Black Box Accounting

Finance allah shmoop we'll have new Some accountants cook the

books Ah those hollywood accountants You know they just make

up numbers to mess with poor naive innocent little actors

and actresses Brad pitiful is making a movie about an

alien who comes to earth and gets elected president brad

gets fifteen percent of the movie's profits as compensation Well

the flick is a block but a a monster hit

doing two hundred million box the box office another one

hundred million in licensing revenues from netflix the network's youtube

and like well brad has his eye on a shiny

new g six jet and has all said to buy

one when the studio says sorry no profits Well how

can this be He wonders the studio accountant lucky jim

here does the math Well the two hundred million dollars

was just box office sales and the theaters keep half

the money So that's one hundred million bucks to us

Same deal with the aftermarket hundred million So only fifty

million came to us Brad says don't i get fifteen

million of that new small thing called production costs while

we needed toe actually make and then market your movie

Well the movie cost eighty million dollars a shoot And

then we spent thirty million dollars to market it Well

brad sighs thinking about a much smaller plane and says

well then okay that's one hundred fifty million to you

and one hundred ten million in expenses So we made

forty million dollars and i get six million write Well

here comes the book cooking paradigm that eighty million dollars

wasn't spent the day before the movie rolled out into

theaters It was spent years beforehand and renting money costs

money so the studio had to use its credit I

even rent money from banks and partners to fund the

movie's production Well the studio borrowed eighty million bucks for

five years in fact and then another thirty million for

two years The market it now this is extremely risky

capital And if this movie had bombed then the banks

might have lost everything So if you were the bank

would you charge just three percent for that extremely risky

capital You have no way So the studio could have

rightly told the producer tio go fund himself you know

to fund the movie elsewhere and get whatever interest rate

on the money he could find and the studio would

match it And surprise surprise Other than in somalia there

were no takers Not a single lender was willing to

take on such enormous risk even at a twenty percent

interest rate So the studio generously loans the production money

at fifteen percent interest and here's the math fifteen percent

on eighty million dollars for five years That's twelve million

of interest per year for five years or so sixty

million dollars in total And that fifteen percent interest rate

was a gift The real market price was more like

twenty percent Well then fifteen percent on the thirty million

for two years to market it Yeah at another nine

million dollars of interest costs So what happened here Well

the interest charges ate up all the profits Yes the

film had operating profit ignoring interest costs over forty million

dollars But it had to rent the money to go

make the film the rental cost or the interest costs

of the money with sixty million dollars for the production

and nine million for the marketing Oh and there's this

other little thing called a distribution fee that studios taken

Return for pushing the film into the difficult to deal

with theater owners and usually that's thirty percent off the

top but those are details So were the books cooked

here No not at all If making movies was such

an easy profitable business well there would be legions of

venture capitalists throwing money at the business the way there

are in silicon valley with computer software engineers Unfortunately hollywood's

heyday was a half century ago and economically hollywood is

dying The studio and the banks behind it have to

charge a very high interest rate to accommodate for the

sad fact that most movies don't make back the money

invested in them Most movies lose money so the one

in ten movies that actually make money have to be

Hey for all the rest of the studio only charged

three percent interest for years I work out great for

brad pitiful in his profit sharing story In a world

where the movie made forty million dollars in revenue and

had only ten million in interest costs With then thirty

million of you know pretax profit well then brad would

have gotten fifteen percent of thirty million or four point

Five million in bonus dough But that's not the way

things work The books aren't being cooked here People They're

just being zapped by interest costs It's almost enough to 00:04:33.104 --> [endTime] make you lose your