There’s a sense of comfort we get from cold, hard numbers. They suggest an objective truth that we can all freely observe and seemingly nobody can deny. For example, Star Wars: Episode VI — Return of the Jedi made over $475 million at the box office against a $32 million budget, earning it the status of one of the biggest blockbusters of all time. And yet after some dubious “Hollywood accounting,” Lucasfilm has claimed the film never made a cent of profit.
How is that even possible? Does this happen often? What is the incentive for a major entertainment studio to essentially lie and pretend its own work was a commercial failure?
In most industries, corporations will use accounting tricks to hide losses from shareholders and investors to appear greater. But given the profit-sharing deals many actors and other creatives include in their contracts, as well as tax liabilities, Hollywood is occasionally inclined to do the opposite.
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This sort of Hollywood accounting doesn’t strictly adhere to the United States’ generally accepted accounting principles (GAAP), which is the standard bookkeeping that other major companies follow. And while these practices are ethically questionable, frowned upon by experts, and the source of countless court disputes over the years… it’s pretty much all legal.
In fact, legal battles and disputes over profit participation and accounting practices are not a new phenomenon within the entertainment industry by any means. In light of the ongoing Writers Guild of America (WGA) and the Screen Actors Guild — American Federation of Television and Radio Artists (SAG-AFTRA) strikes, however, discussing the ways in which studios have historically minimised profits and evaded obligations to those owed a cut of the revenue is perhaps an especially relevant subject right now.
Playing Possum
Let’s talk about “net points.”
You might be asking yourself what that term means. It’s the way many people involved with a production are supposed to be compensated in a financial sense; although the term itself is pretty meaningless by design.
Actors, directors, writers, or producers will often negotiate “net points” which, in theory, would make them entitled to a percentage of whatever is left after the studio recoups expenses.
What actually ends up happening is the studio inflates the calculations of their overheads to the point where no amount of money at the box office will ever make the film technically profitable, and thus eliminates the liability to compensate net participation.
There are countless ways to add expenses to a film’s production, marketing, and distribution — tacking arbitrary charges onto the value chain, thereby ensuring that the money never truly leaves the studio’s own hands.
For this reason, the Tom Cruises of the world will insist on “gross points” as an alternative to a metric for net profit participation. This will directly divert a portion of the box office revenue to that specific participant, regardless of whether other costs have been recouped.
These are (understandably) rare instances and only apply to AAA-list talent with extreme degrees of leverage, i.e. Sandra Bullock was able to negotiate $20 million above the line for Alfonso Cuaron’s Gravity, as well as 15% of the blockbuster’s first-dollar gross, helping her pocket at least $70 million.
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The Real Money Heist
When you read about a film’s official budget in trade publications like Variety or The Hollywood Reporter, it’s worth remembering that this figure does not account for the money that the studio receives from government subsidies, tax shelter deals, or product placement.
There are a number of ways to secure funding for a film that offsets the amount a studio honestly spends on its own. Hollywood studios will dabble in this sort of double accounting, and hardly anyone outside of its walls will ever know how much a film truly costs to produce. And yet this is only the tip of the dodgy paperwork iceberg.
Studios routinely use shell companies for advertising, marketing, and distribution to siphon the film’s profits and funnel it right back into their own coffers. A studio will even create subsidiaries entirely owned, operated, and controlled by them, then charge itself countless fees to impact the overall profit total (profits returning to the studio in the form of fee payments). In other words, the house always wins.
Hollywood accounting can also take the form of a sort of reverse Tobashi scheme, wherein the studio will shift costs within its internal operations and cross-collateralise the accounting of two projects; a single box office flop into two unprofitable films through creative and complex maneuvers.
Studios can establish reserves for future expenses or losses by making deductions for contingencies, interest, and various additional costs that are also applied to lower the profits. They can then defer revenue recognition, get some bloke in a suit that went to Harvard to pull out an amortisation schedule, and tell you all about how your net points mean nothing.
This analysis is obviously non-exhaustive. Some of the best accountants in the world are getting paid a lot of money to devise new strategies that enable studios to avoid compensating talent. The overall message we’re trying to drive home here is that the numbers we freely throw around in reference to a film’s box office and budget aren’t actually that indicative of its financial success, much less an indication of the compensation the people involved actually receive.
Famous Examples of “Hollywood Accounting”
This sort of behaviour is surprisingly prevalent and isn’t exclusive to now-disgraced producers or studio heads. Though, the one you’re probably thinking of was definitely guilty of it. Just ask Michael Moore.
Moore’s documentary Fahrenheit 9/11 showed no profit despite making $220 million internationally, resulting in a lawsuit over his compensation; and when an audit suggests that the money deducted for “advertising costs” was really being spent on a private to fly a producer to Europe, it isn’t a great look.
Peter Jackson’s The Lord of the Rings trilogy also “lost” a lot of money when its box office runs yielded over $2.9 billion. With that in mind, it’s really hard to see why they would then choose to make six films and an extremely expensive spin-off television series with more reportedly on the way.
Men In Black, on the other hand, grossed nearly $600 million on a budget of just $90 million and spawned three sequels. To this day, it remains in the red. The real men in black showed up to make sure of that.
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And then there’s My Big Fat Greek Wedding. The sleeper hit only cost $6 million and netted over $350 million at the box office… only to lose $20 million?
The same could be said about Tim Burton’s Batman, which showed a $36 million deficit against $411 million; Harry Potter and the Order of the Phoenix ($939 million earnings versus $167 million “loss”); Forrest Gump ($667 million earnings versus $31 million “loss”; JFK ($150 million earnings versus $0 in profit); and Coming to America ($288 million earnings versus also $0 in profit).
Behind all of these notable cases is someone who essentially got screwed on net points, and their subsequent lawsuits have yielded differing levels of success over the years.
Whatever the instrument of choice, Hollywood accounting strategies have only become more and more sophisticated throughout the years. The only consistent throughline is that when it comes to avoiding responsibilities on the balance sheet, the studio can’t seem to miss.
Quite literally nothing but “net.”
NOTE: All $$$ = USD (not adjusted for inflation)
