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http://www.reuters.com/article/marketsNews/idUKWNAS045720080211?rpc=44 (http://www.reuters.com/article/marketsNews/idUKWNAS045720080211?rpc=44)

The trustees want to seize back the rights to The Hobbit.

Did NewLine seriously think that they'd get away with what they tried to pull?  :uhrr:

Probably. I'm sure they were shocked as shit when Jackson sued them. From what I've heard and read about the way production companies do their books, taxes, and routinely shaft everyone and everything involved in creating a film, I'm not really surprised.

I mean, the AMTP claimed to the WGA that they didn't make a penny off the internet, while openly bragging of 10 billion+ in online revenues. They're used to lying and not getting called on it.

I'm sure they'll claim they made no profit on those films.

The Tolkien Trust seems to be missing the bigger picture (har har). What about all the merchandising capital created by the movies?

Merchandising may not have been part of the contract.

If this isn't unusual for the motion picture industry then I'm kinda shocked. I thought they would have had things a little more together than that. After all, after something like this, who would be in a hurry to work with newline if they had other options?

Because of all those evil internet pirates, I'm sure.

(http://www.bk.tudelft.nl/students/bk246267/internet/smilies/pirate.gif)

It would be unfair to think of any malicousness on the studios part.  It's highly unlikely that they made any profit whatsoever on the films.  The actual figures are quite likely to look something like this:

Revenue of 3 films: ~$1000m
Budget of each film: ~$95m x 3 = $300m (if we round up to 100m per film for easy numbers)
Extra marketing cost for each film = roughly £50m which at today's exchange rates would be $100m which we add onto the flim budget and don't forget to multiply by 3 for each film means that marketing costs are $300m + $100m x 3 = $1200m
DVD Manufacturing is not as cheap as the Writers would have you believe and actually costs about $10 a unit which is more than the current price of a single unit in the bargain bin of shops at the moment so in fact DVD sales constitute a loss of about $3 per unit.  Every other household in the world has a copy and there are 3bn households so 1.5bn * 3 = $4.5bn lost on DVD sales
Expenses*: a mere $100m but we shouldn't forget them.

So the total cost to make the films was 300 + 1200 + 4500 + 30 = $6100m - let's call it $7000m to be sure - but the films only made $1000m (and that's before the theater chains took their cut of the ticket price) which means that the films didn't make a profit and cost New Line over $10bn (converting 7 thousand million to the equivalent billions and not forgetting to take into account the state of the US economy, inflation and global warming)  to release.  It's amazingly unfair of the Tolkien Estate to demand money from New Line when they should actually be paying New Line in the first place.

*Being the combined salaries of Robert K. Shaye and Micheal Lynne

:ye_gods:

New Line's lawyers will have forty pages of briefs explaining why they don't owe anything.  The lawyers will be paid millions of dollars for this.  A clerk will receive the aforesaid 40 page brief, laugh, and ream New Line.  Businesses would save a lot of money if their lawyers would tell them when to simply pay up instead of stringing together a lot of technically non-frivolous but complete bullshit arguments. 

Was that meant to be green? Since you included global warming into your argument, I'll just give you the benefit of the doubt that it was. There's no possible way those flicks cost $400M each to produce.

In other news, New Line is planning on throwing away more dollars the world over by filming back-to-back Hobbit prequels.

Are you really asking that question?

It's not highlighted green because I reckon a deaf, dumb, blind and illiterate chinchilla could gauge the veracity of those numbers.

 :oh_i_see:

edit: BTW, don't run the family business.

Admit it. You're the New Line lawyer and that was your rough draft initial discovery brief.

Wait... so they spent a billion dollars making those movies?

Then the bloodsucking lawyers wouldn't make any money.  Ain't gonna happen.

Some serious (as in, non-green) questions/comments:

• Each movie cost less than half of Titanic? I can't see how that's possible based on what was shown.
• $100m in marketing for each film (or 100% of the production cost) seems steap.
• The revenue take you sight for the movies is only for box sales, which stands at $3bn worldwide. That is way more believable than the $1bn you have listed.
  
• DVD costs ammortize down over time and it's been years since the first runs were complete. No way it costs $10 a disc now. However, I do agree $10 a disc is accurate for launch. People forget that the $10 not only includes the act of pressing, but also the packaging, distribution, RMO and the rest of the pipeline. But eventually you devolve down to pure hard costs, which I'd estimate are probably closer to $4 for each disk.

Yeah, but then the lawyers wouldn't make a lot of money.

Edit: @Snakecharmer  :angryfist:

As I recall, Jackson was given a lump sum to make all three movies. By doing them back to back to back, he could consolidate and save filming costs. Weta invented and polished many green screen techniques, and he shot entirely in New Zealand. I'd guess the latter lowered costs, plus he probably got tax breaks for being a native.

From other articles I have read on this, the Tolkien trust believes they are entitled to 10% of gross worldwide box office receipts. The profitability games that Hollywood plays shouldn't factor in.

What does "gross profit" mean?  Serious question.  I thought "gross" was the money you took in and the "net" was that minus the money you spent (i.e. the profit).

You're thinking of gross revenue.

Is there a difference between "gross profit" and "net profit"?

Gross Profit minus all expenses results in Net Profit or Net Income.  Gross Profit is the first line on an Income Statement, Net Income is the bottom line.

Edit: Gross Revenue will be your first line on the Income Statement.  Cost of Goods Sold will be subtracted off that to get your Gross Profit, then you subtract off all the expenses for Net Income.

Where I work we don't have CoGS so Gross Revenue = Gross Profit.  The 'funny accounting' the studios use likely is in playing with the CoGS.  I never looked at any studio financial statements, but I imagine at the very least they include anything having to do with the making of a movie as CoGS.

Sales - Cost of Goods Sold = Gross Profit or Gross Margin

Gross Profit - General & Administrative Costs (overhead, administration, sales, etc.) = Earnings before Interest and Tax

EBIT - Interest - Tax (current & deferred) = Net Income

Basically, Cost of Goods Sold is the money paid to directly produce the items you're selling.  So, usually this is raw materials, the labor used, and some amount of allocated overhead (portion of equipment/machinery depreciation directly used in production, utilities used to power production machinery, etc)


The film industry has their own bastard subset of accounting,  much like Health Care and Defense industries, so I don't know about them.


If I had to take a wild stab,  I'd bet that they have special rules relating to the recognition of revenue allowing them to defer or accelerate revenue recognition to better offset it against the multi-year nature of film production.

I would bet that the definition of Gross Profit is a 3 page provision in and of itself in the contract.

If you want to see how Hollywood tries to do its accounting, look up the dispute that Art Buchwald had with Paramount over Coming to America.

According to a few of the WGA folks, that's pretty much the exact reason the writer's strike happened. The AMTP's lawyers talked a fucking big game, and then couldn't follow through.

But look at it from New Line's perspective -- they're paying those fucking lawyers millions, and they don't want to hear "Yeah, you fucking owe those Tolkein guys a shitload". That's not what they were hired to say.

They answered your question pretty accurately, but the short answer is that nobody calls it net profit to avoid confusion.

The best terms to know are simply Revenue, Costs, and Net Income. The breakdown on the Income Statement are different subtotals relating to the types of costs.

Some non-green responses:

1. Estimated budget for each film was about $95m.  Remember that they were a) filmed back to back which will generally keep costs down as they don't have to keep striking/restriking sets, b) there was no 3/4 scale model of the titanic to build nor was there a huge water tank to build and fill, c) lots of the sets were CGI rather than practical, d) it was filmed largely on location in New Zealand which is generally in the US.  Also, Jackson's filming style compared to Cameron's is more economically efficient (e.g. the first encounter with the Riders of Rohan in The Two Towers was flimed in one take with 3/4 hand held camera rigs.  The important part is one take.)  (EDIT - Stormwaltz already said pretty much the same thing)

2. 100m does seem steep for marketing for each film.  I made it up.  No idea what the real figure is - this is something they never release to the public but I'd be surprised if it was even that much for all 3 films.

3. Not only is the revenue I gave solely for Box Office sales, it's for US Box Office sales and ignores all other territories.  Hell, all 3 films took somewhere near $350m in the UK alone (by today's conversion - more like $280 when they were released).  Worldwide revenue for rentals for FOTR alone is estimated at $500m (according to IMDB so don't know where they got their figures from)  Combining DVD sales, box office sales and DVD rentals will net you probably something in the region of 1 - 1.5bn per film worldwide to date.

4. DVD production costs on the scale that we're talking about are marginal.  You could probably lower the total cost to something like $2 a disc and that's being very generous.  Most of the original cost is paying an agency to do design the menus, box art, do all the technical gubbins at the beginning.  The actual physical trappings - disc and case - cost fuck all to produce in builk - something like 50c.  (This figure is from a discussion with a very close friend of mine who is head of DVD distribution in europe for a major company.) 

I reiterate - while some of the numbers I originally quoted were based in fact (the cost of the films) the rest were entirely made up and totally fictitious. They're not there for analysis. 



Too late - I already do.  I spent the entire weekend working on my company accounts, setting up payrolls and figuring out how to pay as little income tax as possible.  I make Al Capone look like a fucking amateur (although to be fair, I don't deal in drugs, alcohol, protection rackets or gambling - just the usual extortion rackets that comes of being a freelance consultant.)

The major movie studios have designed their business expressly so that they can claim little to negative gross profits on individual movies and still make millions and billions as a whole. They do this by charging themselves fees for production costs that they pay to themselves. E.g. a studio movie will rent production studio space from the same studio. For that movie it's a cost. For the studio as a whole it's income. One of the reasons they do this is to screw over their stars, producers and directors and people like the Tolkiein estate many of whom have a percentage of the gross profits in their contracts. Only a very small handful of stars, such as Tom Cruise, actually get a cut of the gross *revenues*. He made $150 million on MI:2 because he (and his production company) got a cut of the revenue.

You're not wrong about this.  It's a fine fucking art all in itself.  A lot of contracts that are set up - particularly for above the line talent (so writer, director, cast) etc that basically state that they get paid a nominal fee for the film* and then a percentage of profits afterwards.  Below the line costs (set builders, grips, gaffers, wardrobe etc) are generally a fixed rate cost and salary.  Where it starts getting tricky is when people (normally producers etc) start deferring salaries.  These figures don't generally get included in the production cost that you'll find on places like IMDB and are suitably vague for auditing purposes because they'll be something like "x amount per month for the duration of the film production lifespan" but without necessarly defining what the lifespan of the film production is (bearing in mind you have pre and post as well).  

Then you start getting into associate and executive producers who may or may not want nominal salaries in addition to a return of their capital stake as well as interest on that stake (which, while it may appear to be a percentage of profit, is actually classed as as a production expense therefore not declared as profits).  

The fact that the prodution time of a big film (or series of films) can also span years means that depreciation and inflation get taken into account - more carpet under which apparent profits can be swept under.  Then there's marketing and DVD production.  Studios will generally fund all DVD production and marketing centrally but will then assign a cost (not necessarily accurate) to the production budget of each film which eats into the profit of that film alone.  The profit from merchandising is rarely - if ever - declared as being profit for the film but the cost of that merchandising is invariably attributed against the production costs.  EDIT 2: Trippy said this much butter above.

Unlike my first post in this thread, none of this is meant to be green.

EDIT: (I'm going to mention here that I used to run my own film production company and so started to get acquainted with a lot of this stuff.  Being small scale and low budget and largely dealing with short film production it was hardly on the same scale but as producer, I had to sort out the budgets and the contracts for films that cost something like $10k to make - a fucking pittance compared to the studio budgets - but even so, you start getting an insight into the convoluted nature of film accountancy and it's a deep, dark, evil place.  I never had the problem of being sued for profits as there really were fucking no profits to be had!  Having said that, I shut the company down a couple of years ago - the binds of starting a new family - so I have no idea who owns the rights to those films and who'd get the money if they ever did get sold.)

*but only for the filming.  Rehearsals, ADR, pick-up shots and the rest may well get paid at an entirely different lower rate.

Exactly how does that work? I admit I'm not a practicing CPA yet, but I'm getting a Masters in Accounting and it sounds an awful lot like the SPE stuff Enron got busted for. AFAIK you can't claim revenue from transactions that aren't arms-length. If the studio owns both, under the various qualifying rules, they would have to be consolidated in the financials according to GAAP.

Almost every movie is produced under an entity that exists solely for this purpose. The financing flows through that entity to the studios and employees of the film. That entitiy then usually vanishes after production. When you go watch a movie, look at all the logos that appear on the screen. There will be one you have never seen before and a bunch that you have. The one you haven't seen before is probably the limited liability company formed for just this film.

They create companies to produce movies. Believe me, the writers' strike was just the beginning. The studios are going to start getting smacked around by people who are sick of the shaft. The problem with Hollywood is that if you won't do it on their terms, there are 100 other people waiting in the wings who will gladly take your place at the terms set forth by the studios. But yes, it has been common practice for a long time for the studios to shift money around so that profits remain low to non-existent.

Yes, but my point is that shit is not above board. Having tons of companies shifting money around to avoid recognition screams scandal to any auditor worth his salt. The moment you find a good fraud, you get the PCAOB issuing standards down your throat.

That's why we have SOX now.

Corporations have long tried to find barely legal ways to suck their own dicks. Hollywood has perfected it to an art.

It sounds like,  at the highest level of consolidation, the net income is unchanged.  The studios are just playing games with whether expenses are picked up as Cost of Sales or G&A.  Almost sounds like they're using percentage of revenue as the method for overhead allocation rather than using percentage of direct costs,  which is supposed to be frowned on but still happens in some industries (especially non-profits).

I do a fair amount of Cost to complete/Percentage of completion revenue recognition with general and specialty contractors,  and yah,  doing that much fucking around with your job costs is usually a big red flag.


Tax wise,  I'm not sure how they're getting around the IRS.  The IRS is okay with some income shifting, if you have a decent rationale for it, but moving large amounts of income to other related parties without a basis in services/goods provided will get your friendly IRS auditor in a state. 

As I understand it, SOX covers public companies.  I believe many - if not all - film production companies are private and therefore not covered by the SOX regulations.

Also, I'm not sure that it's entirely as dodgy as it's being made to sound - I don't think any of it's illegal, it just boils down to defining what the profit from a given film is and what is expenses.  Basically, in any film production course I've attended and in many of the more acerbic commentaries, there are two general guidelines: the first is that nobody knows anything when it comes to making a good film and the second is that films don't make money. 

The proof is in the fact that we're even chatting about this now: how come New Line - a studio that, relatively, is small fry next to your Time Warners and your Fox, have tried to get away with it so much over Lord of the Rings - first with Jackson, now with the Tolkien Estate and some matter regarding extras and actors that I CBATG right now.  I can't find any mention of their stock dropping in price - or even any mention that they have stock which makes me wonder if they're public or not - and I suspect that if their dealings were in anyway illegal according to any US accounting, tax or finance law, they would have already been sussed given the high profile nature of some of these lawsuits. 

Basically, they're cheeky fuckers who will screw anyone over for a quick buck.

If they're a private company not screwing the IRS they can pretty-much cook the books any way they like as far as the law is concerned.

True, except Time-Warner, MGM, and FOX are. Paramount and Warner Brothers aren't. The rest are kinda smallish in terms of numbers. I'd say that the big players are under the regulations.

That's why big talents and big IP should simply ask for an unreasonably high upfront cost.

To get debt financing,  you're still going to have to produce attested financials and that means GAAP.

This exactly highlights the convoluted nature of it all - Time Warner is public, Warner Brothers isn't.  Warner Bros is the film studio division of Time Warner, just as MGM (which I didn't think was public) is for Sony, 20th Century Fox is to Fox and so on. 


Most large production companies and studios will avoid debt financing for movies and go for equity financing instead - hence the plethora of associate and executite producer roles you see on film credits (as well as product placement so on and so forth).  Debt financing is usually the domain of smaller production companies and independent filmmakers who don't have access to the readies that the larger corporations do. 

That being said, the studios are generally able to finance their own productions so any extra funding they get just offsets the amount of money they stand to lose if it all goes tits up.  And when it comes to repaying the investors, the party line is "but the film hasn't made any profit!" and we're right back where we started.

Basically, the Tolkien Trust made the mistake of not having a lawyer specializing in Entertainment Law help them negotiate.  Somebody told them "Make sure you get a cut of the gross" and they didn't blink when New Line just called it "Gross Profit" and proceded to define it the same way they always defined "Net Profit" (as in, no movie ever makes any).  Tom Hanks made over $30M off of "Forrest Gump", the author never got anything past the option money (in fact, I think he had to drop his suit when they pointed out that under the contract he owed them something like 90% of the option money).  Tom Hanks got $20M plus a piece of the gross revenues, the author was in for 10% of a non-existant "Net Profit".

--Dave

New Line absorbed by Warner (http://icv2.com/articles/home/12160.html).  Massive layoffs, and the departure of Bob Shaye and Michael Lynne expected, as New Line goes back to making lower budget stuff.  What impact this has on The Hobbit is unknown.