Hollywood Has Its Own Math
Some of Hollywood's greatest special effects never make it to the screen. They can be found in studio accounting books.
Using the razzle-dazzle of movie math, hits can turn into duds, flops can be hidden behind blockbusters, contracts are as convoluted as the plot of The X-Files and profits well, it depends what you mean by profits.
For the uninitiated, unsuspecting or unsophisticated, this can be more than just frustrating. It can be costly, as columnist Art Buchwald found out in his very public dispute with Paramount Pictures, or as investors in Cannon Films and Orion Pictures were surprised to discover.
There is, however, some hope for the befuddled outsider, two opportunities to peek behind the curtain and get a clearer look at movie accounting wizardry, thanks to a set of proposed new accounting rules and a new book about Hollywood math.
The new Hollywood restrictions, which could take effect by the year 2000, are designed to make it harder to fudge corporate earnings by giving a less-than-candid account of how a movie is performing.
"You'll actually know whether a film is a bust a lot faster. If it's a bust now, you can hide it a little longer," said Frank Scheuerell, project manager for the Financial Accounting Standards Board.
The changes address the way studios account for the costs of marketing and publicity, the financial pinch from an abandoned project and the revenues from syndication rights. Another change would require studios to disclose for the first time their estimated costs for directors, actors and actresses information usually only available in stories leaked to the trade papers.
How much the rules would affect the studios is debatable.
David J. Londoner, a member of the task force that drafted the changes, estimated the major studios would take a onetime $1 billion, industry-wide hit to comply. Studios have either disputed that figure or declined to comment, and other analysts say that even if the write-offs are big, it won't scare Wall Street investors.
If studios fail to follow the new rules they could face large fines. Recently, Sony Corp. agreed to pay a $1 million fine to settle a complaint by the SEC, which ruled the studio had failed to warn investors about the mounting losses at Sony before suddenly announcing a $2.7 billion write-off in 1994.
The Motion Picture Association of America says it has taken no position on the rule changes.
The proposals follow high-profile allegations of accounting abuses in the 1980s by such studios as Orion and Cannon. Analysts say the studios took advantage of the current rules to post profits even though their finances were going south.
In Buchwald's case, Paramount Pictures had claimed that Coming to America wasn't likely to show a net profit, even though the Eddie Murphy film had collected $145 million at the box office at the time of the dispute.
A judge who found the moie was inspired by a two and a half page treatment by Buchwald said the studio had used "unconscionable" accounting practices to deny the humorist his share of profits and royalties. Paramount appealed, and both sides settled in 1995, with Buchwald and his producing partner receiving less than $1 million.
The case was far from the only one. Other legal action has been taken by the heirs of Jim Garrison, whose book was the basis for the hit movie JFK, and director Ron Shelton was awarded $9.8 million in 1997 in a dispute over profits from the 1992 film White Men Can't Jump.
No matter what shape the new rules take, it will be of little use to actors, writers, directors and anybody else who feels ripped off by the studios in profit-participation deals.
What many people fail to understand, according to a new book, is that in movie math, there are profits, and then there are profits, and that financial terms as most people understand them can mean something quite different in the confines of a Hollywood contract.
"It's not accounting at all. It's legal," said attorney/accountant Steven D. Sills, one of the authors of Movie Money: Understanding Hollywood's (Creative) Accounting Practices.
The book provides a sort of financial Gray Line tour through the jungle of movie number crunching, covering everything from contract language to negotiating tips. The fact that it takes the authors almost 300 pages to sketch out the basics should tell you just how dense that thicket is.
Intended for actors, directors and others who aspire to a profit-participation deal, the book is actually helpful to anyone who may someday have a story to sell to Hollywood, whether he or she is the next kid to fall down a well or a particular White House intern.
As the book makes clear, the issue isn't whether you're going to get a sweet profit-participation deal; you're not, unless you're a power player like Tom Cruise or Arnold Schwarzenegger. The issue is whether you can negotiate from the strongest possible position for the amount of clout you possess.
"Hollywood has a culture and a mindset that is somewhat independent and always has been," said co-author Bill Daniels, an attorney and former reporter for Daily Variety. "Hollywood has set up this arcane way of doing business, and it trips some people."
By Michael Fleeman