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Hollywood Accounting Revealed


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#1 James Steven Beverly

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Posted 19 April 2013 - 04:00 AM

Interesting article every film maker should read:

 

Hollywood Accounting: How A $19 Million Movie Makes $150 Million... And Still Isn't Profitable from the a-ham-sandwidch dept
We've written about the wonders of Hollywood accounting before. It's a series of tricks pulled by Hollywood studios to make most of their movies look unprofitable, even when they're making a ton of money. The details can be complex, but a simplified version is that every studio sets up a new "shell" company for each movie -- and that company is specifically designed to lose money. The studio gives that company the production budget (the number you usually see) and then also agrees to pay for marketing and related expenses above and beyond that. Both of those numbers represent (mostly) actual cash outlays from the studio and are reasonable to count as expenses. Then comes the sneaky part: on top of all that, the studios charge the "movie company" a series of fees for other questionable things. Many of these fees involve no real direct expense for the studio, but basically pile a huge expense onto the income statement and ensure that the studio keeps getting all of the movie income -- rather than having to share the profits with key participants -- long after the movie would be considered profitable under regular accounting rules.

Here's a hypothetical example of how this could work in practice, using round numbers just to make the point (these aren't directly accurate numbers, but the concept is). A studio funds A Movie with a production budget of $100 million. It sets up AMovieCo Inc. and gives it the production budget money. The studio then spends another $50 million on marketing and puts that down as an expense as well -- though, with some of the big studios, some of this money involves paying itself for advertising on its own properties. Still, even if we assume that's real money spent, you might think that AMovieCo now needs to make back $150 million to be profitable. But... the studio (which, again, controls AMovieCo completely) then tacks onto all of that, say, a $250 million "distribution fee." Now, while there may be some money spent on actually distributing the film, the number is almost completely bogus, and much higher than the actual expense for the studio. Very little actual money needs to change hands here -- it's just a fee on the books (a fee they are effectively charging to themselves). And it's not just "distribution" but a variety of additional charges. On top of that, the studio may then charge "interest" on that money, even though it's really just lending money to itself. What it all means is that rather than becoming profitable at ~$150 million (the actual money spent), AMovieCo now needs to earn over $400 million before anyone with a cut of the profits sees an additional dime from the movie, thanks to completely imaginary accounting entries on the books.

Over on Kevin Smith's (really, really, fascinating) Smoviemakers podcast, Smith recently interviewed filmmaker Scott Derrickson, who has made a name for himself in the horror film world. The whole interview is fantastic and well worth listening to, starting with part one. However, right at the beginning of part two, Derrickson reveals how he effectively got shafted on one of his most well known films, The Exorcism of Emily Rose.
Scott Derrickson (SD): It made $75 [million] domestic and $150 [million] worldwide...

Kevin Smith (KS): Nice. You're a true filmmaker, you know exactly what your movies made everywhere...

SD: Hellllll yeah.

KS: It's a badge of honor.

SD: And to all the young filmmakers listening, I had 5% of the net of that movie. That was in my contract. And it cost $19 million. And it made $150 million worldwide. There's no net. That's how movie math works.

KS: So even you were not above being screwed by the system.

SD: I told my attorney, the next time you're negotiating my net profit for a movie, ask for a ham sandwich instead.

KS: 'Cause you'll get something.

SD: 'Cause I'll get something [laughter]
Basically, it's the same story as always. The net doesn't exist... but because of the extra massive "fees" the studio tacks on, it makes back many times its money before it even has to go anywhere near paying the writer and director to whom it promised 5%.

Related to this, it comes as no surprise that later in the podcast, Derrickson talks about his recognition that the real future in movies is being able to make them much more cheaply, and outside of studio control. He talks about being influenced by the movie Monsters, which was made for a few hundred thousand dollars, but which he notes would have probably cost a studio $50 million to make. At that point, he realized that to survive in this business, he had to be able to learn to make movies much more cheaply:
SD: The other thing that was happening at that time, was I was watching the business change dramatically.... The movie that was a paradigm shift for me was the sci-fi movie Monsters. Have you seen that movie?

KS: Yeah, yeah, yeah.

SD: It's this great sci-fi movie where this guy, for $800,000 and his little barebones crew, with a small digital camera, made a movie that would have cost Warner Bros. $50 million to make.... He was one of the first of this new generation who grew up with his laptop. He did like 250 visual effects in the movie on his own laptop. And he made a $50 million movie for $800,000. I saw that happening. I saw what Jason Blum was doing with the
Paranormal Activity movies and I said, you know what, the business is changing and you gotta evolve or die. And so part of my interest in doing a movie so small is that I want to be a part of what's happening right now. And I want to be a front runner. I want to be good at it.
They then discuss his new movie, Sinister, which had a $3 million budget (which shocks Smith, who insists it looks like a movie that's much more expensive). Of course, in many ways, this goes back to the discussion we've been having here for many, many years -- responding to the old school movie studio guys, who demand that we answer how could they possibly continue to make $200 million movies. One answer, which we've pointed out time and time again, is that the question is the wrong one. Any business should be asking how it can make its product profitably -- not how it can keep its costs high. No one in the tech industry asks "how can we continue to make $5,000 computers?" They ask "how can we make profitable computers" and one answer is to make the product more efficiently. It's great to see filmmakers like Derrickson not just get that, but then celebrate what that means for him artistically and financially as well.
SD: I want what matters to matter to me.... Knowing that I had final cut in the movie, knowing that's what it was about, I've never had more fun or been more relaxed while making a movie, because I just wasn't worried about how it would do. I'm making this movie because when it's done I'm gonna see it.... I think a lot of filmmakers go through the experience.... you have that difficult studio experience.... you come out of that experience, and it's not just that 'if you die on a swords, it's gonna be my sword,' it's that thing that 'I'm going to make something that's 100% pure. I'm just going to make something 100% pure...'
In the last few years we've been hearing and seeing similar things from a number of filmmakers, recognizing that perhaps the challenges that the movie industry has faced have been self-imposed in large degrees. The industry got used to doing things one way and have had trouble adapting. But, of course, the actual artists and creators figure this stuff out and they adapt... even while the big studios still play their accounting tricks. And have no fear, with a movie this cheaply made, Derrickson notes that if the movie does okay, it could make him "rich" based on the way he structured the deal this time around. He teamed up with Blumhouse Productions (who backed Paranormal Activity) and while they're using a traditional distributor (which anyone still has to do for a real theatrical release), the economics this time around are quite different than for a film where a major MPAA studio is playing the usual accounting tricks.

 


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#2 Richard Boddington

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Posted 23 April 2013 - 01:39 PM

You and I are the only ones interested in this sort of stuff James.

 

R,


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#3 Phil Rhodes

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Posted 23 April 2013 - 01:53 PM

I'm interested, but only inasmuch as it's yet another nail in the coffin of my interest in the "mainstream" film industry. There appears to be two main ways to make money in the film industry. First, you can be an executive, with no real ability to actually do anything as such, and play the sort of games outlined by Mr Beverly. Or, you can become an IATSE camera crew member, and routinely make union wages 40 weeks a year.

 

All else, as I fear we've seen described far too many times on this forum, is an extremely flaky approach. 

 

In this world, who the hell wouldn't just go to kickstarter with a trailer and pitch it at that level? At least you'll get paid to work on it.


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#4 Charles Zuzak

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Posted 23 April 2013 - 11:29 PM

I've never worked a day in my life in this business and even I'm familiar with this bullshit.

 

Here are a couple of YouTube videos (about 22 minutes in total) that might further the discussion:

 

Hollywood Film Budgeting Part 1

 

Hollywood Film Budgeting Part 2

 

Dear ol' Freakazoid was warning us back in the mid 90s!

 


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#5 James Steven Beverly

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Posted 02 May 2013 - 05:56 PM

Nice videos. They seem to confirm what the article had too say. It would be nice to get more details on the nuts and bolts of the practice so one would have a heads up when negotiating contracts with the more experienced players.


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#6 Pat Murray

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Posted 21 May 2013 - 02:18 PM

This stuff interests me as well.  I have a book on independant filmmaking from over 20 years ago and it dedicates a whole chapter on the distribution process.  What I read in the OP article is pretty much mirrored in the Chapter.

 

 

Filmmaker pays for all distributor expenses, even though distributor gets most of the profits. 

 

A filmmaker could produce a 10 milion dollar movie that makes 150 million and wind up owing the distributor 2 million.  LOL.  Distribution is where the money is at!  IIRC, a distributor would take 70% from that 150 million as his/her "share" and then take all advertising, prints etc. expenses out of the filmmaker's 30%.

 

Based on the OP article, the studios certainly understand this truth.  That's why I think the internet is the true game changer, not cheap digital cameras.  Filmmakers have always had the option of telling their stories cheaply, but the ability to distirubute and be paid for your work is much easier now than before.  Granted, it might be tough to get on 3000 screens for a weekend, but by four walling the movie, putting it out to festivals, selling it online and distributing it to Netflix, tv broadcasters etc. you could make some cash.  Assuming you have a great story, which can overcome cheap production values.


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#7 Richard Boddington

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Posted 21 May 2013 - 04:03 PM

which can overcome cheap production values.

 

Um, we prefer, "cost effective."

 

Sure you can spend 200 million on your movie, now guess what you have a break even point of 200 million.  Ouch, that's a big mountain to climb.

 

R,


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#8 Phil Rhodes

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Posted 21 May 2013 - 06:20 PM

That's why I think the internet is the true game changer, not cheap digital cameras.

 

It's an interesting issue. It could be, possibly, and I admit that only on the basis that it already has been for a limited number of people. I hate to be the guy who applauds the latest idea, as it's not been tried very hard, but it seems to me that online distribution really does have some potential to change things. How, I hardly dare imagine.


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#9 Richard Boddington

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Posted 21 May 2013 - 06:54 PM

It has enormous potential in the sense that people like me now rarely watch the broadcast networks. I have my Apple TV and that's really all I need for content.  I don't watch sports and I read my news on-line, so there is nothing left that traditional TV can deliver.

 

I'm chopping my way through season one of Downton Abbey at my leisure in the evenings.  Traditional TV simply can't compete with that.  I watch when I feel like it and I am not exposed to advertising.

 

This could be a golden age of content creation and delivery.

 

R,


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#10 Maximilian Hillmer

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Posted 22 May 2013 - 02:05 AM

To answer what the average movie budget for a Hollywood film is, several terms must be defined. First we must determine if by “average movie budget”, we mean simply the cost of making the movie, or if we are including the money spent to market the film. Depending on the genre of the film, the size of the studio or distributor releasing the film, and the time of year that the film will be released, marketing costs may run from $1 million to $20-30 million, or more. 

For the purpose of this question, let’s decide to keep it simple and just discuss the actual cost of making the movie: “above the line” costs (Writers, Producers, Director, Actors) and “Below the line” costs (production crew, locations, equipment, materials, food, and incidentals.) So what is the average now? We don’t quite have enough information to calculate it yet. Even though we’ve eliminated the marketing costs in our calculation of the average movie budget, there is still another decision we have to make: how do we define a “Hollywood Film”? 

At the most basic level, one could define a “Hollywood film” as one that is released and/or distributed by a major studio. We have to keep in mind though, that studios often acquire and distribute films that they did not actually make, but were originally produced independently. One of the best known examples of this is “The Brothers McMullen” (1995) by Edward Burns. He produced the film himself for $25,000, but after winning the Grand Jury Prize at the Sundance Film Festival, 20th Century Fox purchased and distributed it. 

Of course, much more money was spent to distribute and market the film, but since we aren’t counting that into our calculations of average movie budget, the total cost of production stays at $25,000. Is “The Brothers McMullen” a Hollywood film then, since it was produced independently? Since it was acquired by a major studio and had a widespread theatrical release, it should indeed be counted as such.

So “The Brothers McMullen” is one of the movies with the lowest budget that can be considered a Hollywood film, but what about the projects on the other side of the spectrum? Movies such as “Avatar”, “Pirates of the Caribbean”, etc. Well, studios don’t like to release “official” numbers, especially for huge, expensive blockbusters like those. They also may attempt to make a movie look more or less expensive to the public to suit their purposes, so numbers may differ from source to source. For example, some sources put the production costs of “Avatar” between $200-300 million, some say it was in excess of $300 million. Big difference. So what should you believe?

For the purpose of answering the original question, let’s refer to the site www.the-numbers.com. They list the top 20 highest movie budgets of all time according to the best information gleaned from studios, and the top 20 movies with the lowest budgets that earned at least $1 Million at the US box office. This is a good place for us to get a general average, because those 2 lists will give us a rough estimate of the total cost of both high and low budget movies that were theatrically released in the US. 

In order to stick with our decision to only count movies that were distributed by a major studio, we will eliminate 7 of the top 20 lowest budget films, because they did not have major distributors. Here’s the math:

Highest Budget films (total production cost of top 20): $4,589,000,000 
Lowest Budget films (grossing at least $1 million @ B.O.): $795,000 
Average Movie Budget of these 33 movies: $139,084,697

This calculation is in no way definitive, as it only takes into account the highest and lowest budgets and excludes films that were not distributed by a major distributor, but it does give a realistic idea of how much the average budget is for a Hollywood film. 

In recent years, the gap between the highest and lowest budgets has widened as studios spend more and more to attempt to lure people from their Home Theatre Systems and into theatres with 3-D effects and amazing computer animation. On the other side of the spectrum, as the cost of quality tools for shooting and editing movies has come down, and online movie consumption grows, budgets may become even smaller. But for now, it still costs about $139 million to make a major Hollywood film.


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