Why do we always say in Hollywood that you should never be paid a percentage of the film’s profit?

There is nothing more dishonest than Hollywood accounting, they say.

The questionable accounting practices of Hollywood studios are well known and date back to the beginnings of cinema. Since the making, financing and distribution of a film is a nebulous business, studios quickly realized that it was possible to create superb smokescreens in the books to hide the profits generated.

The idea is naturally to pay as little taxes, royalties and various retrocessions as possible. Because naturally, all these things are calculated on the profits generated by the business activity.

If a film didn’t make money, naturally, no need to pay those interested in the profit…

Hollywood has therefore become a master in the art of inflating production costs and other expenses to ultimately achieve zero profit. Or even a loss, ideally!

An example !

Did you know that the film Bohemian Rhapsody (2018) had an accounting loss of $51 million?

However, the film was a huge success at the worldwide box office, generating a turnover of 911 million dollars, for a modest budget of 55 million.

How can you lose 51 million when you win 911?

Another example !

Harry Potter and the Order of the Phoenix reported a loss of $167 million in 2010 even though the film grossed $1 billion and cost $200 million!

How do studios manage to produce this sleight of hand?

There are several methods. The first naturally consists of overcharging subsidiaries for numerous services. We’re waiting to see how the film works to adjust all of this, naturally. So the money stays in the same house but changes hands in the accounts.

Another method is to pool production costs. That is to say, produce several films at the same time and allocate the losses/costs from one to the other, depending on the needs. Impossible to navigate in the event of an audit or control!

Last classic method: overheads… Drawer concept in which you can slide whatever you want. Practical for suddenly charging undue costs to production, such as “consulting”, “studies”, “marketing research”…

This is how the biggest box office hits can end up posting colossal losses.

As a result, it is well known in Hollywood that being paid in “net points” (percentage of profits) corresponds to receiving nothing at all. Because there will be no profits.

The powerful in Hollywood (actors, directors, etc.) who want a share in success are paid in “big points” (percentage of gross revenues), that is to say a percentage of gross turnover.

If the studio pockets $10 after paying the exhibitors (cinemas) and an actor signed for 10% of the gross revenues, he will receive $1, whether the film is a flop or a success.

Note that there is also another agreement that studios can sign with their partners (actors, directors, etc.), called “cash break”, and which consists of giving the person a percentage of the gross turnover after having deducted expenses that have been contractually defined in advance. It’s a way to be interested in success in a fair way without the studio taking too much risk.

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