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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."
Peter Jackson had to sue New Line Cinema to get paid for LotR. New Line claimed they lost money on the trilogy.
Anyone who loves or hates any language, platform, or manufacturer, doesn't know what they're talking about.
The producers of Forrest Gump used the same math to claim a loss on that one too.
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.
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".
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.
These comments are my own and do not necessarily reflect the views or opinions of my employer or colleagues...
".....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
"I disapprove of what you say, but I will defend to the death your right to say it." - historian Evelyn Beatrice Hall
I absolutely adore the world of film, but holy fuck do I hate Hollywood.
Living With a Nerd
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!
Taxation is legalized theft, no more, no less.
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!
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.
Qxe4
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.
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...
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.
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.
Kwisatz Haderach
Sell the spice to CHOAM
This Mahdi took Shaddam's Throne
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 movie industry, gross profits is customarily defined as the profits remaining after production and distribution expenses are subtracted from revenues.
The more you know.
The Kruger Dunning explains most post on
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.
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 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!
"It's the height of ridiculousness to say for those 9 lines you get hundreds of millions."
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."
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