"Darling! This is the Industry! The really creative people are the accountants. A big studio got over half the profit, after setting breakeven at about three times the cost, taking twenty-five percent of income as an overhead charge, and taking thirty percent of income as a distribution charge, plus rental fees, and prime interest on what they advanced."
— John D. MacDonald, Free Fall in Crimson
"Well, it's like stupid points. Stupid to take the points. "Won't be any net profits?" You sit there with your points going, 'Eeeh, eeh, eeh, eeh, eeh.'"
— Eddie Murphy, explaining why he called net points "monkey points"
Hollywood Accounting is how a production studio weasels out of paying royalties or anything else based on a percentage of profit: just overestimate your expenses, and bingo, there is no profit, or at least a lot less of it — at least on paper, even if the gross reaches into the billions. The "expenses" are charged to a separate entity or aspect of the filmmaking process, such as marketing, even though both entities involved are owned by the same film studio. So the studio basically "charges" itself "$100 million" in expenses, pays itself, and avoids having to claim that it made any gross profits. Some really outrageous cases have led to lawsuits.
For this reason, the smart actors in Hollywood will insist on getting a percentage of "gross points" in their contract, i.e. the money directly made before the studio profits are calculated.
That Other Wiki has a more in-depth article on the subject found here.
Needless to say, this is mostly a Hollywood (and American) trope, since doing this outside the U.S. is considered fraud in many countries.note Not that some non-American companies and directors hasn't tried this trope before in their countries, with various results.
See also Box Office Bomb where the movie makes low gross revenue for real, not just on paper, though the two have gone hand in hand a few times.
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Warner Bros.' first Batman movie, despite earning $253 million at the American box office, posted a $36 million loss when the accounting was done. According to WB's formula, the studio would have had to take in an additional $150 million before the movie could begin turning a profit. Many criticized the production company for using a "rolling break-even point" to justify the film's losses. According to the Los Angeles Times (who did their own investigation), the film still should have made close to $90 million in profit by the time all expenses were paid. However, Jack Nicholson earned around $60 million for his role due to his percentage.
Paramount Pictures once tried to argue that it didn't have to pay royalties to screenwriter Art Buchwald for a script idea that he claimed was stolen from him. Buchwald wrote a treatment for a story idea in 1982, and pitched it to Paramount brass as a possible comedy vehicle for Eddie Murphy. Paramount shelved the treatment after several failed attempts at making a script out of it, but pulled it out again in 1987, and ended up developing the comedy Coming to America based on said treatment (with Murphy, who was starring in the film, given sole story credit). Buchwald sued Paramount, and a jury agreed that Paramount breached their contract and the two stories were remarkably similar. Paramount subsequently argued that it spent so much money on marketing and development that they made no net profit. The courts then said Paramount's formula for calculating profit was "unconscionable", and the production company (fearing a loss on appeal and a wave of lawsuits by other authors) ended up settling with Buchwald out of court.
In 2007, Paul Haggis sued the producers of the 2005 film Crash for not giving him $4.7 million in unpaid royalties. Studio executives argued that the movie (which was made for $7.5 million, and grossed ten times that amount at the box office) wasn't profitable when the accounting was done. The co-writer (Bobby Moresco) and co-producer (Cathy Schulman) also sued for royalties.
The film's producer, Bob Yari, later went bankrupt over the suit (along with a number of money-losing projects he self-distributed). He was later sued in 2012 for the same thing over the same movie.
Sigourney Weaver was told that the studio lost money on the original Ghostbusters, despite it being one of the most successful films ever made, and thus she wasn't going to get any royalties from it. Supposedly she showed up with an army of lawyers and accountants to check the books, and the studio offered her an exorbitant amount of money to appear in the sequel to keep her from looking at them.
It might not have been Hollywood Accounting so much as the studio board being staffed by Manipulative Bastards, but Christopher Lee was hoodwinked into doing most of the Hammer Dracula pictures because the studio would tell him they'd already arranged filming and hired all the crew, and if Lee didn't agree to play Dracula they'd all be out of a job. Oh, and since they'd already made all the arrangements for paying the crew and finding locations, Lee would have to agree to not be paid full salary for the picture. Knowing this explains immensely why he doesn't like to talk about that part of his career anymore.
The cast and producers of the film My Big Fat Greek Wedding (with the exception of lead actress Nia Vardalos) ended up going to court to sue Playtone Pictures, HBO and Gold Circle Films for unpaid profits. The studios claimed the film lost $20 million, despite being one of the highest-grossing independent films of all time (and a record-holder for highest-grossing independent for several years).
This was the origin of the Stan Lee vs Marvel Enterprises lawsuit: Stan's contract said he was entitled to 10% of Marvel's profits from their movies ... and Marvel's share of the net from Blade turned out to be zero. When Marvel got wise and started asking for a percentage of the gross, they tried to claim that Stan's contract didn't cover that. A court of law disagreed.
None of the actors from The Rocky Horror Picture Show have received any royalties from home video/DVD releases. This is the primary reason why Susan Sarandon (Janet) has bad words to say about the movie, rather than a case of Old Shame.
Because the first Saw film had a smaller budget than its sequels, Cary Elwes signed on to play Dr. Gordon in exchange for a percentage of the total gross. When the film proved to be a monstrous hit, Elwes felt he had been shortchanged (receiving only 1% of the profits) and refused to return for the sequel or even allow his image to be reused.
Eric Idle, on his Exploits Monty Python concert tour at the Turn of the Millennium, noted that the troupe's final film, Monty Python's The Meaning of Life, was the only one made with major studio backing (Universal Pictures)...and thus the only one that apparently didn't turn a profit. So in this tour's version of "The Crimson Permanent Assurance", there's an additional verse about studio accountants.
Used as a plot device in The Producers. The premise of the scheme is to massively oversell shares in a Broadway production, then create a deliberate flop, leaving the "heroes" free to flee with the money.
In-universe example, in the Sunny Randall book Blue Screen: Sunny, working as a bodyguard for an actress, is discussing Hollywood Accounting with an industry lawyer that she has been seeing on-and-off. She asks if this sort of practice is done. The response is "I know accountants who could convincingly demonstrate on paper that Gone with the Windnote Which, as of 2014 is still the highest grossing film of all time, when adjusted for inflation showed no profit."
In Falling Free the corporation that made quaddies did some creative accounting to claim that all the R&D expenses involved in creating, raising and training the quaddies were legitimate business expenses for a totally unrelated business the company was doing in the same area, allowing them to cut the apparent profits of said business and reduce their tax burden. A change in the local tax code that stopped them from doing this anymore, followed by a technical breakthrough that reduced the utility of quaddies significantly, resulted in the quaddie project being scrapped (And the person in charge trying to kill all the quaddies).
JMS: The show, all in, cost about $110 million to make. Each year of its original run, we know it showed a profit because they TOLD us so. And in one case, they actually showed us the figures. It's now been on the air worldwide for ten years. There's been merchandise, syndication, cable, books, you name it. The DVDs grossed roughly half a BILLION dollars (and that was just after they put out S5, without all of the S5 sales in). So what does my last profit statement say? We're $80 million in the red. Basically, by the terms of my contract, if a set on a WB movie burns down in Botswana, they can charge it against B5's profits.
Harlan Ellison, in a clip from his film Dreams With Sharp Teeth, also discusses his involvement with Babylon 5, notably when Warner Bros. asked him to provide clearance rights for an interview he did during the show's production for inclusion on the DVD set. When he asked what he would be paid, the studio told him that they didn't have enough money in the budget to pay him royalties (in addition to telling him that he'd have to go buy a copy of the DVD set in a store because they couldn't justify sending him a set).
In 2010, Rysher Entertainment, who produced Nash Bridges, claimed it didn't have to pay royalties to lead actor Don Johnson because they never made a profit from the show and didn't have to share anything with the actor. Johnson, whose contract stipulated he owned half the show's copyrights, sued the company and won $23 million.
"Hollywood accounting" is what led to the Writer's Guild of Americastrike in 2007. The WGA (representing hundreds of film and television writers), in a nutshell, decided to strike because the Alliance of Motion Picture and Television Producers were deadset against increasing DVD royalties for said writers. At the end of the strike, the WGA accepted a minor increase in royalties, far below what they had originally set out to achieve.
The Stop Online Piracy Act/Protect-IP Bill backlash in 2012 resulted in the legal sector criticizing the Motion Picture Association of America for creative accounting that claimed Hollywood lost $58 billion in profits due to online piracy. One legal report showed that the actual amount of money lost to piracy was less than 1% of the original claim, that the only real thing piracy affected was redistribution of disposable income for other purposes, and that the notion that money not spent on movies disappears from Hollywood wasn't true.
The SOPA issue was also parodied in To Boldly Flee where a producer claims his writers aren't getting any money thanks to piracy...despite the fact that he keeps them chained in closet-offices and admits to having multiple houses himself. The Big Bad is actually a studio head who prefers big-money-making cheap schlock to actually putting effort into films at the risk of them not making a return, undermining things more for that side.
Lynda Carter has mentioned this in regards to her time on Wonder Woman. Alongside not getting any money from reruns (which isn't exactly rare; back before people saw the financial potential of syndication, no one really thought to add a clause regarding royalties from reruns in their contracts,) she also saw nothing from merchandising. She specifically recalls them making a likeness of her face and created a run of Wonder Woman dolls. After the first run, they took her name off of it, marketed later runs as a generic Wonder Woman doll, and she never saw any profit from it.
This was discussed in an episode of Freakazoid!, of all places. Our hero is advising the alien Mo-Ron about life on Earth, and says, "Always ask for a piece of the gross. Not the net. The net is fantasy."
While he says this, he is signing a contract with checkboxes marked "Net (sucker)" and "Gross (better get a lawyer)".
Dogbert: The net is what you land in after you jump off a cliff when you realize that the deal you signed won't get you any money. Dilbert: What if there is no net? Dogbert: It's gross.
In 2014, DC Comics announced new royalty policies; payments to writers are now based on the publisher's net revenue on a particular book as opposed to a percentage of the cover price. Colorists are now eligible for these royalties, but overall the pool of royalty funds are declining, much of it admittedly because of a higher sales threshold.