at how the coverage of the BP oil spill has moved to Lindsey going to jail with a fingernail painted to say Fuck You.

Re:Peter Jackson

[mcgrew]

Honest people think most other people are honest, while thieves think everyone is a thief. If you see any kind of DRM on anything, you can be pretty sure its creator is a thief, and a stupid one at that.

Re:Peter Jackson

[feepness]

So what you're saying is, you're a thief.

Re:Peter Jackson

[mcgrew]

Your reading comprehension is a bit flawed today. I didn't say that honest people thought everyone was honest; you only have to be ripped off once to know that not everyone is honest. Most people are honest, me included. But thieves think everyone is a thief.

Re:Peter Jackson

[virtualchoirboy]

A cut of the *gross* may not even work. If I'm reading the various blogs correctly, what the movie studios do is set up a new company for the production of each movie, lend that new company a ton of cash for the creation of the movie. The studio then has to get paid back before any net or gross calculations are performed because it's a loan repayment, not a cost of production. Since it's a loan, they also get to charge interest. Thus, with a big enough initial "loan" and corresponding interest rate, it's possible to rig things so that no movie ever turns a profit - regardless of the quality or box office draw. /props for the creative way of avoiding payouts //still think it's equivalent to stealing

Re:Peter Jackson

[Richard Steiner]

If they gave you 50 million, why not turn around and spent that 2-3 million to make them think twice about trying to screw you again?

Re:Peter Jackson

[peragrin]

not to be mean but haiti is a whole other kind of mess. If that was America or Chili, or just about any where else, the locals wouldn't wait for foreigners to show up to fix the docks and airport.

We would have cleared the roads straighten out the airport, and had the dock ready to receive ships with out waiting for some one else to do it for us.

haiti wants someone else to fix the place. to many foreign donors over the decades have taken away their self sufficiency.

Re:Peter Jackson

[masmullin]

thieves dont believe in honest people... just stupid thieves. Therefore, thieves dont prey on honest people; thieves prey on stupider thieves.

Machine fixed.

Re:Peter Jackson

[Miseph]

What the hell kind of hitman charges 2-3 million? Maybe if you were going for a paranoid military dictator or something, but most of these guys don't even have a real security detail.

Not a new trick

[Drakkenmensch]

The producers of Forrest Gump used the same math to claim a loss on that one too.

Re:Not a new trick

[Yvan256]

Shrimps are expensive.

Re:Not a new trick

[blair1q]

Life is like a box of chocolates...where someone has eaten the middle out of every one.

Re:Not a new trick

[Midnight's Shadow]

And Star Wars (4-6) - the guy who was actually in Darth Vader's suite never got paid for the role.

Re:Not a new trick

[copponex]

Bubba knew all there was to know about the movie business...

"There's dumb fucks, stupid fucks, lying fucks, stealing fucks, lawyer fucks, producer fucks, and they're all trying to fuck you out of your ideas and passion. And that's... that's about it."

Re:Not a new trick

[Midnight's Shadow]

Yes that was a bad typo. So lets try this again to appease all the idiots who can't figure it out.

David Prowse the person who was the on screen presence of Darth Vader in A new Hope, The Empire Strikes Back and Return of the Jedi never got his full compensation for his part in the movies due to the same accounting tricks mentioned here.

Better?

Re:Not a new trick

[zoocey]

and it bit them in the ass. They successfully screwed over the author of the book the movie was based on. Rumor has it that they wanted to film a sequel, but said author refused to allow it. As clearly there is no point in filming a sequel to an unprofitable film.

Re:Not a new trick

[damnfuct]

And Star Wars (4-6) - the guy who was actually in Darth Vader's suite never got paid for the role.

I mean, why should he? That freeloading bas**rd was just hanging around Vader's suite? Being such a key figure in the Empire, he's probably got his suite outfitted with all sorts of luxuries.
note: suite and not suit

Re:Not a new trick

[Jeremy Erwin]

Darth Vader actor David Prowse warns beware of small print

Re:Not a new trick

[dgatwood]

Ideally, no company should ever be allowed to bill a division of itself under any circumstances. Any staff employed by the company is already part of the normal operating cost of the company, and therefore, by definition, not an expense specific to any particular project. If a project would cause a division to be overworked and have to bring in more people, the correct answer is, "No," at which point the requesting division would have to decide if it was important enough to hire someone themselves. And in the case of contractors hired by one division to do contract work for another, there's no good reason for the middleman, so the contractors should be paid directly by the requesting division instead.

Fundamentally, a contract between two parts of the same company cannot be an arms length transaction. It simply isn't possible. The sooner we acknowledge that as a society and refuse to allow companies to sign contracts with themselves, the sooner we'll be able to put these ridiculously abusive business practices behind us.

Re:Not a new trick

[thetoadwarrior]

Where have you been? It's been posted on Slashdot and elsewhere numerous time. Requiring a source for every claim is just being anal especially for something so easily verifiable by yourself with a google search.

Re:Not a new trick

[thetoadwarrior]

Yes but there is demanding a source for something that sounds odd and then there is just being a dork and asking for sources for any claim in hopes they won't do it and thus their comment is deemed invalid and giving yourself some sort of self satisfaction.

Re:Not a new trick

[tinkerghost]

Ideally, no company should ever be allowed to bill a division of itself under any circumstances.

No, internal billing has a place. It's an ingrained part of project accounting & isn't a problem as such. In most companies that are actually doing it, they charge exactly what it costs. You took 400 man hours of 'Research' time & we paid $30/hour for that time, we're billing you $12K which you can account for in your project budget.

The abusive companies are saying: You took 400 man hours of 'Research' time & we paid $30/hour for it. Adding in our profit margin of 100%, we're billing you $24K.

The internal profit making is what needs to be stopped, not the process of internal billing. If Division A is spending time helping Division B, there needs to be some form of accounting in place to show why A lost X number of man hours that quarter, otherwise it just fucks everyone's bonus and job evaluations.

Re:Not a new trick

[CohibaVancouver]

The producers of Forrest Gump used the same math to claim a loss on that one too

Winston Groom wrote the book "Forrest Gump" upon which the movie was based. As you suggest, he made very little money due to creative Hollywood accounting. When the producers approached him about making a movie off his sequel novel "Gump and Co." Groom apparently refused - Apparently he said something like "Why would you want to make a sequel when you lost so much money on the first movie?"

The Terrible Economy Threatens Even the WB

[SeriouslyNoClue]

It's the people below the poverty line who don't work and aren't productive enough that are to blame for Hollywood's plight. Not the rich accountants and brilliant producers that carefully select only the most qualifying of movies. It is obviously getting to the point where our culturual heritage -- the heritage of Americans -- in film needs to be conserved by the government. Which is why movies like Harry Potter should be able to apply for and be granted a government bailout when they finish in the red. It's obvious that the economy has hit them hard and they need a little help. With the file sharers and ripoff dupes in the world taking away their copyright, this is the only way we can help them out until a solid and sane prosecution framework like ACTA is approved for the whole world.

My thoughts and prayers are with Hollywood and the families of everyone involved with such quality original films.

Read Roger Corman's book.

[Animats]

Roger Corman had some problems like that with studios back in the 1970s, and he won, too. Read his "How I Made A Hundred Movies in Hollywood and Never Lost a Dime".

Not Hollywood alone

[rjejr]

Don't most major league sports teams do this as well? And major corporations in a bid to avoid taxes? And most (US) individuals in a bid to pay less in taxes? I'm not saying it's right or wrong only that it just is and is practically universal.

Re:Not Hollywood alone

[phantomfive]

No, this trick won't work for tax purposes. The IRS isn't that dumb (and when they are dumb it is never in your favor). The reason they are able to get away with it from a tax perspective is they actually do pay taxes on it.

What they are doing is setting up a separate corporation for each movie. The corporation is the one that makes contracts with the actors/directors/whoever. Then the studio charges the corporation a (bankrupting, in this case) amount for distributing the movie. Much more than actually distributing the movie cost, but of course the corporation pays it, and ends up making no profit on the movie. The studio still has to pay taxes.

Now, as an average person, you can try to do that, and set up your own personal corporation so you can deduct 'business expenses,' but the IRS will still make you pay a full amount. The studios also still have to pay the full amount in taxes, just not to other people (unless other people sue).

Studios will still continue to do this kind of thing, because while on highly profitable movies, juries might not favor them, on less profitable movies it will be easier to get away with. Obviously it is fraud, but I don't know if it is close enough to the legal definition to press legal charges.

Re:Not Hollywood alone

[pavera]

Hollywood is the only party (and the music industry) that screws over the people actually producing stuff by pulling this trick. Sure corps do it all the time, but they pay employees first, and generally employee pay is not tied to "net profits" of the company. Same goes for sports teams. Lebron James paycheck is not dependent on the team he plays for making money, its dependent on how well he and his agent negotiate his contract.

In hollywood and the music industry, not only do they get to dodge taxes with this trick, they also get to dodge paying their employees cause most of the contracts in LA are of a "% of net profits" mold... Thus, not only are they screwing over the government (why again do they have so much sway in DC??!!??) but they screw over regular working people and of course, high paid actors and musicians as well...

Re:Not Hollywood alone

[Red Flayer]

Lebron James paycheck is not dependent on the team he plays for making money, its dependent on how well he and his agent negotiate his contract.

That's not exactly true. The players unions in major sports negotiate with the owners of the league's teams to determine the total player compensation. This is the major thing that's keeping the NFL players and owners from reaching a new agreement -- the players want to see what portion of the revenues go to player salary, but the league is refusing to release the revenue figures. In the NBA, the salary structure for rookies, and the max salary for players, is partly a function of league revenues.

For any industry where individuals make a big difference to the product, the pay of the individuals in in some way related to revenues. Sometimes it not as clear-cut as a % of gross or net... that tends only to be the case where there's a higher level of risk.

Re:Not Hollywood alone

[yabos]

Yeah, but his name is Gino and he supposedly has ties to the Italian mob so he's probably ok.

Re:Not Hollywood alone

[hey!]

Sure it's perfectly legal and moral to set up shell corporations. It's what you do with them that matters.

I do happen to know a little something about corporate accounting. I actually once recommended that a company be split into two captive parts. The reason was that it had highly profitable software half and a very unprofitable hardware sales half. Splitting the company in two had a legitimate purpose: it made it easier to sell the software business by making its value more clear. Eventually it was sold to a company that already had a hardware business and it's co-joined hardware twin simply folded. That was all completely above board.

In accounting you are constantly making up fictional "expenses", but they are offset by fictional income. You do this in order to make the financial performance of your various business structures more clear. What you CANNOT do is make up expenses to mask changes in owner's equity.

I know that stuff that looks like this happens all the time, and there are lots of borderline cases where legal corporations are created in order to take advantage of various angles in tax law. Many of those schemes are probably illegal, but are allowed de facto because nobody has the time to unravel them. That's why certain politicians always try to understaff the IRS. It's not to defend Joe Blow, who can't hide any significant income. It's to protect the guy who can play the "blind them with bullshit" game with armies of lawyers and accountants.

The situation is different for taxes (which are an exaction in which you have no say) and business deals (which are supposed to be negotiated in good faith). When you enter into a profit sharing contract, you can't take a chunk of revenue, move it from your left pocket to your right and call that an "expense". The proper name for that is "fraud". It doesn't matter how formally correct you make the transaction appear. Substance matters in accounting, and if the substance of a transaction is fraudulent, it's fraud.

In fact, that is the very essence of skillful fraud: to make that which is unconscionable seem superficially correct in every form. You can't pass a counterfeit bill and use "it's such a good copy it is indistinguishable from the real thing." You can't engage in a fraudulent transaction and say, "But all the incorporation papers, purchase orders and invoices are in order."

Re:Not Hollywood alone

[jrumney]

Or try to get share options in a VC funded startup to pay out.

Forest Gump

[Bill_the_Engineer]

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.

Re:Forest Gump

[nedlohs]

Gross doesn't cut it always either, see Peter Jackson and Lord of the Rings.

Re:Forest Gump

[sconeu]

Predates Forrest Gump. See Buchwald v. Paramount, regarding "Coming to America".

Re:Forest Gump

[nedlohs]

http://www.nytimes.com/2005/06/27/business/media/27movie.html is the really old initial lawsuit article.

But basically Jackson had a gross cut contract, and claimed that New Line sold some of the rights to things like DVD distribution to other Time Warner companies for lower than market value - which of course reduces their gross (and hence Jackson's cut).

I think they settled, but I didn't really follow it closely - it's a pretty obvious technique though bound to get you sued...

"It's okay for us to be dishonest.....

[commodore64_love]

".....and not pay our actors, writers, staff their share of the profit-sharing contract, but if you are dishonest and download a DVD, then you'll get the equivalent of a life sentence in fines! Seems perfectly fair to us." - Motion Picture Association of America (MPAA) aka megacorp tyrants

Re:"It's okay for us to be dishonest.....

[iluvcapra]

Without debating the merits of pirating copyright material, I'd point out that the people who sign on the dotted line for "net" deals know exactly what they're getting, which is nothing -- writers, actors, directors and "staff" (of which I guess I'm one) sign their contracts with the advice of a lawyer and a manager, and all of these people know exactly what "defined net" is, and how it's defined is completely clear in the contract. We should respect contracts, right? I can assure you whoever is complaining about their deal in TFA isn't J.K. Rowling, she's getting gross points.

The only revenue sharing deals that ever pay off are "first-dollar gross" or "dollar breakeven" deals, where the money directly from the box office is split. Net deals have always been a fantasy -- it was true when Art Buckwald sued Paramount over to Coming to America in 1990 and it's still true now. In this particular case of Harry Potter, what WB appears to have done is borrowed the money to make Order of the Phoenix at a high rate of interest, and is paying off its note so slowly that the negative cost of the film keeps going up relative to the revenue. What isn't mentioned is that Warner Bros. probably borrowed the money from AOL Time-Warner, it's parent, in the first place. :)

Re:"It's okay for us to be dishonest.....

[ground.zero.612]

Hey Mr. Commodore, I agree with your sarcasm 100%. As I also appreciate your point of view; I am wondering what your answer to the following questions would be:

At which point is it socially acceptable to take up arms and execute said tyrants? Or perhaps even just to take up arms and mobilize citizens with the intent to do so?

I'm desperately trying to find a legitimate, reasonable, logical answer to this question. Mainly because I see no reason to defend the right to bear arms unless we actually exercise it when we need to.

I own many firearms. I feel my leaders are tyrants. I want desperately to remove them from power, and to simultaneously put the fear of death into the hearts of other would be tyrants. Honestly, I'm just scared to be the only person with the testicular fortitude to actually bear arms against these people I personally consider tyrants.

Re:"It's okay for us to be dishonest.....

[Anonymous Coward]

So if I get someone to sign a contract that allows me to kill them whenever I want, that should be allowed?

Yes, we should respect contract law. But if the contract is OBVIOUSLY unfair, there should be no legal protections for it.

Re:"It's okay for us to be dishonest.....

[iluvcapra]

In other words, it's a contract deal where one of the parties has a comprehensive ability to screw you over if they so choose. Yeah, I suppose you're stupid if you sign such a deal, but that doesn't mean it's honest or that it should be legal to make such a deal.

I'd remind you that writers do get hundreds of thousands, if not millions of dollars to write screenplays up front, they aren't dependent on the kicker to put food on the table or live in their house in Laurel Canyon. The screwing-over happens uniformly to all players and in a fully-informed way; it only seems like screwing-over to outsiders.

Besides, why is a writer entitled to a percentage of a film's receipts anyways? Good writing doesn't sell tickets; star's names and franchise recognition are the main things that draw people to theaters. When was the last time you decided to go see a movie because Kurt Wimmer or David Goyer wrote it, instead of a movie written by David Hayter or Tony Gilroy? It really doesn't make that much of a difference, in terms of how much the movie makes. (Which is something of a sad state of affairs, but it's how the market works.)

Re:"It's okay for us to be dishonest.....

[Dhalka226]

I'd point out that the people who sign on the dotted line for "net" deals know exactly what they're getting, which is nothing -- writers, actors, directors and "staff" (of which I guess I'm one) sign their contracts with the advice of a lawyer and a manager, and all of these people know exactly what "defined net" is, and how it's defined is completely clear in the contract.

So what you're saying is that multiple parties willingly enter into an agreement, the following being the possible outcomes:

1. Studio best case -- nobody sues you and you get to pay the nothing you knew you were going to pay.
2. Talent best case -- you sue the studio and win more than the nothing you knew you were going to get, putting up large sums of money for large risks in the legal system to get paid.
3. Studio second-best case -- you get sued but ultimately win and pay the nothing you knew you were going to pay, minus legal fees.
4. Incompetence case -- the accountants can't cook the books properly and somebody accidentally gets paid more than nothing. The studios will still likely do their best not to pay if such a case arose, so it's really just a prelude to case #2 or #3.

That's really your argument? What's the point? It's a risk for the studios since they lose at least some money in three of the four possibilities compared to just leaving the damn clause out entirely, and for the talent they know their best-case scenario is both rare and expensive to pursue so including it is hardly an incentive. Such clauses literally benefit nobody (reliably) if we're operating under the assumption that both parties know what's really going to happen.

Even if the contracts are poured over by lawyers and clear as day, all you know is what the contract says. The studios are not violating the letter of their contracts; the whole point of the term "Hollywood accounting" is that they're technically doing exactly what they're legally bound to do. Rather, they violate the spirit and act in bad faith by setting up subsidiary corporations and what-have-you in order to make gobs of money but avoid actually having to share it with anybody they agreed to share it with. Naturally they'll have an idea of how they're doing it in advance when they offer the contract, but I'm sure half the scheming of "how can we get out of this?" happens long after the paperwork is signed, and there are some veeeeerry clever lawyers and accountants out there who would love even a fraction of the money they could save their bosses.

The more likely explanation is the simplest: The studios are hoping to scam people into feeling like they will be compensated more than they really will if things happen to become wildly successful. Some people won't buy it and either find a new project or get their profit shares negotiated in a way not so subject to being gamed (assuming they have such negotiating muscle to begin with), many will mistakenly assume that they're not going to get screwed for making the studio fistfuls of money, most won't even merit such considerations.

You're right: By and large, the J.K. Rowlings of the world aren't the ones being screwed by this. They have the muscle, either by their money, their popularity, or their control over whether or not a movie even gets made (ie, rights holders) to get clauses that are virtually game-proof. The people who get screwed are the small guys who are working their asses off and working in good faith with the expectation that what makes the show money makes them all money. That's frankly what studios are counting on. They want you to work as though you are more invested than you are.

Feh.

[Pojut]

I absolutely adore the world of film, but holy fuck do I hate Hollywood.

Re:Feh.

[mdielmann]

Love your country, hate your government.
Embrace faith, despise religion.

I'm sensing a pattern...

The general pattern is: Ideals are great, but people keep fucking up the implementation.

MPAA's Piracy Statistics

[Darkness404]

You know, if they can make such a wildly successful film as Harry Potter appear to lose money, then suddenly all of the MPAA's statistics about piracy make sense!

Re:MPAA's Piracy Statistics

[nizo]

Actually it would be awesome if it was legal to download copies of movies that didn't make money anyway; maybe that would solve this problem?

Babylon 5

[Y-Crate]

JMS Posted:

The show, all in, cost about $110 million to make. Each year of its original run, we know it showed a profit because they TOLD us so. And in one case, they actually showed us the figures. It's now been on the air worldwide for ten years. There's been merchandise, syndication, cable, books, you name it. The DVDs grossed roughly half a BILLION dollars (and that was just after they put out S5, without all of the S5 sales in). So what does my last profit statement say? We're $80 million in the red. 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.

Re:Babylon 5

[AnonymousClown]

Even if they didn't tell them so, the fact that they kept the show in production is enough reason to believe they're making money on it.

The other thing is, if they're losing money and reporting profits to shareholders, then how in the World are their books matching? Wouldn't that be considered fraud or at least a violation of SEC rules? What about GAAP and FASB rules? Or are there exceptions for Hollywood and Government?

Re:Babylon 5

[commodore64_love]

I'm surprised the people like JMS, Ronald Moore, Ira Behr, and others don't rally together and sue these companies. Or maybe complain to the IRS, and let the IRS open an audit.

Re:Babylon 5

[kidgenius]

See, the head company makes money, but your contract is with the smaller company that was created. So in this case, you work for Babylon 5 Incorporated. Babylon 5 Inc lost money, tons of it, but they aren't publicly traded or owned. This smaller company is wholly owned by Warner, Fox, etc., who charge the Babylon 5 LLC tons of money for the show. Things like loans, distribution fees, advertising, etc. Warner then gets that money and reports that on their books to their shareholders, which are open, and everything works out quite nicely.

Re:Babylon 5

[Austerity Empowers]

You have to be careful about biting the hand that feeds you, even if it repeatedly punches you in the face while doing so.

Re:Babylon 5

[Anonymous Coward]

The books do match.

Imagine Media Co starts 3 projects: A, B and C. All are given 100 million and complete on budget. Project A has contractors which are compensated according to net revenue. Project B has contractors which are compensated according to gross revenue. Project C has entirely fixed costs.

In order to avoid any payment on project A, the company can simply assign losses from Project C to Project A until Project A shows a loss. GAAP cannot prevent this.

In order to avoid any payment on project B, more elaborate measures must be taken but it can be done(directing revenues to Project D or giving Project B to a different entity).

Re:Babylon 5

[cliffiecee]

I like his last sentence best:

But then again, I knew that was the situation going in...I saw the
writing on the wall (and the contract) from the git-go. I didn't do
this to build an empire, I wanted to tell this story...and that's worth
more than anything else.

And this is why there's so much dreck in the movies/TV. Who the hell wants to give away their best creative ideas to a bunch of corporate executives, and never recieve anything in return except for the chance to "tell a story"?

Kudos to JMS for doing so; I feel I should mail him some money directly, rather than buy the DVDs, however.

Re:Babylon 5

[noc007]

That post from JMS really bummed me out when I first read it since I bought all five seasons and all of the "made for TV movies" on DVD. Not a penny of my purchases went to anyone that poured their heart and soul into B5. Hollywood Accounting is one of the big reasons I don't have much sympathy for the studios crying that they're loosing trillions of dollars to piracy. If they can fudge the numbers so no one can get any residuals, they can fudge the numbers just as much to claim that rampant piracy is going to force them to close up shop and justify their lobbying for more ridiculous laws in their favor.

Re:Babylon 5

[russotto]

See, the head company makes money, but your contract is with the smaller company that was created. So in this case, you work for Babylon 5 Incorporated. Babylon 5 Inc lost money, tons of it, but they aren't publicly traded or owned. This smaller company is wholly owned by Warner, Fox, etc., who charge the Babylon 5 LLC tons of money for the show. Things like loans, distribution fees, advertising, etc. Warner then gets that money and reports that on their books to their shareholders, which are open, and everything works out quite nicely.

Sounds like another old system -- you were paid for your work, but you had to lease all the tools and your food and housing from the company. Your pay always ended up being a bit lower than those costs, but no matter, the company would keep loaning you the tools and housing... as long as you kept working.

Paging Washington

[cdrudge]

Obviously Hollywood needs a government bail out. First the pirates were cutting into sales, and with all these extremely successful movies that have lost millions, Congress must do something fast!

Let's not jump to conclusions

[TheSync]

The document shown probably concerns net calculations for a deal with a writer. A Deadline comment said:

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.e. the writer got paid on a fixed basis regardless of movie performance, with the "net kicker" that no one really expects to see (except maybe on "Avatar").

Note the document has nothing to do with taxes. That is a very different story.

Re:Let's not jump to conclusions

[sweatyboatman]

Avatar had writers?

Four-oh-four... Oooo baby...

[ebbomega]

Canna get to your urrrrrrrrl

So, um, someone wanna post a mirror/text?

Not Just Hollywood

[Bryansix]

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.

Re:Not Just Hollywood

[noc007]

This reminds me of when I worked for Hitachi Power Tools (HPT). Beyond the confusing owner ship of the company ( X% is owned by Hitachi Koki which is Y% owned by Hitachi Group, etc.) and the five year rotation of executives fresh from Japan (once they get a handle on the US market, they're sent elsewhere and are replaced by someone with no knowledge of the US market), they had a very interesting accounting practice:

Every month the head finance/accounting guy spent a few days locked in his office to produce reports of all sales, expenses, and inventory numbers for that month, last three months, last six months, and last 12 months for the parent company in Japan. In Japan they'd review these reports and would determine the quantity and price of each product we'd buy from them. This insured that HPT in North America would not be profitable, so if any income tax were to be paid, it would go to the Japanese government. On top of that, they wouldn't give any raises due to being in the red.

Re:Not Just Hollywood

[pablodiazgutierrez]

I know people who work for consulting companies on precisely these type of internal, cross-border deals. Their task is to ensure that their internal transactions are "arm's length", or at market value. If you know something about it, the IRS will surely welcome a tip.

Re:So this means

[falzer]

So this means I should pirate more movies, since my pirating isn't hurting their wallet as much as they claimed it was yes?

When pirating, you never took into consideration whether or not it would hurt anyone's wallet except your own, so continue pirating at your regular rate. If you ever get caught (unlikely) you can tell them falzer on Slashdot said it was OK.

I forget, why do I feel guilty about pirating?

[jollyreaper]

Oh, right. I'm taking money out of the hands of the starving artists. You know, the ones who aren't getting any money because their points were off the net and golly gee, the movie didn't make any money.

I love Disney strip-mining the world's fairy tales for ideas and then suing people for intellectual property infringements.

Fuck all the fucking fuckers.

Re:I forget, why do I feel guilty about pirating?

[noc007]

Any time Mikey Mouse is going to become Public Domain, Disney heavily lobbys to extend copyrighted works. It's sad that I'll probably live to see this happen again. I just wonder how long they're going to try to string it out.

Re:I forget, why do I feel guilty about pirating?

[Anonymous Coward]

The point is that Disney has fought to keep their works, built ON the public domain, from going back to it.

They profited from it, and they should contribute back, rather than buy off senators to extend copyright and trademark law to where it's way past beneficial for the whole of society.

Hollywood is different

[swb]

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).

Re:Hollywood is different

[Alsee]

Tax avoidance through expense maximization and income minimization

Yeah, you would not believe the amount of taxes I avoid paying through income minimization.

-

No it doesn't

[geekoid]

In the movie industry, gross profits is customarily defined as the profits remaining after production and distribution expenses are subtracted from revenues.

The more you know.

Re:No it doesn't

[Adriax]

Tack a negative sign to the box office take in.

Re:No it doesn't

[biryokumaru]

"Net" profits are the losses they post on the net to show how much piracy is damaging them.

Re:No it doesn't

[geekoid]

the money left after subtracting everything else.

remember, every paid actor showing up to market the show, sighingings general appearance limos, water, gift baskets, ad space and many, many other expenses.

Why people in hollywood keep falling for that is beyond me. They have to know they aren't getting crap. It must be part of the game. The step you must take before getting millions up front.

Re:No it doesn't

[laddiebuck]

That's great. So first they redefine the English words "theft" and "piracy" to mean "copyright infringement", then "gross" to mean "net". It's brilliant!

Re:No it doesn't

[sjames]

In other words, as soon as everyone realized that a percentage of the net was for suckers and started insisting on a percentage of the gross, Hollywood re-defined 'gross' to be the same thing as 'net' and continued screwing people.

All they're doing is investing

[guruevi]

And it's pretty much standard too - just invest as much as you can in your future projects and you won't have to pay taxes or anything on it. I used to work at a company (.com startup) that did the same thing. Every year they invested a rough $2 million (net profit) in the development team (4 people) - eventually the development team became their own company so they just shifted funds back and forth (here you go 2 mil. to build this application, here you go 2 mil. for rent) - the developers kept the same desks, computers etc. I believe they off-shored a healthy profit as well.

Purpose of Accountants

[fermion]

Accountants are there to minimize profit that is shown externally. External profits are always bad. They require taxes and other payouts to external entities. Just as an example because they have the highest gross profits I know about, MS earned about 14 million the latest quarter, of which 11 million was gross profit. About two million of that was spent on research and 4 million on admin expenses and marketing. This is about 33% of gross profits on marketing and admin. As a percent of gross profit this is not excessive, but as percent of revenue it is highly excessive. Other companies might spend 10-20% of revenue. It is arguable that MS maximizes admin expenses to minimize profit. They put perks in minimize taxes and make them look less profitable. They do the same with research money that leads nowhere, i.e. the kin.

Star Trek interview

[KDN]

Years ago I read an interview with one of the cast members of the original Star Trek. He said that the most creative writers were the finance guys who claimed that in 30 years of reruns that Star Trek has never made a profit. (I think the interview was in the early 90's) Unfortunately I do not recall who that was.

revenue vs. profit

[Lord Ender]

Always ask for a percentage of revenue. It is much harder to lie about revenue than about profit.

Re:revenue vs. profit

[Pinky's Brain]

If they drive the subsidiary into bankruptcy and give their own debt priority they can still screw you ... so ask for a percentage of the net, to be paid by the studio.

Planet Money on NPR

[jdev]

NPR's Planet Money covered this before too. Gone in 60 Seconds grossed $240 million at the box office, but somehow "lost" $212 million. Their accounting is about as realistic as their movies.

http://www.npr.org/blogs/money/2010/05/the_friday_podcast_angelina_sh.html

Perfect movie for this theme

[thetoadwarrior]

Guy: It was a producer, wasn't it?

Forrest Gump: A producer?

Guy: That signed you up and fucked you.

Forrest Gump: Oh, yes sir. Fucked me right in the buttocks. They said it was a million dollar contract, but the studio must keep that money 'cause I still haven't seen a nickel of that million dollars.

Once a Thief, Always...

[Nom du Keyboard]

Once a thief, always a thief. Remember that Hollywood itself was created to escape Thomas Edison's patent enforcers. In California the land was cheap (at that time), the sun was usually shining (free lighting), and they were a very long way away from the east coast and Edison.

Win, win, win!

Re:So this means

[mcgrew]

Copyright infringement is illegal, but it may or may not be wrong. If he pirates a movie that he would never buy, or like a lot of people pirate it then buy it when he sees he's not getting ripped off buying it, what he's doing is still illegal, but it isn't wrong.

Adultery is legal in Illinois, but it's wrong. Smoking pot is illegal, but it isn't wrong. Don't confuse legal and illegal with right and wrong. There are a lot of legal ways to steal, but they're still wrong.

Re:A thought occurs to me

[masmullin]

They got him on tax evasion only because they couldn't get him on murder... its not like they willingly chose tax evasion over murder.

Re:A thought occurs to me

[FnordX]

Unless the actors in question have the studio donate the actor's profits to the Church of Scientology. The Co$ then goes and pays the actor a "stipend" to live on, tax free, and, since the Co$ is a "charity", the movie studios get to write that off. The actors get to live tax free, the Co$ gets to play with the interest, and the studios get a tax break. Isn't religion wonderful?