Hollywood Accounting — How Harry Potter Loses Money 447
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Soulskill
from the hypocrisy-in-action dept.
from the hypocrisy-in-action dept.
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."
Forest Gump (Score:5, Interesting)
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:Peter Jackson (Score:5, Interesting)
Peter Jackson had to sue New Line Cinema to get paid for LotR. New Line claimed they lost money on the trilogy.
Indeed [nytimes.com], on top of that I recall the Tolkein Trust [slashdot.org] 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:"It's okay for us to be dishonest..... (Score:2, Interesting)
I call this the "pull it out of your ass" expense. We have no idea where this number came from, and it's just large enough to wipe-out the profit. How convenient.
INVESTMENT
Negative Costs and Advance - $315 billion
And why is the "interest" placed under expense? I've always thought of interest as income... very very odd accounting these Hollywood types have. "Arrogance and stupidity in the same package - how efficient of you."
Re:Babylon 5 (Score:2, Interesting)
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:Peter Jackson (Score:5, Interesting)
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.
Not Just Hollywood (Score:5, Interesting)
Hollywood is different (Score:5, Interesting)
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:Peter Jackson (Score:5, Interesting)
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.
Purpose of Accountants (Score:3, Interesting)
Re:Peter Jackson (Score:5, Interesting)
Re:Not Hollywood alone (Score:2, Interesting)
I'd have to say your numbers are a bit high.
You pay yourself a salary (if sole owner) for RUNNING the company..not the work it contracts out (with you as the worker bee).
If you're billing out $100K...I've known people for years that only paid themselves salary of about $25K. Now, this was a few years back.
but today, if you bill out about, say $120K...paying yourself a salary of about $40K should be plenty safe for you (only pay SS and medicare on that portion). The remainder you will still pay fed and state tax on, just not employment tax at EOY after deductions (if you do and S corp).
Of course...I'm guessing the Obama crew are wanting to close even that little way of keeping your hard earned bread....
Re:Peter Jackson (Score:3, Interesting)
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 (Score:2, Interesting)
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:"It's okay for us to be dishonest..... (Score:3, Interesting)
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:Not Just Hollywood (Score:3, Interesting)
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:"It's okay for us to be dishonest..... (Score:3, Interesting)
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.