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May 20, 2005

Do You Want to See How Convoluted Hollywood Accounting Is?

Posted in: General

Read this article by Scott Galupo in the Washington Times on how the film industry use accounting tricks to shortchange the actors and producers in Hollywood.

Mr. Epstein offers the 2000 Nicolas Cage movie “Gone in 60 Seconds,” a product of the Disney-owned Touchstone Pictures, as an example. It cost the studio $206.5 million to make, factoring in production costs, advertising and overhead expenses. The movie took in $242 million worldwide, $139.8 million of which stayed in theater registers.
    That leaves Touchstone about $100 million in the red, right?
    How did Disney’s Michael Eisner get away with touting the movie as a “hit” in the company’s 2000 annual report? The answer is found in the clearinghouse, the highly lucrative after-market that pretty much shatters the industry mythology that attaches to the vaunted opening-weekend and weekly box-office tallies, which took off in the early 1980s.
    The clearinghouse not only rescues the bottom line of movies that fare modestly at the box office, but it also keeps a significant chunk of money in studio coffers and out of the wallets of actors.
    Follow closely: Buena Vista Home Entertainment International, also a Disney subsidiary, reported $198 million in sales and rentals of “Gone.” But only a fraction of that sum was credited to the movie, Mr. Epstein explains.
    Buena Vista gave Walt Disney Pictures a $39.6 million royalty cut, a transaction that was treated as though the two companies were separate entities rather than corporate sisters. Distribution fees and other expenses claimed $20 million of that sum.
    After various accounting tricks, Mr. Epstein writes, only $18.4 million of “Gone’s” home-entertainment take got credited to the movie itself — which, after deducting manufacturing expenses, left Disney with a $130 million profit on the home-entertainment release.
    For Mr. Cage, who was entitled to 10 percent of the movie’s video gross, the royalty calculation meant he earned a little less than $4 million, as opposed to $19.8 million. That’s not chump change. “Without the royalty system,” a former studio executive told Mr. Epstein, “we would go broke.”

Glenn Reynolds over at Instapundit has the line of the day for this story:

If I were a Republican legislator wanting to cause trouble, I’d sponsor a bill setting uniform and transparent accounting rules for the motion picture and record industries.

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