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

[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

[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

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.

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.

"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

Feh.

[Pojut]

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

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!

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!

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 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 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."

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.

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: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: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

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!