'Hollywood Accounting' Losing In The Courts

from the math-is-hard dept

If you follow the entertainment business at all, you’re probably well aware of “Hollywood accounting,” whereby very, very, very few entertainment products are technically “profitable,” even as they earn studios millions of dollars. A couple months ago, the Planet Money folks did a great episode explaining how this works in very simple terms. The really, really, really simplified version is that Hollywood sets up a separate corporation for each movie with the intent that this corporation will take on losses. The studio then charges the “film corporation” a huge fee (which creates a large part of the “expense” that leads to the loss). The end result is that the studio still rakes in the cash, but for accounting purposes the film is a money “loser” — which matters quite a bit for anyone who is supposed to get a cut of any profits.

For example, a bunch of you sent in the example of how Harry Potter and the Order of the Phoenix, under “Hollywood accounting,” ended up with a $167 million “loss,” despite taking in $938 million in revenue. This isn’t new or surprising, but it’s getting attention because the income statement for the movie was leaked online, showing just how Warner Bros. pulled off the accounting trick:

In that statement, you’ll notice the “distribution fee” of $212 million dollars. That’s basically Warner Bros. paying itself to make sure the movie “loses money.” There are some other fun tidbits in there as well. The $130 million in “advertising and publicity”? Again, much of that is actually Warner Bros. paying itself (or paying its own “properties”). $57 million in “interest”? Also to itself for “financing” the film. Even if we assume that only half of the “advertising and publicity” money is Warner Bros. paying itself, we’re still talking about $350 million that Warner Bros. shifts around, which gets taken out of the “bottom line” in the movie accounting.

Now, that’s all fascinating from a general business perspective, but now it appears that Hollywood Accounting is coming under attack in the courtroom… and losing. Not surprisingly, your average juror is having trouble coming to grips with the idea that a movie or television show can bring in hundreds of millions and still “lose” money. This week, the big case involved a TV show, rather than a movie, with the famed gameshow Who Wants To Be A Millionaire suddenly becoming “Who Wants To Hide Millions In Profits.” A jury found the whole “Hollywood Accounting” discussion preposterous and awarded Celador $270 million in damages from Disney, after the jury believed that Disney used these kinds of tricks to cook the books and avoid having to pay Celador over the gameshow, as per their agreement.

On the same day, actor Don Johnson won a similar lawsuit in a battle over profits from the TV show Nash Bridges, and a jury awarded him $23 million from the show’s producer. Once again, the jury was not at all impressed by Hollywood Accounting.

With these lawsuits exposing Hollywood’s sneakier accounting tricks, and finding them not very convincing, a number of Hollywood studios may face a glut of upcoming lawsuits over similar deals on properties that “lost” money while making millions. It’s why many of the studios are pretty worried about the rulings. Of course, these recent rulings will be appealed, and a jury ruling might not really mean much in the long run. Still, for now, it’s a fun glimpse into yet another way that Hollywood lies with numbers to avoid paying people what they owe (while at the same time sanctimoniously insisting in the press and to politicians that they’re all about getting content creators paid what they’re due).

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Companies: disney, warner bros.

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Comments on “'Hollywood Accounting' Losing In The Courts”

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130 Comments
Anonymous Coward says:

Re: Huh

Creative accounting has been an open-secret for decades in the movie industry (and likely many other industries as well). In many ways it mirrors federal monetary policy, which scares me even more.

I was saddened to note that there are people who apparently still think a % of net profits has the potential for significant financial rewards.

Hephaestus (profile) says:

Re: Re: SSDD

Not it is totally unacceptable. If this creative accounting was straightened out it would actually end the TV and Movie Studios. The probability of that happening are slim to non.

The TV and movie studios will be destroyed by competition from small efficient groups making shows and movies, competition for advertising dollars from to many stations, competition from other forms of entertainment, a decrease in what they can charge for advertising due to the internet, and infringement.

Basically you can’t change how they do business (SSDD), you can however help the disruptive technologies along, prevent them from getting laws passed, donate money to web based media projects, and plan for every option they have remaining to them.

Don’t worry about what you can’t change, push the things you can to affect change.

s.muso says:

Re: SSDD

well at least TV Studios, Movie Studios, Record Labels, and Collection Societies all pay artist,actors, authors,musicans, producers, directors something, and some of them a lot.

isp’s and digital startups, dont invest in any new products, they steal the book, music or film or game, make money from it and don’t pay anything back to the artist, authors , directors, or musicians.

same stuff different day

Anonymous Coward says:

The real big one is “Negative cost and/or advance”. What’s that about? If that’s really an “advance” as in, paying people before the movie is made, then I’ll say that they’re only cheating on the % of profit (which is still bad). I love how the WGA ends up after the accounting, earning 0.

Anonymous Coward says:

Re: Re: Re:

Makes sense. Is that a monthly rate (like, distributed over n months). If it isn’t, then it doesn’t make sense any more. I mean, Wikipedia states that the movie cost between 150-200M to produce, and the cumulative to date 2 years later is 315M. That’s why I don’t understand this number.

Jonadab (user link) says:

Re: Silly question...

Tax evasion is another category of clever accounting entirely. This trick presumably won’t do much for that, because both corporations (the studio as well as the dummy corp set up for each film) have to file. However, I’m pretty sure there are other ways to skin that cat. You can’t generally get rid of your tax liability entirely, but a clever accountant can definitely save you a good chunk.

Anonymous Coward says:

Re: Re: Re: Re:

So if the studio is not the “production company”, what is it they do exactly? Advertising? I love the ingenuity of your comment, but I think that if all these “production companies” end up losing money, there’s something very weird on how they conduct businesses. Nevermind the fact that the people in this “companies” already have works in the lending company.

But, yes, I but the “cost of doing business” argument. I don’t see why that is not a negative return, though, as it will be wiped out once the return is positive enough. The way it’s represented, it looks like a passive (and also, one that grows monthly).

Shadow Six says:

Re: Re: Re: Re:

Wait, you said “cost of doing business” that’s not exactly correct. It’s compensation for risk.. that what interest is… so if these companies are all wholly owned subsidiaries of the same conglomerate, the risk is mooted and the “interest” is simply shuffling… which would be illegal under several State’s Tax Statutes.

Anonymous Coward says:

Re: Re:

… except, WB set up this shell company themselves, and then charged it interest for lending it money! There’s only one reason for this company to exist and that is to separate the profits from the income.

Also, this doesn’t just affect net profits, it affects gross too: your %-of-gross agreement is with company A (owned by company D). Company A sells (eg) merchandising rights to company C (also opened by company D) for *way* below the going rate. Company C (and hence company D) makes a mint that *you* never get to see.

The only way to solve this is for directors (to start with) insist that they sign agreements with the holding company only, and that each agreement with a subsequent company include a clause to report related gross earnings which then become part of the amount used to calculate payment.

Pickle Monger (profile) says:

Costs

Here’s a good one: a movie with a $150M budget had $131M in “Advertising and publicity” costs. What are the chances that all those screaming tweens, et al wouldn’t have gone to see the movie or known about the movie without all that advertising? The use of the “Advertising and publicity” costs to hide money is the easiest way. On our side of the 49th parallel this resulted in the biggest political scandal in 30 or so years a while back. The Liberal Party of Canada is yet to recover from their little “sponsorship” adventure. I have no way to know if they really did that but spending $131M for a $150M sequel movie that is part of one of the most famous franchises in the world is irresponsible at best. I’d get fired if I did stuff like that at work.

Scote (profile) says:

Interesting how the MPAA/movie studios take a hardline on individuals engaged in relatively minimal private copyright infringement but have no problem with conspiring to steal money from people they are contractually owed to pay net profits to. I can’t wait for the move trailers warning people of how many filmakers will go hungry because of net profit theft–oh, wait, they’ll never make such warnings. Sigh…

Anonymous Coward says:

Re: Re: Re:

so what you are saying is that they didnt violate gaap, just that you dont happen to like what they are doing. its nice of you to try to tie together things that really are not the same, but hey.

so, where do you stand mike? did they or did they not violate gaap? if yes, why not say it, and if no, why the long post about nothing?

Mike Masnick (profile) says:

Re: Re: Re: Re:

so what you are saying is that they didnt violate gaap, just that you dont happen to like what they are doing. its nice of you to try to tie together things that really are not the same, but hey.

so, where do you stand mike? did they or did they not violate gaap? if yes, why not say it, and if no, why the long post about nothing?

Do you even know what GAAP is? This has nothing to do with GAAP. These aren’t filings for public companies where GAAP is required.

This post is about specific contractual relationships where people have “participation rights” and are denied due to funny accounting. Whether or not the accounting is GAAP compliant is meaningless. GAAP is something totally different.

Anonymous Coward says:

Re: Re: Re:2 Re:

I think you might want to re-read your own comment. You state it has nothing to do with GAAP but it’s about “funny accounting.” Considering GAAP is Generally Accepted Accounting Procedures I think it’s a perfectly legitimate question as to whether someone thinks this violates that code of conduct.

btrussell (profile) says:

Re: Re: Re:3 Re:

“Principle of sincerity: According to this principle, the accounting unit should reflect in good faith the reality of the company’s financial status.”

“Principle of non-compensation: One should show the full details of the financial information and not seek to compensate a debt with an asset, a revenue with an expense, etc.”

“Principle of Full Disclosure/Materiality: All information and values pertaining to the financial position of a business must be disclosed in the records.”

Mike Masnick (profile) says:

Re: Re: Re:3 Re:

I think you might want to re-read your own comment. You state it has nothing to do with GAAP but it’s about “funny accounting.” Considering GAAP is Generally Accepted Accounting Procedures I think it’s a perfectly legitimate question as to whether someone thinks this violates that code of conduct.

If you don’t think that you can do funny accounting within FASB’s GAAP rules, you’re not paying attention. Again, this has nothing to do with GAAP, which is for an entirely different purpose.

OG says:

Re: Re: Re:

Mike, I think what he’s saying is that while “we the people” may not like “creative accounting” (which is done in EVERY industry, not just the “entertainment” industry), it is perfectly legal. The problem here is not that the industry is doing this type of accounting it is that the law permits this type of accounting.

After Enron, everyone wanted to see transparency. Well, we didn’t get much, but from what we did get we can all learn that it’s possible to make billions while showing losses. It’s brilliant (if you’re the one making the dough).

As for the investors, actors, etc who are getting screwed over, all I can say is that they should be hiring better lawyers and more aggressively negotiating their contracts.

Every single one of these jury decisions will be overturned on appeal.

Anonymous Coward says:

Re: Re:

Without having access to the corporation’s complete books, it’s impossible to say which of the numbers are cooked and by how much. But there’s no way it actually costs a billion dollars to make, distribute and market a Harry Potter movie, for two simple reasons: One, they wouldn’t keep making them if that were the case, and two, they wouldn’t make ANY movies if a film with a $150 million production budget can gross six times that and still show a nine-figure loss!

Mike (user link) says:

Where did $938 million come from?

I don’t see where this number was derived from, on this balance sheet. Was that number published later? The only clear amount of gross that could conceivably be construed from this sheet is the Total Defined Gross which adds to $652.6 million dollars for the period accounted for on this sheet. It is possible that an additional $285.4 million in gross revenue could have been generated since this sheet was published, but if that revenue generated less than $118.1 million in expenses, then the film has since then made a profit. If the additional expenses were more than $118.1 million, the film is still at a loss.

Either way, this article is disingenuous by not fully conveying the dates that the various numbers were collected.

Bill says:

What is so surprising?

Everybody does it. Even the federal government.

Just ask Johnson & Johnson what happened when it was caught marketing drugs for off-label, untested purposes (an offense that permanently bars a company from ever selling anything to Medicare)

I’ll give you a hint:

The DoJ helped them set up a “subsidiary” that was “hired” to market the product (all after they got caught remember). So the “subsidiary” was convicted, barred, bankrupt and closed.

Its good to be a rich white guy.

Anonymous Coward says:

Re: What is so surprising?

“It’s good to be a rich white guy.”

So basically what you’re saying – by assuming that rich white guys are the ones coming up with these clever schemes – is that non-whites aren’t clever enough to pull it off? Sounds like a pretty racist comment to me. Or would you like to rethink that?

John (profile) says:

The tricks do have a purpose

I think the level of trickery and outright, sometimes even recorded, attempt to cook books in order to avoid paying partners is a problem.

Nevertheless, this accounting madness does have a method — even if that method is taken too far and abused.

For every movie that makes money, there are multiple that lose money. Having a separate corporation or LLC as a production vehicle allows studios to take on risks that otherwise couldn’t be done.

These vehicles insulate major studios and their partners from the risk of losses. Many movies simply cannot be made without this insulation.

Also, studios are not necessarily the primary distributors. There is a lot that goes into movie distribution, especially on an international level, and studios don’t completely control either vertical or horizontal distribution efforts.

Finally, financing. Studios are often the primary financing partners in a film such as Harry Potter. They should, therefore, be able to recover costs as quickly or more quickly than other partners. This is the way of financing.

The problem comes when someone negotiates a deal for portions of the profit and does not understand the crazy Hollywood account schemes.

Nothing says that you, as a producing partner or someone else with a stake in a movie profit, cannot negotiate to have proceed derived from a percentage of the revenue, or from a proportional first slice of profit, or from some other source.

Another problem occurs, though, when a studio or some other entity elbows out other partners with a stake in the profit by purposely inflating costs. This includes advertising and distribution costs. Sometimes the reported costs have no bearing on the actual costs.

So, in essence, Hollywood accounting trickery is a bit ridiculous, but it does serve a purpose.

More importantly, if you find yourself lucky (or unlucky) enough to be negotiated with a studio on the profits of a film, it is important to know about the terminology and the ways these tricks work. Otherwise, you may think you’re getting a percentage of revenue or profits before cost adjustments when, in reality, you’re getting only after-cost profits. Which means you got hosed. And, if you see anything, it won’t be until the movie’s been out on DVD for 5-7 years.

Michael says:

Re: The tricks do have a purpose

“These vehicles insulate major studios and their partners from the risk of losses. Many movies simply cannot be made without this insulation.”

That insulation is an illusion. The debt they avoid with your ‘insulation’ doesn’t vanish. It gets eaten by the dozens of companies and individuals to whom it is owed. Causing many real people to go bankrupt because Hollywood doesn’t want to pay it bills.

I’ll start listening to Hollywood sob stories about their great risks on movies when they aren’t turning disgusting profits.

John (profile) says:

Re: Re: The tricks do have a purpose

Actually, the debts owed to companies and most individuals are paid from gross profits rather than net. Net profits are often reserved, on a percentage basis, for bit players. For example, the cousin of the studio head who got an associate producer credit but didn’t do anything? Net profit share.

An example of the kind of people who do get screwed are actors, writers, and other talent who didn’t understand the system and opted to get paid out of net profits. That’s definitely unfortunate.

And insulation isn’t an illusion for the hundreds of films each year that actually do lose money, and not in the illusory sense highlighted above.

So, in short, the people getting screwed are the people like the guy in Who Wants To Be A Millionaire or Don Johnson with Nash Bridges. It’s wrong that their ignorance of the system was abused and take advantage of by Disney and the TV producer for Nash Bridges.

Even so, the fundamental, underlying structure of these productions serves a purpose. Just because that system is also abused by production companies doesn’t mean the confusing accounting system is worthless.

The important thing is that the legal system in these two cases is working. Production companies taking advantage of less sophisticated parties and, in some cases, outright lying and misleading those parties were found liable for their actions.

My point, however, is that there is a method to the madness. Feel free to dislike the method, or its results, but the method exists nonetheless.

Oh, and for those who think independent and low budget films don’t do this — you’re wrong. Small-budget films often have even more creative, maddening, and abusive structures that tend to harm interested parties.

The reality is that making a movie is often a money losing venture. Doesn’t mean its not worth it on some level, it’s just not typically worth it on the monetary level.

Actor says:

Re: Re: Re: The tricks do have a purpose

For big budget movies, stars and directors get their fees up front. I am sure the “Potter” regulars got fees for millions because they don’t have fools for agents. Most behind the camera people belong to unions that have a defined pay and benefits scale. I assume the people that are really cheated are the assistant executive producer.

Tuomas says:

Re: The tricks do have a purpose

“For every movie that makes money, there are multiple that lose money.”

True, but not whole truth. Those movies are made by _different studios_. Big ones won’t produce “multiple” losers, even the flops earn themselves. Not officially, of course, by Hollywood accounting they _always_ make a huge loss but _somehow the studio gets their money back while everybody else is left penniless_.

“Having a separate corporation or LLC as a production vehicle allows studios to take on risks that otherwise couldn’t be done.”

What? A studio earning profit _a billion every year_ couldn’t invest to a movie costing 200M in honest methods? Are you serious?

These people are stealing bastards and should be shot. In China they would be.

Anonymous Coward says:

Who takes the real losses?

It’s pretty clear that the transient production company took those $ 167M losses on the accounting sheet, but who’s the guy in the end who doesn’t get paid? Actors, contractors or some other entity?

If the “financing company” (probably WB itself) does take those losses, then why falsify the accounting in the first place?

LaBrant (user link) says:

Hollywood Owes Jim for Torrents

So I’ve shrunk the numbers down to fit my friend Jim’s situation. It seems last month, he successfully downloaded Harry Potter using BitTorrent.

If we subtract the distribution costs that he saved the studio, as well as their portion of the advertising, interest, and other costs by not paying to watch the movie in the theater, then it reduced their cost by over $12,000.

Jim is a generous guy, and he’s willing to do things they way that makes them the most comfortable. So since he saved them $12,000, he’s willing to take $20,000 and call it even.

We’ll be in touch with the accountant shortly to collect our check!

Sethumme says:

Re: Losses are going to be now handed down to the consumer

Because consumers are forced to buy DVDs at whatever the cost? If they raised DVD prices and consumers responded by not buying DVDs (instead using Netflix, iTunes, P2P, or simply waiting longer), then their DVD revenues would take a hit and they’d be forced to restore their prices. The only ones who would pay more in the end would be their hidden profit margins.

LA999 says:

movie accounting

Funny how this is the same accountants that were telling us how many billions piracy was costing them, where in fact I am sure that now it would be different story altogether…
I hope they throw the book so far up their *sses that they never sit right again….and maybe they will stop pestering the normal people over all this supposed piracy….seriously trying to make me feel bad about their lowly camera guy not getting money because I downloaded a movie off the internet….how about you use some of that supposed loss cash and pay them what they deserve!

Crias says:

I wish I’d thought of this sooner!

I’ll start a company called “Crias Enterprises”. They will loan me $2,500,000 per month at a generous rate of 0.1% monthly interest.

Then every month I’ll pay back last month’s debt plus interest, for a total of $2,502,500.

Since I earn about $2,500/month, plus I’m using this month’s loan to repay last month’s loan, you can see quite clearly that I earn a $0 net.

My other debtors will surely understand that I, as an individual, am too busy dealing with this large monthly debt to “Crias Enterprises” to repay them. 🙂

(I’ll give you a hint – nobody in Hollywood actually thinks this is legit. They just keep it quiet.)

Crias says:

Sidenote: Nobody said any of these companies are trying to dodge taxes. They aren’t.

This backwards accounting simply shifts profits, and Uncle Sam gets his money regardless.

What these tricks do is allow you to promise people 10% of Net Revenue and still pay them $0. It’s a tool for creating contracts intended to screw people into giving up their time, effort, creative abilities, etc. in exchange for nothing but a dream of riches that will never materialize.

It’d be wise to stop whining about “taxes”. That’s not what they’re dodging.

Tsu Dho N imh (profile) says:

“$57 million in “interest”? Also to itself for “financing” the film.”

That is a standard accounting practice for any project. If they had put the money in a bank, they would have made money on the interest paid by the bank.

However, in most accounting systems, as soon as the project costs are paid off (salaries, filming, etc.) the intgerest payments stop.

AC says:

Look up offshoring and GE Capital and compare business tax rates for the US to every other nation. Or for one more in motif, why did Winston Groom say that he “could not in good conscience sell rights to film the sequel of a failure”?

It’s not all swindling. Look up the ‘costs of doing business’ via a vertical breakdown from the movie ticket prices to studio employee labor cost.

gorehound (profile) says:

About time the real pirates were brought down

This is a great example of what we have known for years.Hollywood is a bunch of crooks who rip us consumers off and rip off their own actors/crew/ETC.

Want to make a difference here then you have to do something about it.Try not buying any new Hollywood films but buying them used.Try finding used films in a local store or online as it is easy to buy used and NOT GIVE HOLLYWOOD your money.
Stop feeding these pigs.

bubbles says:

Is The Power With The Wrong and Strong ... Now???

Regarding alleged GAAP violations (if any), the Financial Accounting Standards Board (FASB) is a private, not-for-profit organization whose primary purpose is to develop generally accepted accounting principles (GAAP) within the United States in the public’s interest. When intermingling sums in the amounts of hundreds of millions, as is the subject here, the Securities and Exchange Commission (SEC) and “its” designated FASB is the organization which should have a “definite” eye on this; as it is responsible for setting accounting standards for public companies in the U.S. It was created in 1973, to replace committees of the American Institute of Certified Public Accountants (AICPA) to regulate what these individuals do.

I agree with Anonymous Coward because the agencies mentioned above were formed to guard John Q public and otherwise good faith interests from being destroyed from such tactical financial harassment. Why is the movie industry exempt? Just as a reminder, it was also stated during the mortgage blow-out of economic disasters, of 2007-2008 that Goldman Sachs did not violate illegal SEC standards either… after a sufficient amount of research, that was disproved. Disaster? Yes… Effective to the overall state of the economy, absolutely.

Also regarding Arglebargle’s “better be careful” commentary, society in whole and in part is becoming vigilant on transparency and conscious capitalism; even as a means of adjusting applicable laws and awareness. The public is no longer accepting or giving credence to the Al Capone methodology of turning aside hard earned lost money for protecting greed of greater evils. The economy has taken emotions to the point of vigilance.

I wouldn’t be surprised if you see some big honchos on their way out by some crazed irrational (crew, actor, union, etc.) vigilantes.

Robert says:

The crooked movie industry

My my, an industry heavily dominated by those who lean leftist seek ways to lie, cheat, and steal their way out of paying what they would owe under honest accounting – what a freaking surprise! Then again, I suppose that’s to be expected from the “What can we get away with?” mindset of such characters. The CPA where I now work had some interesting stories about the entertainment industry, including how the original Star Trek TV series, more than 40 years since it was canceled, reported losing another $11 million. And all they have to do to distribute the shows is make a copy and ship it! After hearing his stories, I know if I am ever offered a chance to invest in a movie, I run, not walk, the other way!

Stephen Hutcheson says:

Re:

>I’d love to see the statment sent to shareholders. Do you think THAT document shows a net loss on every movie?

Yes, of course it does.

But the only shareholder is the Pigopoly Studio. It works out like this:

Pigopoly Studios creates a subsidiary, BigHit2014. BH2 pays PS 2 gazillion dollars. BH2 shows a loss to its shareholder of 2 gazillion dollars. PS shows income of 2 gazillion dollars, so the net effect to PS shareholders is zero: the net loss from the 100%-owned subsidiary exactly balances the net gain from income.

The only people that are actually affected are the people who actually produce something — the writers, actors, costumers, etc. They have no interest in the pigopoly, they just get paid out of the nonexistent profits of the subsidiary.

Anonymous Coward says:

Re:

Reminds me of the twisted Roman concept where bringing up facts in court was considered a sign of being a bad lawyer.

The juries are finding that all the lawyers and contracts in the world can’t make their fraud stand up to those inconvenient facts that they are raking in profits so don’t give them bullshit about not making any profit.

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