Are you a movie lover? If so, you’re not alone.
After all, films are one of the best ways to spend your free time and relax. For more than a century, Hollywood has been pumping out great works of art and commercial blockbusters that have enriched the heart and provided a tremendous escape from everyday life.
Some movies are huge successes, while others fail to make much of a splash at the box office. If you’ve ever wondered how Hollywood accounting works, you’ve come to the right place for answers.
This article takes a look at how movie distribution and movie production works, as well as why movie accounting is so confusing to most people. Keep reading to get the inside scoop.
What the Term Means
The truth is that most people don’t care about how much money movies make. They just enjoy watching movies. But keep in mind that movies are extremely expensive to produce and distribute.
And yet when you hear about a movie like Star Wars making nearly a billion dollars, you probably assume that everyone at the studio and the actors become very wealthy due to its success at the box office. Well, you might be surprised at just how wrong this assumption is.
The term “Hollywood accounting” or “Hollywood booking” is used to describe the fact that movies technically never make a profit, no matter how successful they are at the box office. How is this possible? That’s a great answer.
Basically, Hollywood booking is an accounting technique used to inflate expenditures to the level where it’s impossible for the talent involved in production to ever see the amount of money their contracts promise.
How Booking Works In Hollywood
Let’s take a look at creative accounting in the world of big movie studios.
There are several factors to consider. These include production overhead, distribution overhead, and marketing overhead. These are the three areas that chew up the most money once a studio has greenlighted a feature film.
Production overhead typically accounts for around 15% of total production costs. This might sound incredible, but it’s true. That’s right, the cost of physically making a movie only accounts for 15% of total costs. Thus it’s only a small part of the overall expenses. Why? Well, because the movie then has to be distributed and marketed.
Even if a movie costs $200 million dollars to film, you still have to spend an incredible amount of money to make prints of the film and then pay for advertising so that the general public knows it exists.
Next, you have to figure in something called distribution overhead. This is a term that refers to the actual cost of distributing any given movie to movie theaters. You might have assumed that this happens automatically, or most likely never gave it a single thought at all, but this is actually an extremely complicated and expensive part of the movie-making process.
Believe it or not, film distributors keep 30% of the amount of money that the movie grosses. In other words, when a movie makes $100 million dollars, the distributor of that movie will typically keep $30 million. Thus you can see why film distribution is such a big business. This is called “gross rentals”
After all, if the movie isn’t properly distributed to theaters, no one will be able to see the movie, which results in no one being able to see it. And if you want to make money, people need to be buying tickets. When you stop and think about that percentage, the cost of distributing a movie costs twice as much as the cost of actually making the movie.
The third part of the Hollywood bookkeeping process is called marketing overhead. This is another major expense. Why? Because someone has to pay for all those expensive movie trailers you see on TV.
Keep in mind that hundreds of movies are produced every year in the United States. Thus it’s easy for them to begin to get lost in the crowd and totally ignored by the general movie-going public. When a movie isn’t properly marketed, the odds of it getting totally lost and forgotten increases dramatically.
That’s why major movie stars get paid such huge salaries. Names like Brad Pitt and Jennifer Lawrence attract millions of fans. The average moviegoer isn’t interested in seeing actors they’re not familiar with. They demand big names, and those are the people they’re willing to pay to see. Thus big movie stars can demand huge salaries because the movies they appear in will make a huge splash at the box office.
This is where it gets interesting. Why? Because those big-name actors have contracts that guarantee them a large percentage of the profits once those movies become profitable.
The problem is, creative bookkeeping skills by Hollywood studios prevent those movies from ever showing a profit, thus withholding serious cash from those big-name actors.
In other words, no matter how much money a movie makes at the box office, studio accountants move the numbers around so that the movie will remain in the red forever.
Does this sound totally confusing? Well, that’s because it is.
Does this accounting method sound unethical? Well, it definitely is. But that’s the way the industry has always worked.
How the Studios Hide the Money
One of the most interesting things about the movie-making process is that all this is an open secret. Everyone in the business understands that this is the way the business works. Thus they simply accept it.
This sounds crazy to the average person. That’s because it’s not exactly an ethical way to do business or treat the talent involved, and yet the studios will go to great lengths to keep as much of the profits as possible.
It might not sound ethical, but it’s apparently totally legal.
Here is a great attorney for tax relief.
A Guide to Understanding Hollywood Accounting and Why It’s So Controversial
Movies remain as popular as ever. Fortunately, this bit of insight into Hollywood accounting will help you understand where all the money goes.
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