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Hollywood Accounting — How Harry Potter Loses Money 447

Posted by Soulskill
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."
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Hollywood Accounting — How Harry Potter Loses Money

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  • Peter Jackson (Score:5, Informative)

    by jjohnson (62583) on Friday July 09, 2010 @12:45PM (#32851962) Homepage

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

  • Not a new trick (Score:4, Informative)

    by Drakkenmensch (1255800) on Friday July 09, 2010 @12:45PM (#32851966)
    The producers of Forrest Gump used the same math to claim a loss on that one too.
  • Babylon 5 (Score:5, Informative)

    by Y-Crate (540566) on Friday July 09, 2010 @12:55PM (#32852078)
    JMS Posted: [google.com]

    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:Forest Gump (Score:4, Informative)

    by nedlohs (1335013) on Friday July 09, 2010 @01:06PM (#32852182)

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

  • Re:Not a new trick (Score:2, Informative)

    by Midnight's Shadow (1517137) on Friday July 09, 2010 @01:07PM (#32852188)
    And Star Wars (4-6) - the guy who was actually in Darth Vader's suite never got paid for the role.
  • by phantomfive (622387) on Friday July 09, 2010 @01:08PM (#32852196) Journal
    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.
  • by TheSync (5291) on Friday July 09, 2010 @01:10PM (#32852222) Journal

    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.

  • by ebbomega (410207) on Friday July 09, 2010 @01:15PM (#32852272) Journal

    Canna get to your urrrrrrrrl [showclix.com]

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

  • Re:Forest Gump (Score:4, Informative)

    by sconeu (64226) on Friday July 09, 2010 @01:22PM (#32852372) Homepage Journal

    Predates Forrest Gump. See Buchwald v. Paramount [wikipedia.org], regarding "Coming to America".

  • Re:Babylon 5 (Score:5, Informative)

    by kidgenius (704962) on Friday July 09, 2010 @01:23PM (#32852382)
    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.
  • by Anonymous Coward on Friday July 09, 2010 @01:25PM (#32852410)

    HAHAHA Techdirty is now being dirty, they REMOVED the news. Google follows by not offering the cached page, EVEN THO IT EXISTS!

    Check the article HERE: http://webcache.googleusercontent.com/search?q=cache:8V1pgRKUcLsJ:www.techdirt.com/articles/20100708/02510310122.shtml

  • by iluvcapra (782887) on Friday July 09, 2010 @01:25PM (#32852416)

    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 [wikipedia.org] 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 [wikipedia.org] 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:Not a new trick (Score:2, Informative)

    by Midnight's Shadow (1517137) on Friday July 09, 2010 @01:26PM (#32852420)

    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:Babylon 5 (Score:2, Informative)

    by Anonymous Coward on Friday July 09, 2010 @01:27PM (#32852444)

    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).

  • by guruevi (827432) <<evi> <at> <smokingcube.be>> on Friday July 09, 2010 @01:29PM (#32852466) Homepage

    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.

  • Planet Money on NPR (Score:2, Informative)

    by jdev (227251) on Friday July 09, 2010 @01:49PM (#32852726)

    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 [npr.org]

  • Re:Peter Jackson (Score:2, Informative)

    by sumdumass (711423) on Friday July 09, 2010 @01:49PM (#32852730) Journal

    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 (Score:5, Informative)

    by HungryHobo (1314109) on Friday July 09, 2010 @01:50PM (#32852742)

    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:No it doesn't (Score:3, Informative)

    by geekoid (135745) <dadinportland @ y a hoo.com> on Friday July 09, 2010 @02:07PM (#32852898) Homepage Journal

    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.

  • by noc007 (633443) on Friday July 09, 2010 @02:11PM (#32852970)

    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:Forest Gump (Score:5, Informative)

    by nedlohs (1335013) on Friday July 09, 2010 @02:14PM (#32853010)

    http://www.nytimes.com/2005/06/27/business/media/27movie.html [nytimes.com] 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...

  • by Red Flayer (890720) on Friday July 09, 2010 @02:44PM (#32853364) Journal

    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 a new trick (Score:3, Informative)

    by dgatwood (11270) on Friday July 09, 2010 @02:53PM (#32853460) Journal

    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:Peter Jackson (Score:5, Informative)

    by virtualchoirboy (717310) on Friday July 09, 2010 @03:44PM (#32854170)
    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
  • by Nom du Keyboard (633989) on Friday July 09, 2010 @03:49PM (#32854242)
    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!
  • by hey! (33014) on Friday July 09, 2010 @04:09PM (#32854476) Homepage Journal

    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."

  • by masmullin (1479239) <masmullin@gmail.com> on Friday July 09, 2010 @05:11PM (#32855272)

    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:Peter Jackson (Score:3, Informative)

    by masmullin (1479239) <masmullin@gmail.com> on Friday July 09, 2010 @05:20PM (#32855378)

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

    Machine fixed.

  • Re:Not a new trick (Score:3, Informative)

    by CohibaVancouver (864662) on Friday July 09, 2010 @05:20PM (#32855388)

    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?"

  • by FnordX (115944) <fnord@@@cyberspace...org> on Sunday July 11, 2010 @09:39AM (#32866044)

    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?

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