EXCLUSIVE: Signing a deal that makes anyone a net profit participant in a Hollywood movie deal has always been a sucker’s bet. In an era where studios have all but eliminated first dollar gross and invited talent to share the risk and potential rewards, guess what? Net profit deals are still a sucker’s bet. I was slipped a net profit statement (below) for Harry Potter and The Order of the Phoenix, the 2007 Warner Bros sequel. Though the film grossed $938.2 million worldwide, the accounting statement below conveys that the film is still over $167 million in the red. (Text continues below…)
I ran the data above by several attorneys and agents, who are so accustomed to seeing studio accounting wave magic pencils over hit movies that they weren’t surprised even a Harry Potter film that grossed nearly $1 billion would fall under the spell. Dealmakers say studio distribution fees are a killer, as are incestuous ad spends on studios’ sister company networks. They also cited the $57 million in interest charges, an enormous pushback on profitablity. Since Warner Bros didn’t invite in a co-financing partner on the Potter films, has the studio borrowed money from parent company coffers? Are they paying that interest to a bank, or to themselves? Bottom line: nearly $60 million in interest for the estimated $400 million required to make and market Harry Potter, charges carried for about two years, is a high tariff.
As one dealmaker tells me: “If this is the fair definition of net profits, why do we continue to pretend and go through this charade? Judging by this, no movie is ever, ever going to go to pay off on net participants. It’s an illusion to make writers, and lower-level actors and filmmakers feel they have a stake in the game.”
And yet Warner Bros isn’t doing anything differently here than is done by every other studio. Clearly, nothing has changed since Art Buchwald successfully sued Paramount over the 1988 hit Coming to America when the subject of net participation was scrutinized, and a judge called studio accounting methods “unconscionable”.
Recent Comments
WOW. The amount of money spent on P&A needs to drastically drop or movies will never be profitable!!!
Agreed. I’m a bit shocked the number is that high. I mean…hello, this is the fourth sequel in the series. The fact that it exists should pretty much speak for itself, no? Audience interest, at this point, is already built in and obvious, why invest that much $$ in to advertising and publicity?
I guess you’re not getting it.. They paying that to partner network companies, or to themselves.. 20th Century Fox might pay Fox television network a ton of money to advertise the movie.. or maybe they pay it to themselves to have it shown as a preview at the beginning of other movies.. Either way, they keep the money and the movie shows a loss, so they can complain that illegal downloaders are taking away all of their profit, and they also don’t have to pay any profit sharing money to the actors etc in the movie.. Their advertising divisions sit back and rake in all of the money, and somehow the execs upstairs continue to decide to make movies even though the poor old studios are bleeding money like crazy for making them.. They don’t like to mention that they’re bleeding all that money into their own advertising departments or partner companies that agree to bleed their own money back..
They’re paying that much because they’re paying it to themselves. The studios own TV networks, where they run the ads. Since it’s going in back in their pocket, it’s not surprising that they wouldn’t bat an eye at spending a million dollars on a single 3am spot, especially not when it means that they take away from the bottom line, which is where they pay net points from.
Why invest that much in P&A, needlessly?
Simple – To siphon off (to a sibling broadcasting/cable subsidiary) revenue that would otherwise fall to the net profit bottom line.
I would *love* to see what kind of CPM’s were charged to the sibling theatrical subsidiary – my guess is that they had to be insanely high or the month of Phoenix’s release in the US would have been non-stop Potter commercials…which it wasn’t…
They are profitable. This shows it. The companies simply shift money within themselves to make them appear not.
WOW!!! That’s all that can be said… And these are the guys that don’t want to pay the talent and
crew…
They don’t usually pay the crew in net points. Even extras will simply get handed a check for $100. The people that they are screwing is investors and actors who accept contracts with net points (percentage of the PROFIT). Most big-name actors accept only gross points, which is a percentage of the REVENUE, not the profit, which is all but impossible to hide without doing something illegal.
Mike. What you say about paying the crew in net points is true but the studios use these numbers when they go to the table to make the deals with the Unions for pay and fringes. They have always said that they are broke and need to take something away from the previous contract because they are not making any profit because of the outragious labor costs! They always point to these Numbers!
Well here’s the problem…they released it on video cassette (line 9 under DEFINED GROSS). Hasn’t Warner Bros heard about DVDs???
I thought the last film released on VHS was David Cronenberg’s “A History Of Violence”. I’m pretty sure that any HP movie since the first one wasn’t released on VHS.
Just a made up reason for WB to claim more loss.
To clarify —
The point I was making is that studios are so out of it they are still using a profit/loss statement written before the advent of DVDs (c. 1993).
Pretty much explains how they missed out on capitalizing on the web. They make their profit there by just not paying the creatives.
You bet your buttocks The WB Studios knows DVD. Hell, they fucked Warren Lieberfarb, the Warner exec who practically created the DVD business model, out of his job a few years ago.
They’re probably sittin’ back with Bewkes and counting that loot.
How could releasing to video tape be the problem? if it earned 86 million? Moron. The reason these companies get away with these things is that idiots like you, distract the focus away from the real issues. ($211 Mil for distribution, 130 Mil – P&A and 315 Mil – UNKNOWN)
I can assure you that WB and ALL THE REST NEVER EVER EVER EVER show a net profit.
I will prove it —- get your hands on ‘The Hangover’ profit/loss sheet. It shows a loss.
The Guilds don’t give a shit.
The Guilds?!!
Not only don’t they give a shit but they assist the studios is stealing. They get the real numbers but won’t share them with their own members because they are “confidential.”
What a fuckin’ joke they are.
Really? Why would the guilds be given the numbers in the first place if these nefarious dealings were going on? Seriously, this made me laugh out loud and I had a terrible day. Thank you!
It’s a wonder the poor studios can stay in business.
They’re obviously using democRat accountants. ‘Rats hate profits.
Either that or corRuptlican accountants. Rupts just love to hate.
Clearly they are in the business of money laundering, and have been since the beginning. Why do you think Joe kennedy invested in RKO back during Prohibition? To bang Gloria Swanson? That was a fringe benefit.
Same thing going on today. Will untill someone with a spine faces down these crooks.
Hey Mike,
Why are you singling out Warner Bros. as ‘phony baloney accounting’?
There is a long history of studio accounting practices and various lawsuits challenging the process.
And guess what Mike, rarely IF EVER do the studios lose.
Nice to see some numbers regarding Harry, but this story about studio accounting is very old news, indeed.
It maybe old news, but I have never seen a profit and loss statement before, and it is a safe bet I am not unique. Single out WB? He specifically mentions Paramount as well. Did you not read till the end before calling out the blogger?
Where the hell is SAG is any of this? Why isn’t there a class action suit against the parent company Time/Warner – Hit ’em where it hurts… the stockholders! If the stock falls 10%, its a helluva lot more than what they would have to pay out. Yes, audits are expensive, but if the FBI came in, I guarantee the bean counters would spill like a mafia hitman and Time/Warner would take a gigantic hit for all of the profits they would have to pay back… I know. Dream on. But things change. Its about time someone challenged these crooks once and for all.
If Warner Brothers let the film show a profit they have failed as a studio.
Wait, so Paramount and Warner’s(close) are both reporting a BILLION dollars in profits, but a movie that made almost $1B is not producing net profits???
Who’s in charge over there?
They’re reporting a billion in 2010 domestic box office GROSS – not profits.
do SAG and WGA etc get residuals from this film franchise?
SAG and WGA always get residuals IF it’s a SAG and WGA film. Their participation is on a different basis.
And, BTW, the first “Teenage Mutant Ninja Turtles,” which cost just about NOTHING to make, didn’t turn a profit either, according to New Line. Lying bastards.
We are auditing another big studio for similar situation. Its out of control and there needs to me more oversight.
MGM Television still owes me foreign residuals on a show that sold 22 eps but only paid me for 12. And I was All Shows Produced.
MGM owes you money? See that ridiculously long line over there to the left? Join it.
I wonder what JK Rowling gets up front for those movies. Assuming her agents are too smart to take any backend deal.
She gets gross.
Gross points, I mean.
Interestingly there’s no gross participation according to the line item. But the “negatrive cost/advance” goes up each period. hmmm…
J.K.Rowling gets 75% of what her publisher got for the subsidiary rights – that 75% will be deducted from the advance against royalties that she got for the book. Of course, her publisher is playing this game too, and her book may never earn out and she may never see dollar one from the movie rights…
She’s not getting this type of net profits statement. She’s no doubt getting paid based on gross and a simplified deduction by the studio that she’ll still have to audit to make sure it’s accurate.
Winston Groom wrote Forrest Gump and got swindled by the studios into a net points deal. on the same movie, T. Hanks took no salary and made about 40 mil on gross points. Mr. Grooms reported got 300,000 for movie rights and a bad taste in his mouth for movie studio crooks. research what Clive Cussler got for “Raise the Titanic.” And the studios say movie piracy is killing them! Pay your talent you crooks!
The Justice Dept needs to get involved more in movie making accounting…
I feel like there’s a secret room at each Studio… where all the money is counted, packed, and sent back to Kansas City in brown, nondescript suit case — meanwhile phony statements like this are generated to hide the trail.
And the tooth fairy still brings you a shine quarter everytime gallons of coke you drink rot the teeth out of your thick skull.
No you’re a clown ny friend, Studio accounting fit neatly into the definition of RICO.
Yup. Go and do a bit of research, RICO has been successfully used to hammer folks who are doing a lot less than the studios are.
every distribution fee and deduction in this statement was in the agreement signed by the talent before they did anything. if they didn’t like warners charging such high fees, they didn’t have to sign and could have remained seated at starbucks.
why isn’t anyone talking about a negative cost in excess of 300 million — that’s all money that got paid to people.
are you really defending this kind of thing? yeah, everyone has to go along with it because the studio has us all by the balls. that doesn’t make it right.
This *does* seem to be the studios basic fallback line of defense:
We’re financial rapists – we are *known* to be financial rapists – you contractually *agreed* to let us be financial rapists…
so sit back and endure it if you want us to pimp your film as only we can.
Now, that said, it is still a bit of a mystery why anybody actually *bothers* with the net participation facade since only the most raw, ill-informed, horrifically represented newbie is going to get suckered into believing that net participation equals anything other than zero.
(I suppose it could be worse – “net participation” could be studio-defined to permit execs to come over, tie up/”net” and gang rape your spouse – and then add a line charge for the “service”).
So, if everybody knows that “net participation” is BS, what is the point of the facade? Anybody with leverage will get some form of gross participation.
I wonder if it all comes back to some form of (not very) elaborate *tax* dodge…after all, there is no income tax if there is no “income”…
If you are wondering where the Guilds are in all of this, they are making sure that residuals are paid via the MBAs. Based on units sold, not percentage of the net. The net points falls under an individual’s deal, which is the concern of their agent and lawyer. The agencies and law firms should be the ones to bust the studios. This is exactly why the WGA wanted the internet points based on gross and not net.
We have gotten so used to this that we roll our eyes and call it ‘phone baloney’ accounting. It is THEFT. Institutionalized, legalese derived theft. And no one should call it anything else.
Wow – maybe Hollywood needs a bailout. They seem to be very poor. Oh wait – that’s the rank and file people.
In related news the studio still plans to go ahead and make 2 more sequels despite the 170 million dollar loss.
Which is the most damning and hilariously tragic indictment of the lying.
Thank you for shedding a little more light on this horrific practice.
Where are the guilds on this, you ask? Sulking in a corner with their collective tail(s) between their legs, that’s where. SAG already cut off its own balls last year. AFTRA never had any (though they don’t mess with features much). WGA stood strong for their share of the pie, but their “leadership” has cowered as well and I believe they’re still in a lawsuit with AMPTP for back payments negotiated, what, two years ago?
These people/companies/stockholders are literally stealing from their own people – the creative people who are hired to make the entertainment they profit from. Uber-wealthy million- and billionaires taking food out of broke peoples’ mouths, people who struggle every month to pay their rent. I’d say “shame on them”, but there’s no shame to be felt – just depraved greed. (And these people believe they’re “religious”. HA!)
Why nobody can get the Feds involved in this is beyond me.
oh please. no offense but most of the the above comments are completely naive. Nobody anticipates a movie of this budget to hit Net. Every statement I’ve ever seen on a big movie shows similar losses as to the net participants. Then they make a sequel! But the net partipants like the writers, junior directors, and some cast get their backend via resids which as you can see here amount to more than $3M per guild. As to writers and directors who do not share with any other participants (or many as to writers) that’s a nice chunk of change in addition to the millions that the studio will have spent on the up front fees and credit bonuses. The neg cost here seems crazy as does the interest and advertising but good luck w/ trying to knock enough out such that they’re going to pay anyone net. and the wga resids are an advance on that anyway, so double good luck!
You’re an ass. The conversation isn’t about your cowardly belief that nothing can be done. It’s about the outrageousness of this thievery.
People like you don’t even realize what suck-asses they are. You start with the premise that the studios have a right to defraud people and then go on to say we can’t touch them.
We can do something but it will take a monumental effort and every time someone tries, the studios buy them off, then pay for confidentiality,
They are thieves plain and simple and if this business wasn’t so racist and incestuous, we could so something about it.
In the end that is the real problem here. Hollywood hasn’t changed since the 1920’s.
you look for justice in the oddest places.
well said. not sure why anyone trying to make a living in hollywood would defend the more egregious studio practices– it’s almost like they have stockholm syndrome or something; unless of course they don’t work in hollywood, which in that case they should probably just stay out of it.
Unless, of course, you work for the studios and have a vested interest in those more egregious practices…
And people say that Wall Street is crooked?
Movies are expensive to make, employ hundreds and thousands of people. Studios create the auidence for the films with all this help: ie publicity, advertising etc. They take ALL the risk. Sorry that’s how it works. Just ask any indie film producer – there is NO indie audience that goes to see films based on WOM anymore. The audience is created using studio money. Would anyone have seen Paranormal Activity if Paramount did not turn their corporate machinery on and pump millions into marketing it? Answer: NO.
If you believe that PARANORMAL ACTIVITY, one of the most successful movies of 2010 that cost the studios little more than a pickup fee and P&A, is still running in the red, then you and reality aren’t on speaking terms. i
You are a bit out of touch. PARANORMAL had a ground-breaking method of inflating the demand for the film by having an incredibly lost-cost grass-roots online campaign to generate interest in the film. The DEMAND IT! experiment worked incredibly well for the studio, as it generated a ton of interest for a very insubstantial amount of money.
Sometimes films don’t need a tremendous amount of advertising expenditures for it to become a success. This is exactly why they made an entire sector in the company for distributing these small films, likely using the same manner of distribution, ie slow expansion. It increases demand.
The trick seems to be in the ever-increasing negative cost – I see box office mojo says the production budget of this film was 150 mill.
Whoa, whoa, whoa, whoaaaa. Before everyone goes crazy, why don’t we actually take a beat and actually understand what we’re looking at.
Whoever cut the deal reflected by the above statement KNEW EXACTLY WHAT TYPE OF DEAL THEY WERE CUTTING — a deal that would not kick in except at the most extreme levels of profitability. To say anything different is ludicrous. If you think anything different, then your agent or lawyer is probably an idiot.
The deal articulated by the studio statement above is not the type of deal that talent is cutting in lieu of first dollar gross. To say so is utterly ridiculous and extreme. What we’re looking at is a typical “net” deal cut by a writer.
Let’s walk through the statement.
Note the following:
– Distribution fee of 30% on theatrical
– Extremely high staged fees (probably royalty rates?) on Video and Television
– Fairly aggressive interest calculation on negative cost
These are VERY high loads, but they are TYPICAL loads for writers, who very rarely receive “cash break” or “studio breakeven” type deals. To repeat, nothing has changed under the sun: the “net” deal articulated above is fairly standard for writers. Typically writers are compensated up-front with a kicker if a film is absurdly profitable. Writers rarely, if ever, get gross or “studio breakeven” or “cash breakeven” — i.e., a share of the revenue from the first dollar of revenue, or a share of the profits from the first dollar of profits. When the studio cut the deal above with the writer, I can’t imagine they told the writer: “Once we breakeven, you get paid! We all win!” They probably said to his agent/lawyer: “We’ll give you the standard “net” kicker”, which is exactly what he got.
I think people who don’t work with these concepts every day get caught up in the semantics of “net” or “breakeven”. Those are defined terms, not literal terms. “Net” is slang for a deal that occurs after the studio has broken even. It doesn’t mean such deal kicks in exactly when a studio breaks even.
I am not arguing whether the compensation scheme for writers is fair or not, all I’m saying is that the above is nothing new: it’s consistent with how writers have been compensated for as long as I’ve worked in this town.
Last point: The definition of “net” that someone would get for giving up gross is MUCH more favorable for the talent than the statement above. In those deals, the studio would say, “you give up your share of revenue from the first dollar of revenue, in exchange for a higher share of the profits from the first dollar of profits”. So if you were to look at a profit statement that reflect that sort of deal, you wouldn’t much, if any, distribution fees, and the interest would be much lower to reflect the studios true cost of capital.
Great explanation. I completely agree.
Well said. Whichever Net participant is being reported to in this statement signed off on the terms (including how interest would be calculated and at what rate). WB didn’t just pull a bunch of shit out of thin air and throw it together.
Then why does this exist AT ALL? To say it always has been this way doesn’t mean it’s not an intentional snow job. It should be held up to the light as such. Think of all the time wasted every year on this kind of nonsense. If there’s no way to ever get paid from this kind of deal, then this kind of deal should not exist. Period. The deal might as well say you get a bump if the movie is released on Mars. To defend it as SOP is silly. It’s like the Monty Python “No Claim Insurance.” “It’s a very good deal as long as you never make a claim.” Get rid of it.
What bullshit.
No writer or director has a choice as to the kind of deal they make. It’s take it or leave it and you know it. Spielberg makes a better deal because he can.
All of your blah blah blah is studio propaganda and false intellectualization of this thievery. Studio collusion and attorney and agent cooperation forces artists to take these shitty deals. As a man said above it’s textbook coercion, racketeering which is only legal because no one in DC has the balls to stop it– yet.
These studios are no different that the Wall Street Bankers who create phony profits and steal from people. Shills like you make me sick. Take the studio dick out of your ass.
Thank you, Anon.
I very much appreciate the analysis here, and I think the point that people’s contract terms can differ widely is very well made. But while I have neither Hollywood-insider nor finance-expert credentials, let me see if I understand one of the central premises correctly…
…namely, that the amount the studio actually spent on various line-item expenses — distribution, royalties, interest, etc. — is not, in fact, necessarily the amount stated on the line-item entries as listed here?
I mean, presumably there’s a real amount paid by the studio in interest, for instance — and whereas I can certainly see why a studio would jigger contract terms to favor paying some “net” participants sooner than others based on arcane ways of calculating “net”, I would think the line item for interest ought (in an honest world) to reflect the actual figure.
Yes, this is probably hopelessly naive and optimistic. But it really would be nice if there were enough genuine numbers on movie balance sheets for rational observers to be able to discern where the money is going.
John, I think the point he’s making is not that these numbers aren’t real, but that in a deal where “net profit participation” was a real goal, some of the items being deducted here would not be included. This deal is one where neither party EXPECTS to get into net profits, it’s just the way this deal is commonly structured.
The point is that this writer likely got paid very handsomely upfront and knew going into this deal that he would never see net profits because of the way the terms are defined. In a situation where net profits were a legitimate negotiation interest, the deal would have been structured differently.
And I get that point — I’ve seen enough print publishing contracts to know that there are immense differences between the boilerplate and what leverage and a good agent will get you.
But my question stands, because the analysis “Wait a second” is using to make his point seems to illustrate a key difference between the print-publishing world I’ve dealt with and the Hollyweird landscape. In print, it’s often very difficult to drill down and pry sales figures or other hard numbers out of a publisher…but if you can manage it, the numbers you get are generally reliable.
By contrast, what the upstream poster (and the balance sheet itself) seem to suggest is that in Hollywood contracts, it’s much easier to get numbers — only the numbers you get may bear little resemblance to whatever the real-world income and expenses for the project may have been.
As an aside: I don’t think I believe that this particular balance sheet belonged to a screenwriter. As far as I recall, there’s only ever been one primary scripter attached to any given HP film — and only the lead writer could negotiate any sort of profit-participation deal, even a weak one. That being the case, if this were that writer’s balance sheet, he might as well have left his name in bold letters at the top…and I can’t see a Hollywood veteran being quite that suicidal.
The participation statement above is not a “balance sheet,” it is at best, an income statement. I know you’ll prob say I’m playing at symantics, but this confusion illustrates what is wrong with most of the posts on this site regarding $ and cents (sense) – with few exceptions you people don’t know your ass from your elbow.
But if everyone who is anyone knows that net is meaningless (because “everyone” has agreed contractually to allow “expenses” to eat up all revenues) what is the point of the exercise?
Is it simply to beat the IRS out of hundreds of millions in tax revenue each year (no income tax if no “income”)?
Thoughts from those in the industry?
(sound of crickets chirping)
You know this isn’t the same statement to the IRS, right? This is simply a statement between the participant and the studio and that I can bet another participant’s statement will tell a much different story.
There are so many profit centers for the studio within those numbers/categories as well.
Plus they get rebates from their advertising agency, labs, duplicators, and other vendors that were more than likely not credited back to the movie.
Most of what they do with their accounting is legal; however, there are many gray areas, let alone moral issues, and one could say a certain amount of fraud as well.
People on here claiming thievery have no concept of large corporations.
Those dollars on the ledger that are “spent” go largely to related companies all under the corporate umbrella. So, yes, HP has not turned a profit. It never will. The money went to a different division. It’s legal. It’s not thievery.
You’re just plain moronic to accept net points on a picture and expect big (or any) money.
Meanwhile, that money that is going into other corporate affiliates is keeping a hell of a lot of people employed at those affiliate companies.
So, you kick and scream and say the studio is stealing money! Yet, they are keeping people employed when they spend that money.
What you really want is for the money to go to the artists who took “net points” instead of negotiating a better deal for themselves. That is the failing of their agent/attorney.
Beyond that, it is business as usual. Get used to it.
Thank you for comments kind sir. Now please return to your job in the WB PR dept.
Less than year after the release of this film — and your presumed investment of theses profits in their own company — WB announced massive studio-wide layoffs:
http://www.hollywoodreporter.com/hr/content_display/film/news/e3i1472d5304a5c1a50d3dbecb27cb811b2
Sincerely,
A Plain Moron
I can somewhat rationalize the $200m P&A spend, but 34% distribution fee PLUS 18% interest on the entire production budget… looks like robbery.