How Do Hollywood Studios Manage to Lose Insane Amounts of Money on Movies That Make Billions?

[00:00:00]Here's a fun fact for you to mull over.

[00:00:01]Despite having a clause in his contract that entitled him to a share of the total net profits of Return of the Jedi, David Prrowse didn't get so much as a single thin scent from Lucasfilm from this. Because on paper, Return of the Jedi then until today has been a massive financial failure. So, how is this possible, you ask? Well, it's all thanks to a wonderful concept known colloquially as Hollywood accounting, or more accurately, how to lose friends and screw people. Notable examples of this bastion of pencil pusher ingenuity include The Lord of the Rings trilogy, which New Line Cinema asserts was a horrendous loss for the studio despite it grossing some $3 billion worldwide in theaters off a combined budget of just $281 million, let alone all the money made after in DVD and Blu-ray sales, streaming rides, games, and other merchandise. Moving on to Harry Potter and the Order of the Phoenix. This one apparently lost Warner Brothers $167 million while simultaneously being one of the most successful films the studio has ever released, grossing just under a billion. In yet another case, the 2002 surprise blockbuster, My Big Fat Greek Wedding, managed to bring in $370 million, which is about $536 million today, off a production budget of a mere $5 million, yet somehow managed to lose the studio $20 million. So, yes, they apparently lost four times the production budget itself. This means that if the studio is to be believed, they'd have been better off throwing the film in the trash after spending the $5 million for filming and producing the film rather than earned their cut of that $370 million in ticket sales and all the revenue streams that came after.

[00:01:47]Perhaps best showing how it's impossible to make money in Hollywood is the case of Forest Gump, one of the most critically acclaimed and successful movies ever made, which cost $55 million to make. Despite this relatively low figure, unfortunately for executives at Paramount Studios, it never turned a profit after grossing nearly $700 million at the box office. Our condolences to the executives and their families after no doubt all of the executives were fired for backing such a financially disastrous project for the studio. These are by no means cherrypicked examples with some estimates suggesting that upwards of 80% of all major studio releases lose money according to the studios which somehow magically manage to stay in business anyway. So well what gives? Well certainly not the studios. But how and why are they doing this? As to the former question of how do they do it?

[00:02:40]Well, they have countless tricks up their sleeves. One of the biggest ones is simply making separate companies for various projects and aspects of promotion and production. This is important because the studio or sub company can then charge the other company for its own services essentially paying itself to produce and distribute the movie. In this way, the studio or vice versa can charge pretty much whatever it feels like for any service.

[00:03:04]As an example, the distribution of a film may be handled by another company the studio also owns. This distributor can then charge the parent company really anything they want to distribute the film. The studio will naturally accept this fee no matter how obscene as they're just paying themselves. But now they can show that they had to pay say $100 million for distribution even if the distribution only cost a fraction of that. The distribution company owned by the studio just made a hall while the film officially cost a lot more to make for the studio itself. A similar thing is often used in marketing. Again, using a separate arm to handle that, who can then charge the studio who owns them anything they please, which may or may not reflect the actual cost of marketing a given film. Another trick, if a movie was particularly profitable, is to charge fees to cover the pay and bonuses of various studio employees, whether they actually directly had anything to do with the project or not. Similarly, many of the other internal operational costs of a studio can be shifted around different projects easily on paper.

[00:04:01]Using this fact, part of the losses from an actual box office bomb can be moved to a film that they made a ton of money on, thus making the box office bomb help reduce profits from the successful film.

[00:04:12]Again, all in order to ensure every project possible loses money on paper.

[00:04:18]Additionally, while the movie is being made, accountants will scour receipts to write off everything and anything they can and at the highest price possible as an expense to further inflate the cost of production. As one industry insider noted in an interview with the New York Times, everything, just everything, is deducted. That's the system. You deduct lunches and dinners, xeroxing, parking, everything. The studio sent me gifts.

[00:04:42]They were deducted, too. So, well, why do they do this? One of the biggest benefits of all these shenanigans is the studios not having to pay royalties to the various entities they'd otherwise be entitled to pay, as well as, in some cases, saving a lot of money on taxes, at least in the immediate. On this latter one, this might be done by shifting the ultimate profits into funding things that increases the overall value of the parent company itself. 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 project 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 and all that. These amazing number tricks are of course what is going on with the affforementioned David Prrowse who once recalled in an interview that he periodically received letters from Lucasfilm informing him that one of the most successful movies of all time which had a production budget of only about $32 million had still after almost four decades and literal billions of dollars later had yet to turn a profit and thus they don't owe him anything. Naturally, the frankly astounding capability of studio accountants to turn even the biggest box office smash into a failure on paper has led to a running joke in the industry that the most creative people in Hollywood are the guys who do the books.

[00:06:04]A thing to note before we continue is that while Hollywood is by no means unique in its use of such accounting shenanigans to save money in various ways. What is somewhat unique is that certain entertainment industries like Hollywood studios and major sports team owners, as we'll get into in one example in the bonus facts in a bit, they use these methods to quite publicly emphasize how much money they lose.

[00:06:25]Something not really observed in most any other industry where widely broadcasting your losses would normally see stocks plunging. Naturally, because most studios can be fairly confident that their accountants will figure out a way to make sure most films they release will lose money on paper, they can use the sweet lure of a share of a film's net profits to hoodwink unsuspecting creative types, tricking actors, directors, writers, and producers into signing onto a project for less money than they ordinarily would by giving them a percentage of the net profit, knowing full well that they'll never have to pay anything out. For example, consider the case of Winston Groom, who was promised 3% of the net profits of a film based on a little book that he wrote called Forest Gump. As noted, Paramount would later argue that the film, which cleared almost 13 times its production budget, a total of $700 million at the box office, or about $1.2 billion today, had actually lost $62 million. All in an attempt to weasel out of paying Groom, among others. After the story blew up, Paramount settled the matter out of court and offered Groom a sevenf figureure contract for rights to the sequel to Forest Gum. Soon after this, Groom mysteriously stopped accusing Paramount of trying to rip him off and explains that the whole thing had been blown out of proportion. On a similar note, when looking at the affforementioned Lord of the Rings trilogy, New Line Cinema seems to have managed to piss off countless individuals and entities, including most notably Peter Jackson and the Tolkien estate itself by claiming one of the most successful trilogies in history was a massive financial failure and thus allegedly not paying what Jackson and the Tolken estate were due in the process. Similarly, later 15 of the actors on the film would go on to sue Uline, noting that they had been supposed to get 5% of the merchandise sales, which mysteriously allegedly lost money despite bringing in excess of hund00 million at the time for the studio. A similar example is that of the late Stan Lee, who was promised 10% of the profits made on the 2002 live-action Spider-Man film and walked away with nothing after the movie, which grossed $800 million at the box office, didn't turn a profit on paper, despite having a production cost of only $139 million.

[00:08:28]When Lee raised the issue in court, the matter was quietly and quickly settled out of court. Although the terms of the deal reached with Lee were never disclosed and various figures have been thrown out, it would appear at the least that Marvel Studios decided to start paying the comic legend a yearly salary of a million dollars for doing basically nothing, as well as gave him an honorary executive producer credit on every movie they produced while he was alive. It's presumed that Lee waved 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 most popular people in the industry. All that said, one instance where a studio was actually given a bit of a slap on the wrist in recent years for these rather shady bookkeeping practices and a case that some within the industry hope see studios playing a little more fairly in the future is when an arbitrator in 2019 ordered 21st Century Fox to pay $179 million to various individuals involved in the show Bones. Among other things, the arbitrator, Peter Likman, criticized the deal Fox made when signing over the streaming rights to the show to Hulu, an entity which Fox owned a large stake in.

[00:09:46]Now, interestingly enough, mostly owned by Disney. So, if you're paying for Hulu and Disney Plus, you're kind of paying Disney twice for streaming. So, what was wrong with this deal? Fox not only gave the streaming rights for the show away practically for free by industry standards, but says Lichman, perhaps the most shocking piece of evidence related to the Hulu issues, Fox actually signed both sides of this agreement. Mr. Dan Faucet signs the Fox content license agreement on behalf of FEG, Fox Entertainment Group, and Hulu.

[00:10:14]Naturally, in this way, Hulu would make a massive profit on the show, while Fox itself would only show mild income from the streaming rights. In response to all of this, the Fox lawyers were bold enough to note that Bones, despite being one of the most successful shows in the network's history, was only a, to quote them, middling show with middling ratings. Thus, Fox execs didn't think it was worth much to Hulu. The arbitrator didn't agree, noting similarly rated shows had streaming rights, sometimes selling for the hundreds of millions of dollars. And thus, after all his tallying and tacking on a bit extra just for Fox being allegedly so unscrupulous, he ultimately doled out a $179 million ruling against Fox. So, moving on to how this whole Hollywood accounting thing got started. It's largely thought this was in response to studios getting wise to actors taking advantage of gross revenue sharing schemes which started on mass 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. being rather dense.

[00:11:20]Allegedly, studio execs wouldn't actively work to change this precedent until the 1960s and 1970s when such deals were all the rage. Things began to change thanks to actor Warren Batty, who somehow managed to argue for an astounding 40% of the gross of Bonnie and Clyde in return for reducing his usual fee. The movie went on to gross adjusted for inflation about half a billion dollars, which was about 30 times its original production budget.

[00:11:45]Naturally, losing 40% of that debate stung a bit and finally made studios start to realize that with an abundance of talented actors who would sell their own souls for a bit of fame, they probably didn't need to give out gross deals like that, except in rare cases.

[00:11:59]Doubling down, they seem to have realized that they could still reduce pay anyway by instead giving out net profit deals and then cook the book so they didn't actually have to pay anything extra to anyone. In the end, Hollywood accounting is an often mocked and derided element of film production that many in the industry would happily see die and be replaced by a fairer, more transparent system. However, this isn't likely to happen unless someone can convince major studios to loosen up the kung fu death grip they have on the throat of the industry. We can only hope that one day someone makes a movie about the whole thing that somehow fails to turn a profit despite grossing a billion dollars. But while we wait on that, as Sylvester Stallone sums up when lamenting the rather poulry amount he was given compared to how much the Rocky franchise and merchandise has made, the studio is the power. The agency relies upon them and the attorneys are the go-betweens. When I finally confronted them just before Rocky 4 in 1985, I said, "Does it bother you guys that I've written every word? I've choreographed it. I've been loyal to you. I've promoted it, directed it, and I don't have 1% that I could leave for my children." And the quote was, "You got paid." And that was the end of the conversation. I love the system, don't get me wrong. My kids and their kids, they're taken care of because of the system. But there are dark little segways and people that have put it to you. They say the definition of Hollywood is someone who stabs you in the chest. They don't even hide it. And now for a bonus fact. As alluded to, Hollywood accounting to try to show losses when you actually made a huge profit isn't just limited to Hollywood.

[00:13:29]as has recently been seen with the ongoing rather messy battle between the Major League Baseball Players Association and MLB franchise owners. In this case, multiple Major League Baseball owners have been very publicly crying poor by noting they don't profit much or at all each year despite by just about any reasonable ballpark figure you want to look at, showing the league should be profiting billions annually.

[00:13:50]They are of course seeming to employ many of the same tricks as Hollywood to ensure that on paper they don't technically make a profit. But the value of their franchises and the league of course continually increases by doing things like taking profits each year and investing in land around stadiums, purchasing larger stakes in the very sports networks that show their games again using the trick of then essentially having a second company that pays themselves etc. Thereby turning many billions each year of profit into losses for the clubs on paper.

[00:14:18]Naturally, the players association, beyond rejecting overtures of revenue sharing this season, which of course would very likely just see ownership cooking the books in their favor. Allah Hollywood isn't exactly buying the we lose money argument in the recent negotiations, especially as the ownership is on the whole refusing to open their books to show that's happening at all. 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 billionaires buying and running these teams have no idea how to manage money, paying billions for franchises that just hemorrhage losses every year.