from the a-ham-sandwidch dept
We’ve written about the wonders of Hollywood accounting before. It’s a series of tricks pulled by Hollywood studios to make most of their movies look unprofitable, even when they’re making a ton of money. The details can be complex, but a simplified version is that every studio sets up a new « shell » company for each movie — and that company is specifically designed to lose money. The studio gives that company the production budget (the number you usually see) and then also agrees to pay for marketing and related expenses above and beyond that. Both of those numbers represent (mostly) actual cash outlays from the studio and are reasonable to count as expenses. Then comes the sneaky part: on top of all that, the studios charge the « movie company » a series of fees for other questionable things. Many of these fees involve no real direct expense for the studio, but basically pile a huge expense onto the income statement and ensure that the studio keeps getting all of the movie income — rather than having to share the profits with key participants — long after the movie would be considered profitable under regular accounting rules.

Here’s a hypothetical example of how this could work in practice, using round numbers just to make the point (these aren’t directly accurate numbers, but the concept is). A studio funds A Movie with a production budget of $100 million. It sets up AMovieCo Inc. and gives it the production budget money. The studio then spends another $50 million on marketing and puts that down as an expense as well — though, with some of the big studios, some of this money involves paying itself for advertising on its own properties. Still, even if we assume that’s real money spent, you might think that AMovieCo now needs to make back $150 million to be profitable. But… the studio (which, again, controls AMovieCo completely) then tacks onto all of that, say, a $250 million « distribution fee. » Now, while there may be some money spent on actually distributing the film, the number is almost completely bogus, and much higher than the actual expense for the studio. Very little actual money needs to change hands here — it’s just a fee on the books (a fee they are effectively charging to themselves). And it’s not just « distribution » but a variety of additional charges. On top of that, the studio may then charge « interest » on that money, even though it’s really just lending money to itself. What it all means is that rather than becoming profitable at ~$150 million (the actual money spent), AMovieCo now needs to earn over $400 million before anyone with a cut of the profits sees an additional dime from the movie, thanks to completely imaginary accounting entries on the books.