It’s difficult to know what goes on in studio accounting departments, as much of their time seems to be spent finding ways to say that no movie has ever made a profit. It’s generally agreed this habit is less about Hollywood being a flawed business model (after all, every studio would have gone bust by now if none of their movies ever made money), but because of talent backend deals, which give a percentage of the net profits to lowly actors, writers and others once the studio has made all its costs back. So if the studio can claim a loss, they don’t have to pay out anything.
Studio accounting has been a major bone of contention for years, with Peter Jackson going to court in 2007 after New Line tried to claim that the Lord Of The Rings movies had lost money. Now Deadline has got its hands on a leaked accouting memo for Harry Potter and the Order of the Phoenix, which says that as of September 2009, that film has lost $167 million.
Bear in mind this is the ninth highest grossing movie of all time with a worldwide take of $938 million, so if the studio really has lost that much, they’ve done something very wrong with the franchise. That’s not to mention that it would make their decision to turn the seventh film into two movies look absolutely insane. I think it’s safe to say the real story is rather different, with the memo more to let net profit participants know they’re not getting any money and never will.
Alas, there’s nothing that unusual about this, as it happens on nearly every film, and lots and lots of below the line workers promised a piece of the net profits are used to the fact that in the world of studio accounting, the more money a film makes at the cinema, the bigger the loss on the balance sheet they’re eventually sent. The studios can get away with it because they’re practiced in the art, their accounting is labyrinthine and beyond the ability of a single person to audit or check, and there are numerous tricks that help hide the amount a film has made.
For example, when they do a TV right deal, they may bundle a couple of hugely successful movies with a lot of rubbish, but they treat each film as if the TV station paid the some amount for each, so while everyone knows it was the big movies the TV network wanted, on the accounts the amounts paid for the television rights look much smaller. Similarly, the advertising spend includes money they’ve paid in sweetheart deals to sister companies, so the cash never leaves the studio, but looks like it has for accounting purposes. Even the ‘interest’ on the statement below may be slightly fictional, as the ‘loan’ probably came from another Warner company, so it’s probably paying $60 million in interest to itself. Similarly distribution fees are ridiculously high, and result from the fact that for accounting purposes the production arm of a studio is treated separately from the distribution arm, so the latter can charge huge amounts, which come off the bottom line of an individual movie, even if the cash never leaves the studio.
It just goes to show, if you want to make money on the backend of a film, you have to get a deal on the first dollar gross, as a studio will never, ever claim a movie made a net profit.
As I said, it’s quite unusual for us plebs to get a look at the accounting sheets, which even the untrained eye can see can’t really tell the whole story, but take a look at the Order of the Phoenix one below.
