He was promised 3% of the net profits (on top of a flat $350k) of the biggest film of that year–Forrest Gump. So while the studio says they paid this company a ton of money as part of the costs–they own the company now. Once the movie comes out, this production company, created by the studio, is absorbed back into the studio.
To reiterate a point from earlier in this article, it is important for the artist’s lawyer to zealously advocate for fair and transparent payment terms that do not put the artist in a situation where everyone but the artist profits. If such underpayment exceeds five percent of the amount paid under any respective payment, then Studio shall reimburse Artist for all reasonable costs of such inspection thereby incurred and actually paid by Artist in connection with the applicable audit. The audit clause could be a single sentence that grants the creator a right to access the financial records of the studio, but a more robust clause, like the one below, will do more to enshrine a creator’s audit rights. Without the audit clause, a creator may be left relying on the goodwill of a studio to produce the requisite accounting information in order to determine if the creator is being compensated fairly. The sometimes-complex accounting calculations, which can obscure how profits are calculated and distributed, frequently leave creators feeling shortchanged — or worse, walking away empty-handed despite others profiting off their work. They can also request transparency in financial reporting and conduct audits to verify the accuracy of the studio’s financial statements.
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- A similar example is that of the late Stan Lee, who was promised 10% of the profits made on the 2002 live-action Spider-Man film and walked away with nothing after the movie, which grossed $800 million at the box office, didn’t turn a profit on paper despite having a production cost of only $139 million.
- The shift in today’s vertically integrated entertainment marketplace means “it’s more important than ever for the talent, creators and investors of successful projects to ensure the distributor is properly reporting fair market values,” Sippel said.
- The indies exaggerate the cost of their movies; the studios lie in the other direction.
- Instead of an upfront salary, Wasserman negotiated for Stewart to receive 50% of the film’s net profits.
- Indeed, Hollywood outsiders would be hard-pressed to find many vocal critics from within the Hollywood accounting system.
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- Major movie stars have the clout to negotiate those types of deals.
With a $55 million budget, the film had a phenomenal first week of release. Both fans and critics critically applauded the film, and it established Tom Hanks’ reputation. Gain hands-on experience with Excel-based financial modeling, real-world case studies, and downloadable templates. Such an opaque accounting system must be addressed to give the rightful share of compensation for the hard work of creators, artists, producers, and directors. It also has cons, like unfair profit sharing with the participant of the project, violation of the project sharing agreement, and lawsuits by the aggrieved parties. Furthermore, this accounting practice generally works by
If the whole concept of net profits is confusing or seems nonsensical, just know you’re not alone. And if it goes into production, the net-profit participant will at least receive fixed compensation. Why is this system even in place and do net profits participants ever benefit? Melniker and Uslan sued Warner Bros. and Polygram Pictures, the production companies behind the film. The executive producers of 1989’s “Batman,” Benjamin Melniker and Michael Uslan, along with the movie’s screenwriters, had a net-profit share of zero. Some in the film industry would disagree about the fairness of such contracts.
Actor Don Johnson sued the company Rysher Entertainment in 2010 over his share of profits from the show “Nash Bridges.” The company claimed it was so expensive to produce, that the show was left $40 million in the red. Writer Art Buchwald won $900,000 from Paramount for his work writing the story treatment that inspired the 1988 Eddie Murphy comedy “Coming to America.” The movie had made $288 million when Buchwald sued in 1990, but it still had not seen a net profit. Moore said he was supposed to get 50 percent of the profits; the Weinsteins said he was a profit participant. Over the years, there have been signs that the studios’ clever tricks would catch up with them. His success even prompted studios to take a closer look at the over-generosity of its contracts.
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Experts say that there’s confusion surrounding what “net profits” from a movie actually are. “That’s basically Warner Bros. paying itself to make sure the movie ‘loses money,’” Techdirt noted. Because of deals like these, Solomon used his situation to make a broader point about how writers in the industry are not as financially well-off as some assume. Despite raking in hundreds of millions of dollars at the box office, some movies have still managed to report losses. Some writers say creative Hollywood accounting practices mean that studios aren’t spreading the wealth. This makes project “A” not as bad a loss but drives down the profitability of project “B” so they don’t have to pay out as much in net points and tax.
The studio will naturally accept this fee, no matter how obscene, as they’re just paying themselves. (Our condolences to the executives and their families, after no doubt all of the executives were fired for backing such a financially disastrous project for the studio.) Perhaps best showing how it’s impossible to make money in Hollywood is the case of Forrest Gump- one of the most critically acclaimed and successful movies ever made, which cost $55 million to make. In yet another case, the 2002 surprise blockbuster My Big Fat Greek wedding managed to bring in $370 million (about $536 million) off a production budget of a mere $5 million, yet somehow managed to lose the studio $20 million… So, yes, they apparently lost four times the production budget itself.
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According to New Line’s accounts, the trilogy made “horrendous losses” and no profit at all. Fifteen actors are suing New Line Cinema, claiming that they have never received their 5% of revenue from merchandise sold in relation to the movie, which contains their likeness. Peter Jackson, director of The Lord of the Rings, and his studio Wingnut Films, brought a lawsuit against New Line Cinema after an audit.
- Or as NPR’s Planet Money explained, movies are set up as their own corporation.
- But at the time, Goldberg noted that the likelihood of payouts had declined in recent decades.
- This is especially egregious given that, without inflation adjustment, the Wizarding World film series is one of the highest-grossing film series of all time both domestically and internationally.
- Gross profit is what you make after subtracting the raw production costs of your product.
- If such underpayment exceeds five percent of the amount paid under any respective payment, then Studio shall reimburse Artist for all reasonable costs of such inspection thereby incurred and actually paid by Artist in connection with the applicable audit.
- You have your revenue, then you have to subtract certain expenses, and if there’s anything left over, you get, for example, 10% of that, he explained.
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Winston Groom’s price for the screenplay rights to his novel Forrest Gump included a 3% share of the profits; however, due to Hollywood accounting, the film’s commercial success was converted into a net loss, and Groom received only $350,000 for the rights and an additional $250,000 from the studio. Using this fact, part of the losses from an actual box office bomb can be moved to a film that made a ton of money, thus making the box office bomb help reduce profits from the successful film, again, all in order to ensure every project possible loses money on paper. The apparent mismatch between profits and losses has been an issue going back decades, with studios finding themselves in the crosshairs of legal disputes over questionable accounting practices. In this, a movie studio combines two projects or productions together, allowing them to shift accounting between the two, moving profit or loss across them as required. At its core, Hollywood accounting refers to the accounting practices used by studios to manipulate financial statements and make it appear that a successful film or TV show has not generated a profit. The term “Hollywood accounting” describes the stigmatized financial practices employed not only by film studios but also other powerful entities that pay creators, whether they are streaming platforms, recording labels, or publishing companies.
In the early 1980s, Buchwald, a humorist and Pulitzer Prize-winning columnist, wrote a two-and-a-half-page movie treatment about an African prince who travels to the U.S. When you hear that a star has 20 percent of the adjusted gross, what does “adjusted gross” mean? It’s either right or wrong, it speaks to the notion of absolute truth, and it cannot be manipulated, unlike so much else in an industry that has turned manipulation into an art form. Kendale provides insights into the complexities of revenue recognition and cost amortization in this new environment and discusses the potential implications for talent compensation.
Another form of Hollywood accounting is a reverse tobashi scheme, in which the studio unjustly cross-collateralizes the accounting of two projects and shifts losses from a flop onto a profitable project by shifting costs involving internal operations. Hollywood accounting (also known as Hollywood bookkeeping) is the opaque or “creative” set of accounting methods used by the film, video, television and music industry to budget and record profits for creative projects. Michael Moore sued Bob and Harvey Weinstein for creative accounting to deprive him of his share of profits for the film Fahrenheit 9/11.
Say a movie studio sets up a distribution arm as a sub-entity. What is it called when people take losses in order to preserve the cleanliness hollywood accounting of their potential profits? Recently, despite grossing $911 million against its $55 million budget, the 2018 Freddie Mercury biopic Bohemian Rhapsody was written down as a $51 million loss by the studio.
Yet according to New Line’s accounts, the trilogy made “horrendous losses” and turned no profit at all. One of the most staggering examples of this is around a movie most would never guess didn’t turn a profit, according to the pinstripe suits in the halls of Hollywood. His contract gave him 10% of the net profits of absolutely anything based on his characters. He got nothing outside of his initial fee as the movie didn’t make any money… apparently. Screenwriter Winston Groom was due a 3% share of profits. By the time the Hollywood accountants got hold of it, the movie made a net loss.
Bizarrely, this can work in either direction depending on what the studio needs the story to be. Remember what we said about arbitrary costs inserted at any point in the value chain? Harry Potter is the third highest-grossing franchise of all time, behind only Star Wars and the Marvel Cinematic Universe. Jackson’s Wingnut Films has sued, and fifteen actors from the movie are still locked in legal action against New Line Cinema. A case was settled in January 2005 with Marvel paying out $10 million to Lee. However, it is officially listed as… you guessed it, a loss!