Accounting Business of Hollywood

[Sean Yu]

I know this is a pretty broad (and stupid/naive question), but I'd still love to hear the answer. When a film becomes profitable, how are the profits split between studios, producers, directors, writers, actors, or other people. Now, I know there are plenty of different scenarios, circumstances, etc. However, just humor me.

Say, for example, a fairly big producer like Lucas Foster hooks up with a fairly big director like Zach Snyder or F. Gary Grey, and they make a movie with a budget of $40M provided by 20th Century Fox and the worldwide gross is $170M. I know usually the general way to calculate profits in theaters is to divide the worldwide gross by 2, and subtract the original budget. So it'd be ($170M / 2 ) - $40M = $45M.

So I ask, how are the percentages often split between the people involved? I'm speaking generally, on average. I've heard some horror stories regarding Hollywood Accounting that's absolutely shameful (but I'm not really considering those).

Again, I apologize for this naive question.

 

[Noah Kadner]

Ha-= don't know where you get the divide by two but as you might imagine it's nowhere near that simple. In truth most films never actually make any profit whatsoever according to the shady calculations of yes even the biggest studios. Read this book for an eye opening look at how it still works:

http://www.amazon.com/Fatal-Subtraction-Pierce-ODonnell/dp/0385416865

Then there are the big big boys like Lucas and Spielberg who actually have enough clout to not get totally hosed in their profit participation. Why do you think both have their own studios?

-Noah

 

[Sean Yu]

No, of course, it's never as simple as dividing by 2. Generally speaking, I was told that the theater keeps about half the gross, and the other half goes back to the filmmakers.

 

[donatello b]

in general on a new release it's a 90/10 split = 90 percent of ticket sales go to studio/distributor & 10% to theater ... theaters make their $$ on popcorn ...
it cost X $$ to operate each screen (many times referred to as their operating NUT) many times a therater will get a guarantee to cover their screen NUT so if a movie has a terrible box office the theater doesn't loose but it all comes down to the contract ...
a movie that is not expected to do well then the theater might get a 70/30 or some other numbers ...
also in contracts are who pays for advertising etc...

many movies have contracts where directors/producer/actors get a % of gross or net ... if NET = 90+ percent those with NET never see a dime ... if gross then they do see many dimes .. as the % are paid out then the cost of the movie keeps going up = if the movie had a budget of 50 mil and they pay out another 50 mil in percentages over 2 years then the movie now cost 100 mil = so as long as % are being paid out over years the cost keep going up = this can go on for several years & longer so cost & profit may not be known for years = those with NET % wait ... this is often called creative book keeping

 

[Michael "Dorkman" Scott]

I know this is a pretty broad (and stupid/naive question), but I'd still love to hear the answer. When a film becomes profitable, how are the profits split between studios, producers, directors, writers, actors, or other people.

No film ever becomes profitable, at least not on paper. That's why you negotiate for gross points.

 

[Sean Yu]

How is this even legal? So ideally, if you're a producer/writer/director/actor, it's to your best interest to negotiate gross. Got it, thanks.

So let's say, for a young person (or in my case, two young people, myself and my business partner) who has his/her own production company, what would be a highly beneficial, yet reasonable thing to negotiate for if I'm working a deal with a major studio, or if I'm negotiating with independent investors (considering it's the first feature project we're working on)? What should my partner and I ask for on behalf of the company we own that would yield us the most money (what's a reasonable % of the gross to ask negotiate, considering we own the script and are producing and directing it)? I really need to go talk to an accountant or lawyer, but until then....

 

[donatello b]

most 1st timers will only end up with whatever $$ they give you upfront and never see the word gross in their contracts ....
right now it's a buyers market so your script ( or finished movie ) needs to stand out =all comes down to how much $$ the distributor/studio thinks they can make off your product ( it business) ...
speak to lawyers that have experience in the film business ...

or look/study to some independent Director/producer that have been doing it for years to see how they get their movies out there and the deals they make ..(i.e. Henry Jaglom has been making HIS movies for years and getting them distributed )

 

[Zakaree Sandberg]

just be creative and pump out commercials and make BANK!!!
ill pass on movies after being in the commercial world

 

[Michael "Dorkman" Scott]

How is this even legal?

It's a game they play with multiple business entities.

For example, Studio X bankrolls a project for Production Company Y. X and Y are pretty much the same company, but legally they are separate entities.

Company Y rents a soundstage from Studio X, for which Studio X charges Company Y exorbitantly -- even though the money is really going out of and into the same pocket. Then Company Y delays payment to Studio X, so Studio X tacks on a late fee to the invoice. Company Y finally pays the already-high cost for the soundstage, but neglects the late fee. So Studio X charges the late fee again, plus interest. Company Y pays the late fee, but not the interest, which continues to accrue...

You get the idea.

Again, all of this is ultimately a game of make-believe since Studio X and Company Y are, in a practical sense, the same company. But on paper, legally, they are two separate entities, and on paper Company Y owes Studio X tons of money and back-payments for production, and such back-payments only seem to increase as the movie becomes more successful. So basically, "Hollywood Accounting" ensures that no matter how much a film makes, its "production costs," on paper, were higher. And thereby no profit is ever made on paper, yet they all somehow manage to get richer...

And that's why you never, ever agree to take any percentage of the "profit". Not even "gross profit". There ain't no such thing. Get a percentage of the gross revenue that the studio gets after the distributor takes their slice -- aka "Producer's Gross".

 

[GlennChan]

The same thing can happen with advances... the advance is the only money you'll ever see.

2- You can look up the profitability of publicly-traded movie studios. Paramount Pictures for example doesn't seem to be all that profitable...

Filmed entertainment division of Viacom:
Revenue: 2007 2006 2005
Filmed Entertainment . 5,475.6 4,273.8 2,905.2
Profit (Operating Income):
Filmed Entertainment . 103.5 131.9 62.4

Their profit margin is razor thin (actually they might actually be losing money depending on how you'd like to do the accounting). Filmed entertainment is only a sliver of Paramount's overall profits.

Total operating income . . . . . . . . . . . . . . . . . . . . . . $ 2,935.7 $ 2,766.6 $2,358.7

http://www.viacom.com/investorrelations/Investor_Relations_Docs/Form 10K.pdf

I'm not sure if it changes things; if they're greedy, they aren't getting rich.

 

[Chris Pickle]

First time filmmakers can almost never negotiate gross points. What you do is you make your indie film for say 200k. Then you sell it to a distributor for say ZERO, well, that's what they will offer you, but they'll also offer revenue sharing.

Ah yeah, the dubious revenue share! They agree to pay you a percentage of the film's profits. Profits! But first the dist needs to recoup the small to zero advance they paid you, plus marketing and dist fees, plus an agreed upon return for them, plus the splits they make with their foreign dist deals. (who they have been doing business with long before you)

If you can make a slightly bigger production deal based on dist advances, then you will be in a little better shape in that you might be paid a small fee based on what your duty is--writer, director, producer. But it will still be the only money you ever see. Even if it's your own film!

Of the lower budget models, I think the mid 6 figures is the most dangerous. It's often not enough to pay yourself much, plus you still have the drama of investors and other money people. If you make it micro budget then any upside is good, and it stays your deal. At the other end, 1 million and above, you at least get a few bucks from a line item and someone else deals with the money.

I once made the mistake of walking away from a deal that I thought was unfair only to realize that all deals are unfair, and you need to balance that with at least getting your film made, and then building from there.

Anyone who says they will hold out for better and not take any crap, and hasn't yet made a blockbuster, is delusional.

Chris

 

[Lucas Wilson]

I really need to go talk to an accountant or lawyer, but until then....

I started out my professional career as a musician. I went to music school and was forced to sit through what I thought at the time was one of the dumbest, most boring classes I ever had - "Business of Music." Two semesters of it.

My teacher for the first semester gave some advice that has stuck in my head and served me really well throughout my career... "Everybody loves to be the expert. But make sure you're actually talking to experts."

As a homework assignment, we had to pick a part of the music business we knew nothing about - A&R, Contracts, Recoupables, Rackjobbing, Distribution, whatever - find 10 experts who were dedicated to that part of the business, and write letters to them introducing ourselves, saying that we were young musicians who needed knowledge and were wondering if we could have an hour of their time whenever it was convenient to learn from them about their side of the industry.

Out of the 10 people I wrote letters to, 7 of them responded and were kind enough to sit with me and tell me what they knew. For free.

Do a little bit of research and find the 10 best entertainment attorneys and accounting firms for entertainment. Hand write them letters (email is waaaaay to easy to ignore and nobody gets letters anymore!) and ask for their time and advice. I predict you'll get an awful lot of free knowledge.

Pay it forward...

Lucas
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ASSIMILATE, inc.
LA, CA, USA