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Kai Ryssdal: The Academy Awards, as you probably know, are Sunday. There are 10 movies up for Best Picture. And come Monday morning, there is going to be much crowing and advertising by the studio that produced the winner. But, y’know what? Oscars aren’t everything. When Hollywood gets right down to it, money is. And while there is a certain clarity to the Academy Awards, a win is, after all, a win. There is nothing so clear cut about the economics of making movies.
Edward Jay Epstein’s latest book about the movie industry is called “The Hollywood Economist,” on that topic. Mr. Epstein, welcome to the program.
Edward Jay Epstein: It’s a pleasure being here.
Ryssdal: I guess it’s not secret that Hollywood keeps its finances opaque. But I had no idea, til I read this book, how actively opaque they were. I mean, those guys take a lot of effort to make sure nobody understands.
Epstein: It’s not just them; journalists don’t make a great effort to understand. Every movie is an independent, off-the-books corporation that issues statements called “participant statements” every six months. Problem is that if you’re writing for a daily newspaper and you get a report on a movie that’s six months or a year old, it’s of no interest to your newspaper, or possibly, your readers.
Ryssdal: You say each movie is an “independent, off-the-books corporation.” That reminds me of nothing so much as it does Enron and the way they handled their finances.
Epstein: Well, it’s not that far. I mean, basically, it’s a fee-driven business, Hollywood. Everyone who works on a movie and gets a fee, whether it’s a director, lawyer, the insurance company — everyone gets paid. The people who don’t necessarily get paid are those people who are either equity investors — so it’s like Enron in that situation — or people who take contingency payments based on how well the movie does.
Ryssdal: Before you start talking about profit-and-loss in a movie, you have to talk about where the money comes from to make these movies. So run us through that: Where does a major studio or a filmmaker find the financing?
Epstein: Studios have no problems finding finances, if we’re talking about the major studios. With the studio movie, such as “Wall Street 2,” which is coming out, it goes into production in September and it comes out in the theaters April 23 — so it’s only six months that the money is at risk. If you are making an independent movie, it may be years before the movie gets released, so you have to borrow the money for a very long period of time. And no one wants to lend you this money, except at high rates of interest.
Ryssdal: Let me digress here for just a second. Did I read some place that you actually played Ben Bernanke in “Wall Street 2?”
Epstein: It’s a fictional movie, of course, and I was in as a Federal Reserve bank, let’s say, as the financial crisis was breaking.
Ryssdal: So, in essence, Ben Bernanke, right?
Epstein: You could say that.
Ryssdal: Yeah. You’ve mentioned risk a couple of times. I wonder if you could explain to us how movie studios ameliorate that risk. How do they lay it off, so they’re not really the ones hanging out there?
Epstein: Movie studios, one of their great arts is basically taking the risky movies and using other people’s money, and taking movies that are less risky and using their own money. The movies that are most risky, dramas and comedies — because with comedies, you don’t know if you’re going to get foreign rights and how they’re going to play abroad — they try to sell them to hedge funds or to equity investors or to production companies that want to get in the game.
Ryssdal: And they also — I mean, they pre-sell foreign distribution rights for tens of millions of dollars, they take out these huge insurance policies on the actors that are in the movies…
Epstein: When they’re really at the height of their game, as they were in Paramount a few years ago, they could finance the entire movie by pre-selling a few markets in Europe and Japan, by going to tax shelter deals and then they have a deal to sell it to paid television, and as I pointed out with a movie like “Lara Croft,” which had a budget of $90 million, they were able to do maybe $85 million from other people without putting a penny at risk.
Ryssdal: So no risk and all upside potential there.
Epstein: If they can.
Ryssdal: Edward Jay Epstein, his most recent book is called “The Hollywood Economist: The Hidden Financial Reality Behind the Movies.” Mr. Epstein, thanks a lot for your time.
Epstein: Thank you so much for having me.
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