Here’s a good write-up with the actual balance sheet that shows how Hollywood accounting works. It shows how “Harry Potter and the Order of the Pheonix” actually LOST $167 million (despite the fact the studio pulled in $350 million of the gross $938 million).
The idea is basically you set up a shell company – a fly-by-night studio – to make the movie. The shell company makes the movie and then pays back the parent studio company for whatever ‘fees’ the studio would like to have made until the shell company shows a loss. This then allows those that worked on the film (artists, writers, actors, etc), to not get much of a red cent from a company that is now bankrupt/underwater.
Which is why (as an acquaintance who worked down there told me), you must read the contracts carefully and be guided by someone that knows the biz to avoid being had. Because if you sign a contract to make a movie about the story you just wrote and agree to a percentage of the profits – you just gave them the story and all your hard work for the rest of that year for free. Because the shell studio will always show a loss – which means you get a percentage of nothing.
I don’t wonder when the oil companies will start doing this with their drilling wells. First you set each well up as a shell company that ‘sells’ its oil to its parent company (i.e. BP), then the parent pays them only enough to cover the drilling costs in exchange for the oil. If the drill ever has a disaster or accident, the only people you could sue would be the ‘broke’ drilling company – a company that is always basically bankrupt (i.e only has enough money for operating costs). You better believe that oil companies facing $100’s of billions in damages for a single spill are eyeing this idea closely.
The only good news is that the film studios are starting to lose lawsuits against these practices in court. Hopefully it’ll start straightening these studios out – and discourage others from trying the same tricks.