Hollywood Accounting

Dec 8, 2021

Wait, how does a movie that had a $175mm budget with $880mm in box office revenue lose money? Other notable movies that haven't turned a profit:

  • Star Wars: Return of the Jedi (budget: $32mm, box office: $475mm)
  • Forrest Gump (budget: $55mm, box office: $683mm)
  • Harry Potter and the Order of the Phoenix (budget: $150mm, box office: $942mm)
  • Men in Black (budget: $90mm, box office: $589mm)
  • Coming to America (budget: $36mm, box office: $288mm)
  • Bohemian Rhapsody (2021) (budget: $55m, global box office $911mm)

How is this possible? Hollywood accounting.

Writers, actors, and producers often get stuck with a share of the net profits. For example, Winston Groom, screenwriter of Forrest Gump, sold the screenplay in exchange for $350,000 and 3% of the net profit. Yet, Groom never saw any of his share of the profit.

Net profit can be easily manipulated, whereas gross revenue is harder to change. Studios, not wanting to pay out their royalties on profit, have a few (in my opinion, unethical but legal) tricks up their sleeves to make these hit movies look like they have turned a loss.

First, studios typically set up a subsidiary corporation for each movie. The studio then charges that subsidiary to make the movie. The studio has free rein to increase overhead at different points along the value chain. Arbitrarily calculated "distribution fees" from the studio to the production subsidiary. Then more fees for other services, like advertising and marketing. Since the studios are simply paying themselves, these fees can be set at anything.

Only a fool would accept net points in their contract – Eddie Murphy

Another trick is to shift expenses from different movies to the highest grossing movie. Imagine a movie that flops and loses $100mm. That loss can be spread out across many different projects, turning many profitable projects into unprofitable ones.

Of course, all creatives would love to negotiate net points instead of gross points, but not all have the leverage against the studio. Some new writers might not even know this practice and settle for net points.

But it's not all bad news – some actors end up with great deals. Sandra Bullock, fresh off of her Oscar win for The Blind Side, was allegedly able to negotiate 15% gross (!) box office for her role in the movie Gravity. The movie had a budget of $80mm and netted $723mm in the box office. Bullock most likely walked away with over $100mm from that movie!

So it pays to negotiate for net!

If you're wondering what Hollywood accounting actually looks like, here's a receipt from Harry Potter and the Order of the Phoenix:

Source: The Atlantic