How can a film make almost $1 billion at the box office but still “lose” money?
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How can a film make almost $1 billion at the box office but still “lose” money?
Despite raking in hundreds of millions of dollars at the box office, some movies have still managed to report losses.
“Harry Potter and the Order of the Phoenix,” released in 2007, pulled in more than $900 million worldwide, yet a leaked accounting statement revealed that it ended up “losing” $167 million. Other movies have similarly fared badly on paper despite high grosses, like 2018’s “Bohemian Rhapsody,” which also made over $900 million but lost $51 million.
The apparent mismatch between profits and losses has been an issue going back decades, with studios finding themselves in the crosshairs of legal disputes over questionable accounting practices.
Some Hollywood writers, directors and producers have net-profit deals with studios, where they are supposed to receive a certain percentage of the net profits, but can’t because these films are losing money on paper.
In the case of “Bohemian Rhapsody,” screenwriter Anthony McCarten filed a lawsuit against the film’s production company in 2021, alleging that he is owed 5% of the film’s net proceeds.
“The greatest work of science fiction”
Ed Solomon, a screenwriter behind films like “Men in Black”, “Charlie’s Angels” and the “Bill & Ted” franchise, has been vocal online about Hollywood’s questionable accounting tactics and has said that his “Men in Black” profit statement is “the greatest work of science fiction I’ve ever been involved with.” Back in May, he tweeted:
“In my case, films I wrote have generated over $2 billion. Studio accounting has us believe NOT ONE is in profit even though they’ve spawned multiple sequels. Thus I’ve gotten exactly $0 of my 5% of net points. The residuals I get are only cuz 50 yrs ago writers went on strike.”
Because of deals like these, Solomon used his situation to make a broader point about how writers in the industry are not as financially well-off as some assume.
Back in May, the Writers Guild of America went on strike over wages, short-staffed writers’ rooms and regulation surrounding the use of artificial intelligence, among other issues. By September, the WGA ended up reaching a deal on a new contract with the Alliance of Motion Pictures and Television Producers, which represents major film and TV studios. The deal includes higher minimum weekly pay and streaming bonuses for series and films that are viewed by a certain percentage of subscribers.
When studios end up paying themselves
The blog Techdirt, which examined “Harry Potter and the Order of the Phoenix’s” accounting statement, explained how Hollywood accounting works. For example, the statement shows that the movie had a distribution fee of about $212 million.
“That’s basically Warner Bros. paying itself to make sure the movie ‘loses money,’” Techdirt noted.
The movie also had advertising and publicity expenses of more than $131 million, which Techdirt said much of which is also Warner Bros. paying itself.
Or as NPR’s Planet Money explained, movies are set up as their own corporation. So, for example, in the case of the 2000 film “Gone in 60 Seconds,” you have the movie and you also have Gone in 60 Seconds Incorporated.
“The whole point of Gone in 60 Seconds the company is to lose money, basically by paying too much in fees to Disney,” NPR explained. (The movie was released by Touchstone Pictures, a now-defunct production label owned by Disney.)
What do “net profits” actually mean?
Experts say that there’s confusion surrounding what “net profits” from a movie actually are.
A normal break-even point means revenue minus the costs. So for example, the minute a product that costs $100 million to make earns $100 million, it has hit its breakeven point. Net profits, on the other hand, are based on a concept known as a “rolling breakeven.”
“As revenue from the movie goes up, the breakeven point goes up as well,” explained Victor Goldberg, a professor emeritus at Columbia Law School.
How does that work? So the net profits formula is calculated by taking revenue and subtracting production costs (including people’s compensation), distribution costs and a distribution fee, which is based on a percentage of the revenue, Goldberg said.
Sometimes people involved in the film receive a percentage of the movie’s gross. “If there is a gross participant and the movie succeeds, the gross participant’s share also increases the costs,” Goldberg said.
As a result, if you have gross participants, and the movie succeeds, it’ll be unlikely that the net profits will be positive, Goldberg said. You have to subtract the ever-growing amount you’re paying them from the gross.
So the talent whose compensation is based on gross end up benefiting and sharing the profits that the film pulled in. Major movie stars have the clout to negotiate those types of deals.
But there are some cases where there are participants whose compensation is based on net profits. While the gross participants can end up reaping the financial rewards of a film’s success, net-profit participants may end up left with nothing. That’s what happened in the case of 1989’s “Batman.”
Mark Weinstein, an associate professor emeritus of finance and business economics at the USC Marshall School of Business, said studios actually aren’t reporting losses. (Note: Weinstein said he has served as a consultant in litigation involving definitions of net profits in film and TV, and has been compensated by attorneys who worked for film studios.)
“[Net profits are] not profits according to generally accepted accounting principles,” he said. “It’s a bonus pool. I sign a contract with you, you’re a salesman or you’re a manager. And I say, ‘Listen, we’re going to pay you a salary.’ And you negotiate the salary, right. And you also negotiate that over and above that, there’s going to be a bonus if certain conditions are met.”
That contract will have a rider defining the bonus pool. You have your revenue, then you have to subtract certain expenses, and if there’s anything left over, you get, for example, 10% of that, he explained.
“There’s nothing wrong with a contract like that. It’s well defined,” he said. “The problem in Hollywood is that for an accidental reason, they use the phrase net profits instead of bonus pool.”
Some in the film industry would disagree about the fairness of such contracts. Lawsuits have been filed against studios with mixed results.
The executive producers of 1989’s “Batman,” Benjamin Melniker and Michael Uslan, along with the movie’s screenwriters, had a net-profit share of zero. Melniker and Uslan sued Warner Bros. and Polygram Pictures, the production companies behind the film.
A judge threw out their suit because they had allegedly not provided enough evidence. But sometimes, there are cases that win.
Back in the late 1980s, humor columnist Arthur Buchwald and his producing partner Alain Bernheim sued Paramount Pictures over the film “Coming to America,” alleging that the movie was based on a script treatment that Buchwald had written titled “King for a Day.”
A judge ended up ruling that the film was based on Buchwald’s idea and that Paramount owed Buchwald and Bernheim both a lump sum and a percentage of the film’s net profits. While Paramount argued they did not owe them anything because the film didn’t yield any net profits, the judge presiding over the case ruled that their contracts were unfair and that he would decide what they should be paid. Both ended up being collectively awarded more than $1 million.
Why is this system even in place and do net profits participants ever benefit? Goldberg, in a 1997 paper on net profits, wrote that when gross participants (who might be big movie stars) become involved in a picture, that increases the likelihood the project will actually go into production — even if the net-profit participant’s likelihood of receiving profits goes down. And if it goes into production, the net-profit participant will at least receive fixed compensation.
But at the time, Goldberg noted that the likelihood of payouts had declined in recent decades.
“In part, this is attributable to rising production and distribution costs. In addition, there has been an increased skewing of earnings, with the payments to top stars increasing relative to those going to the net participants,” he wrote.
And in many cases, actors, writers and directors simply haven’t had the power to negotiate for better deals with studios.
If the whole concept of net profits is confusing or seems nonsensical, just know you’re not alone. Eddie Murphy, who starred in “Coming to America,” once called them “monkey points.”
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