Why can hit movies still “lose” money, according to studios?

Despite earning hundreds of millions of dollars at the box office, several films still report losses.

“Harry Potter and the Order of the Phoenix,” released in 2007, grossed more than $900 million at the worldwide box office, but a leaked financial report showed that it ended up being a “loss” of $167 million. It was revealed that the . Other films similarly performed poorly on paper despite high box office numbers, like 2018’s “Bohemian Rhapsody,” which also earned more than $900 million but only earned $51 million. suffered a loss.

The apparent discrepancy between profits and losses has been an issue for decades, and studios have been the target of legal disputes over questionable accounting practices.

Some Hollywood screenwriters, directors, and producers have net profit contracts with studios, in which they are supposed to receive a percentage of the net profits, but if these films lose money on paper, I can’t accept it because it is.

In the case of “Bohemian Rhapsody,” screenwriter Anthony McCarten filed a lawsuit against the film production company in 2021, claiming he was owed 5% of the film’s net revenue.

“A masterpiece of science fiction”

Ed Solomon, a screenwriter for films such as Men in Black, Charlie’s Angels and the Bill & Ted series, has been speaking out online about Hollywood’s questionable accounting tactics, and his He expressed his thoughts as follows. “Men in Black” Income Statement ” is “the best science fiction work I have ever worked on.” Back in May, He tweeted:

“In my case, the movies I wrote grossed over $2 billion. If you look at the studio accounting, even though they’ve produced multiple sequels, none of them are making a profit.” So I earned exactly $0 of the 5% net points. The only residual I got was because the writers went on strike 50 years ago.”

Because of these contracts, Solomon used his situation to make a broader point about how writers in this industry are not as financially well-off as some assume. .

Back in May, the Writers Guild of America went on strike over pay, understaffing in writers’ rooms, and regulations surrounding the use of artificial intelligence. By September, the WGA had agreed to a new agreement with the Motion Picture and Television Producers Alliance, which represents major film and television studios. The deal includes an increase in the minimum weekly wage and streaming bonuses for series and movies watched by a certain percentage of subscribers.

If the studio ultimately pays its own expenses

The blog Techdirt, which examined the accounting reports for Harry Potter and the Order of the Phoenix, explained how Hollywood accounting works. For example, the statement indicates that the film’s distribution salary was approximately $212 million.

“That basically means Warner Bros. is paying themselves to make sure the movie is ‘in the red,'” TechDirt noted.

The film also cost over $131 million in advertising, much of which was paid for by Warner Bros. itself, according to TechDirt.

Or, as NPR’s Planet Money explained, the movie will be set up as its own company. For example, for the 2000 movie Gone in 60 Seconds, there is a movie and there is also Gone in 60 Seconds Incorporated.

“The whole point of ‘Gone in 60 Seconds’ is basically that by paying Disney so much money, the company loses money,” NPR explained. (The film was released by Touchstone Pictures, a now-defunct production label owned by Disney.)

What does “net profit” actually mean?

Experts say there is confusion over what a movie’s “net profit” actually is.

Break-even point normally means revenue minus costs. For example, a product that costs him $100 million to manufacture will break even as soon as he earns $100 million. Net income, on the other hand, is based on a concept known as “rolling break-even.”

“As a movie makes more money, its break-even point goes up,” explains Victor Goldberg, a professor emeritus at Columbia Law School.

How does it work? Therefore, the formula for calculating net profit is calculated by subtracting from the revenue production costs (including personnel compensation), distribution costs, and distribution fees based on a percentage of the revenue. , said Goldberg.

In some cases, people who worked on the film may receive a portion of the film’s compensation. gross. “If you have total participation and the movie is successful, the total participation increases the cost,” Goldberg says.

As a result, Goldberg said, even with gross attendance and the film being successful, it’s unlikely the net profit will be positive. You have to subtract the ever-increasing amount you are paying them from the total amount.

In other words, the talent that is the basis of compensation is gross Major movie stars have the clout to negotiate these types of contracts.

However, there may be participants who receive less compensation. Net income. Gross participants may end up reaping the financial rewards of a film’s success, while net profit participants may end up with nothing. Such was the case with 1989’s Batman.

Mark Weinstein, associate professor emeritus of finance and business economics at the University of California’s Marshall School of Business, said the studio didn’t actually report any losses. (Note: Mr. Weinstein said he was paid by an attorney who worked for a movie studio to serve as a consultant on a lawsuit involving the definition of net income in film and television.)

“[Net profits are] “It’s not profit according to generally accepted accounting principles,” he said. “It’s a bonus pool. I’m going to sign you a contract. You’re a salesperson or a manager. And I said, ‘Listen, we’re going to pay you.’ And the salary is also negotiated. Additionally, negotiate bonuses if certain conditions are met. ”

That contract includes a rider that defines a bonus pool. He explained that if you have income, you have to deduct certain expenses and if there is any left over, you will receive his 10% of it, for example.

“There is nothing wrong with such a contract. It is clearly defined,” he said. “The problem with Hollywood is that for some random reason they use the term net income instead of bonus pool.”

Some in the film industry may object to the fairness of such a contract. Lawsuits have been filed against the studio, with mixed results.

Benjamin Melniker and Michael Uslan, the executive producers of 1989’s Batman, and the film’s screenwriters had a zero net profit share. Melniker and Uslan sued the film’s producers, Warner Bros. and PolyGram Pictures.

The judge dismissed the case on the basis that not enough evidence had been presented. However, there are cases where you can win.

In the late 1980s, humor columnist Arthur Buchwald and his producing partner Alan Bernheim sued Paramount Pictures over the film Coming to America, which Buchwald wrote as King. It was claimed to be based on a screenplay titled “For a Day”.

The judge ultimately ruled that the film was based on Buchwald’s ideas and that Paramount was obligated to pay Buchwald and Bernheim both a share of the film’s net profits and a lump sum. did. Paramount argued that they owed nothing because the film did not bring in any net profits, but the judge who presided over the case ruled that their contract was unfair and that they had no obligation to pay them anything. The court ruled that Paramount would decide. In the end, they both won more than $1 million in prize money.

Why is this system in place and why do net-profit participants benefit? In his 1997 paper on net-profits, Mr. Goldberg writes that net participants (who may be big movie stars) They write that being involved in a film increases the likelihood that the project will actually be produced, even if there is a higher chance of a net profit participant. The profit you receive will decrease. And once it goes into production, the net profit participants will receive at least a fixed remuneration.

But Goldberg noted at the time that the likelihood of a payout had declined in recent decades.

“This is partly due to higher production and distribution costs. Additionally, there has been an increase in revenue bias, with payments to top stars increasing relative to payments to net participants. ” he wrote.

And actors, writers, and directors often don’t have the power to negotiate better contracts with studios.

If the whole concept of net income seems confusing or nonsensical, know that you’re not alone. Eddie Murphy, who starred in “Coming to America,” once called them “monkey points.”