How Hollywood Studios Manage to Officially Lose Money on Movies That Make a Billion Dollars

The whole purpose of accounting is to reduce or avoid sharing profits with actors and stakeholders other than the studios. So creative accounting may be a common practice, but is it legal? After all we didn’t hear many entertainment companies swept up in the accounting investigations of the early ’00s. There is a grey area there, what is hollywood accounting and the legality of this sort of profit sharing tends to be defined only when lawyers can prove damages. This usually requires the close inspection of a studio’s books and accounting methods and you can imagine how they might resist such scrutiny, especially when their own profits might be erased in fact as well as on paper.

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Whether the books were ever opened or not (and they were not), it’s true that Brandywine ultimately won the suit (albeit with little substantial hit to Fox) and went on to make six more Alien films in partnership with the bigger company. Moving on to how this whole Hollywood Accounting thing all started, it’s largely thought this was in response to studios getting wise to actors taking advantage of gross revenue sharing schemes, which started en masse around the 1940s. Specifically, industry experts often point to Rita Hayworth as a trailblazer in this regard, as the starlet’s agents are known to have secured lucrative deals for the actress that saw her taking home 25% of the gross for many of the films she starred in. Because payout is often based on profit (and defacto how successful a film is), many contracts, particularly for actors, are a percentage of the film’s first-dollar gross. The first-dollar means they get paid before other expenses are paid–which just means they’re prioritized.

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In response to all this, the Fox lawyers were bold enough to note that Bones, despite being one of the most successful shows in the networks’ history, was only a, to quote them, “middling show with middling ratings”. As to the former question of how do they do it… Well, they have countless tricks up their sleeves, but one of the biggest ones is simply making separate companies for the various projects and aspects of promotion and production. After seeing how lucrative Sir Alec Guiness’ net-point deal was, he signed on for a similar payment.

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Erase any possible profit, the studio charges this “movie corporation” a big fee that overshadows the film’s revenue. For accounting purposes, the movie is a money “loser” and there are no profits to distribute. Many reputable companies in the entertainment industry follow transparent accounting practices and honor their contractual obligations to talent and profit participants.

• Specifically, industry experts often point to Rita Hayworth as a trailblazer in this regard, as the starlet’s agents are known to have secured lucrative deals for the actress that saw her taking home 25% of the gross for many of the films she starred in.
• This approach to hiding profits, rather than losses, is what sets Hollywood accounting apart.
• The arbitrator didn’t agree, noting similarly rated shows had streaming rights sometimes selling for in the hundreds of millions of dollars.
• In fact, Harry Potter and the Deathly Hallows – Part 2 (2011) is the highest grossing Warner Bros. movie ever made.

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That said, while the Players Association isn’t buying it, many among the general public are, which is of course why the owners are being so vocal about how unprofitable baseball is, despite the franchises themselves mysteriously selling for billions anyway. Clearly the billionaries buying and running these teams have no idea how to manage money, paying billions for franchises that just hemorrhage losses each year. So now you know payout for people in the production pipeline is based on profit and not an agreed upon constant. The studio is the entity that determines who gets their payout–and in a market where everyone wants to get paid, they also want their cut. This means anything that isn’t net profit goes back to the studio, and money they take in can be listed under “recouping costs.” If profit is a pie given out to actors, writers, etc. in slices, ballooning costs are how studios take their slice of the pie. Each movie is set up like a corporation that’s designed to lose money.

When Lee raised the issue in court, the matter was quickly and quietly settled out of court. It’s presumed that Lee waived his claim to 10% of the net profits generated by films based on his creations at some point as part of this deal- not that they’d have been worth anything anyway because of how the books are cooked. In this case, it would appear the companies involved were simply keen on avoiding the bad publicity that would come from shafting one of the more popular people in the industry. Hollywood accounting gets its name from its prevalence in the entertainment industry—that is, in the movie studios of Hollywood at a time when most studios were located in Hollywood.

This ensures in a given year they aren’t making a cash profit, or at least making less of one. For example, they might snap up the rights to some other product or purchase another business entity to expand, etc. etc. In some cases, if they can combine this into making it seem like an expense for a given film, all the better- two birds with one stone. Our movie studio wants to make a movie, so they create a production company that exists to just make that movie.

In the 60s and 70s payouts for actors, writers, producers, and directors were based on the gross and net profits/income of any movie. At its base, Hollywood accounting reports a bunch of costs that functionally do not exist. The point is to balloon the paper cost of making a film as much as possible. You can think of a movie as a corporation designed to lose a bunch of money with shell companies that just siphon profits. Which is basically the opposite of how most shell companies work–they’re more often used to hide losses in an effort to make a given company seem more profitable.