-Studios create a subsidiary corporation for each movie and they almost never show a profit.
-The studios charge the subsidiary service fees for services performed like distribution, which lowers net income to zero or less.
-They do this to avoid taxation and paying royalties to actors.
Quote from wikipedia: "Because of this, net points are sometimes referred to as "monkey points," a term attributed to Eddie Murphy, who is said to have also stated that only a fool would accept net points in his or her contract."
There are many more cases like this involving high profile people including Peter Jackson:
This is a very good insight. I wonder how often the figures that get flashed around about how much money Hollywood is losing due to piracy are drawn directly from these fictionalizations created for an entirely separate purpose.
Another example of how criminal it is: A major studio will pay Technicolor $25 million annually for an exclusivity fee. Then Technicolor will charge inflated rates to the studios, so the films will appear to lose money.
Why isn't there an enterprising law firm going through the credits of all the Star Wars (and similar-vintage films with ongoing commercial potential), contacting every person on the list, and telling all the retired ones "There is a pot o' money with your name on it if you sign these papers which let us sue them for residuals on your behalf."?
I have to imagine that the legal strategy required there is a for loop with half-dozen templated documents: "Settle with $CLIENT regarding the residuals from the production of $FILM or in discovery we will subpoena all of $FILM's books and hand them to the forensic accounting department of $BIG_FIVE who will describe in vivid detail how they are an utter fiction, resulting in $DISTRICT_JUDGE issuing a judgement in excess of $GUESS against $YOUR_COMPANY."
Look at how hard it is to get traction on investigations into the current foreclosure/securitization boondoggle - it's taken 3 years for judges to actually start looking, the federal regulators are completely uninterested, and maybe 4 state AGs out of 50 have even started looking. And these are obvious and clearcut violations of pretty straightforward laws. Their reputations and legal teams have been a buffer against all sorts of suits and investigations.
A Hollywood investigation would be worse politics, since you've have every TV station screaming about the government intrusion in investigating their parent companies. Look at things like the just failed Attorney General settlement with the banks - the worst case here is the company makes a one-time payment of a few pennies on every dollar of profit to some fund nominally targeted towards the victims. Then you throw in all the indemnification offered by corporate structuring and the fact that there probably aren't technical violations of the law here and good luck selling some accounting irregularities as a prosecution.
Maybe in a few years that stuff will change, but right now the environment is such that nobody really buys the idea of government actually smacking someone with TR's Big Stick.
Right (I blame 1AM posting for my error), but counting on $DISTRICT_JUDGE to bring down the hammer is equally over-optimistic. If one can barely get a judge to wade in on "a clearly fraudulent document was submitted to your court" when it undermines a foreclosure, I'm pessimistic about the idea that $GUESS is going to be show-stopping.
The hope is that Hollywood would settle rather than take that risk. It's happened at least once before. Perhaps with higher stakes they would change strategies.
Why isn't there an enterprising law firm going through the credits of all the Star Wars (and similar-vintage films with ongoing commercial potential), contacting every person on the list, and telling all the retired ones "There is a pot o' money with your name on it if you sign these papers which let us sue them for residuals on your behalf."?
Because it's a violation of professional ethics to solicit clients in this way. That's one reason you occasionally see articles by lawyers explaining in copious detail why situation XYZ actually rests on a totally unstable legal foundation; they're hoping some interested party will notice the article and come to them.
weird, I get mail all the time from law firms..."you may already be owed this money!" or "we have records showing you purchased xyz lawnmower from abc, we have a class action suit blah blah if you simply sign and return this form you can join the class..."
Ah, I see your point. But those notices are where a plaintiff has already filed suit, a class has already been certified, and a settlement offered. You are being notified as a possible party to the settlement of your right to accept the settlement terms or opt out and bring a lawsuit of your own.
In keeping with the Star Wars example, suppose David Prowse sued on behalf of himself and all other costume-actors in Return of the Jedi - by 'costume actors' I mean people who appear on the screen but don't speak any lines. Darth Vader's lines are all spoken by James Earl Jones because David Prowse has a goofy accent that's not appropriate to the character; the Screen Actor's Guild mandates quite different royalty payments for actors who talk as against actors who merely appear. If a court agrees that 'costumed actors' constitutes a viable class of identifiable persons who are similarly situated (they probably would; they're listed in the credits, and many actors appear without having any lines to speak) then it may certify a class on the basis that it's more reasonable to wrap multiple plaintiff's claims into a single suit. A lot would depend on whether the court considered the suit to have any merit, which would require looking at industry employment agreements of the time. I don't know much about labor law so I couldn't tell you how likely that is. My gut feeling is 'not very' because these compensation practices are widespread. Anyway, say Prowse does a good enough case that he either wins, or Lucasfilm fears that defending the case will cost more than paying out and offers a settlement. Then everyone who played an Ewok/Stormtrooper/whatever but didn't have any lines will get a letter advising about rights arising from a class action.
Basically, if you are ever invited to appear in a big-budget film or TV show you need to remember three things: do you have a line (otherwise it's low-paid day labor with free lunch and some celebrity-spotting fun), SAG minimum (get hired in accordance with the Screen Actor's Guild deal, or Actor's Equity on a TV program), Taft-Hartley (in case the producer says you need to already be a member of the actor's union). If you have a line and come under an industry agreement, you get a residual payment every time the film/tv show/commercial is rebroadcast. This can add up to a tidy sum if you are lucky enough to work on something that becomes a hit. If you get hired as an extra, you can try talking during the scene you're in to get a speaking credit, but you'd better add enough value to the scene that the director is willing to stick up for you when a producer objects. That's the basic difference between acting and just having a particular look. David Prowse can't act, sad to say; he's what people in the industry call a 'movable prop.'
I could easily see such an enterprising law firm becoming the type of patent trolling law firm that everyone here dispises. While this is an extreme case of someone not getting a dime when he clearly deserves it, I am sure there is enough book doctoring out there that simply going after $STUDIO/$FILM/$TVSHOW could become profitable if the threats are there and the fear of where the monies should be gets uncovered.
> Why isn't there an enterprising law firm going through the credits of all the Star Wars (and similar-vintage films with ongoing commercial potential), contacting every person on the list, and telling all the retired ones "There is a pot o' money with your name on it if you sign these papers which let us sue them for residuals on your behalf."?
One of my intellectual property law professors, with fifty years experience in just about every kind of I.P. licensing scenario possible, all over the world, recommended it's almost always best in an I.P. license to ask for a flat fee first, and a small percentage of gross revenue with a short, hard reckoning date second. The more bargaining power you have, the higher you should bump up your position for upfront flat fee first and percentage of gross revenue second. Agreeing to a percentage of "net profits" is almost always a commitment to sue the other party down the road or get nothing. Whatever I've learned since then has left his recommendation intact.
Just to add, there are a million different possible situations, and "almost always" is a big exaggeration here, and I don't know anything about the particular case in the post. But the point remains; there is often virtue in simplicity.
I'm always fascinated by the way institutionalized dishonesty creeps into entire industries. From used car salesmen to film moguls, once a certain practice has ossified over the years into "everyone in the biz does it", practices that would result in jail time in other industries are simply accepted as business as usual. Even more curious, everyone to the man knows its wrong, but no one moves to change it. The emperor has no clothes and we just like him better naked.
There was actually a time in the 1980s when software developers got a percentage of profits. I remember working at WordPerfect in the late 80s and seeing some of the developers houses - one guy built a medieval castle complete with a working moat and drawbridge.
At the time I was hired in '89 or so they were doing away with that practice. "New developers don't get royalties any more."
But, it was a good business to be in for a short time. I'm not sure if Microsoft developers ever enjoyed royalties.
And then due to some Microsoft court case in 1999, they also did away with permanent contractors as well (now after 1 year, you must be incorporated).
Who did this benefit? Not the government, they lose taxes as now the contractors have to incorporate (filtering your income through an S-corp allows you to deduct all sorts of expenses). Not the contractors who now have to maintain and run a corporation.
It's always the corporations who benefit. Corporations are largely owned by the massively wealthy.
Only if you were unable to actually turn a net profit.
What would happen instead is that more actors and writers would be willing to work with you because they knew they'd get a fair share of the whole deal.
The problem there, is that the talent that would truly help you succeed can already demand gross participation from any studio. And the rest, while they would undoubtedly prefer to work for an honest studio, would climb over one another to land almost any work regardless of accounting policy.
Geez, Lucas. Have you no sense of decency, sir, at long last? Have you left no sense of decency?
I mean, really. I can see being a greedy fuck for a couple decades, while you're still unsure if you are, in fact, going to become and remain wealthy beyond the dreams of avarice. But once you have the fuck-you money put away for you, your entire family and everyone you've ever met who was halfway interesting, can't you toss Lord Vader some coin for his trouble?
"... I accuse the corporations, who oppose the moral rights of the artist, of being dishonest and insensitive to American cultural heritage and of being interested only in their quarterly bottom line, and not in the long-term interest of the Nation. ..."
There's more, including calling any such distortion of [his movie?] art as barbaric.
Donating 5% of your net worth to charity is praiseworthy, but it's not really anything special, particularly for people in that range of disposable income. He could probably release another boxed set of the original trilogy and make the entire amount back. Every active Mormon donates twice that much to their church.
Since you brought it up. My experience is that the Mormon church is a very laudable charity.
Humanitarian efforts relieve suffering for families of all nationalities and religions.
-In 2010 the Church provided relief to people affected by 119 disasters in 58 countries.
-Over 7.5 million people now have access to clean water because of Church efforts from 2002 through 2010.
-Since 2002, over 193,000 health care workers have been trained in Neonatal Resuscitation Training. The World Health Organization estimates that 1 million newborns die each year of breathing difficulties.
-Since 2003, over 550,000 people have benefitted from Church vision projects throughout the world.
The point wasn't the amount of good being done with the money, it was the size of the sacrifice being made as it affects the life of the donor.
Likewise, suppose I donate 5% of my income to charity A which is 100 times as effective at saving lives as charity B. My neighbor, of similar means, donates 50% of his income to charity B because of his mistaken belief that charity B is just as good. Now, I may know he's making a mistake, and there's no way I would choose to send my money to charity B, but my neighbor is still more honorable for making such a large sacrifice for something he thinks is right.
It makes no sense to judge people or award "points" for things wholly outside their control. As human beings, we aren't capable of perfect knowledge, and we don't have total control over most situations. So judging people on "actually being right" has limited utility. You may as well decide to slap a random stranger in retaliation for the weather being inclement.
For example: If Gandhi had been assassinated earlier, would that have made him a worse man?
Okay, they have some real estate holdings. But they've also provided significant relief for every major disaster in the past century. In addition, they offer job search assistance, food assistance, etc., through a network of farms, canneries and thrift stores. And all of this is funded by member donations in addition to the 10% mentioned by the GP.
But none of that's the point. The GP was pointing out that a not insignificant portion of the population donates more than 10% of their income on a regular basis. In light of that, 5% isn't much, particularly for someone with a great deal of income.
My point is that a person donating 10% to an inefficient charity like the Mormon Church is not as laudable as, e.g., a person donating some fraction of 10% to one of these: http://www.givewell.org/charities/top-charities
I never claimed it was laudable or a charity. I just claimed that pretty much every Mormon gives more of his wealth to this cause than Lucas does to those causes, by way of illustrating that it was not as big a humanitarian sacrifice as the raw dollar amounts might lead one to believe without knowing how rich Lucas is.
Yes because he clearly knew they would be such a success at the time he was negotiating contracts. He made the standard contracts, which is what you have to do, because you can't just change the terms later based on how successful something is or isn't.
This isn't a case of Lucas being exceptionally greedy. Maybe its a case proving how 1-sided Hollywood contracts are, though.
While I agree with you, the article is about Return of the Jedi which was released in 1983 - six years after the first Star Wars movie came out.
So by the time these contracts were being negotiated with David Prowse, the producers of the project knew that the movie was likely to be highly successful.
I don't know why this is such a surprise to everyone. Outside of the startup scene, showing net profit is a Bad Thing. It increases liability to taxes and to employees[1], etc.
Maybe public companies are different (though since, movie studios are just about all subsidiaries of public companies, maybe not), but in my dealings with many multi-million dollar companies (especially those with union contracts to deal with), they find any way possible to show a loss on the balance sheet.
Between accounting tricks and taking money off the table through reinvesting (real or imagined) and executive salaries, profit is basically a made up number based on whatever management wants it to be.
Taking any percentage of net profit, in plenty of industries, is basically the same as taking nothing.
On a side note: the article and the one from the other day that mentioned this story as well only seemed to consider box office gross as the movie's revenue. I mean how many of us just on HN have more bought or gotten than one copy of the Star Wars movies over the years? I know I have at least 3 hanging around, to say nothing of TV airings and the like.
[1]Liability to employees: Through profit-sharing programs, raise discussions, union contract talks, etc., publicly showing a "profit" can cost the company money.
I seem to remember Alec Guinness hit the jackpot on the SW franchise by demanding a % of the profit (gross?), so I assume this guy had a different contract. I suppose Guinness had a lot more pull and negotiating leverage than a dude whose primary contribution to the films was to be tall.
I don't think Sir Alec ever thought there would be sequels. Especially since he dies in the first movie.
I think it's just a matter of good bargaining. At the time, Guinness had been in the movies for three-plus decades. Prowse's career hovered just above the "extra" category. Prowse probably signed whatever contract they gave him; Guinness probably dictated terms.
Even shares on "gross profit" can fail: it can be beneficial for the publisher to give away the product for free. I've had this happen to a J2ME app, which the publisher gave away for free in exchange for advertising (they were building presence and reputation by this).
Another trick seems to be bundling - "buy this collection of things and you get thing x for free". So profits for selling thing x would be zero.
I never cease to be amazed at how honest and forthright everyone in the (top tier) of the startup industry is, vs. the entertainment, government contracting, small business, etc. space. To say nothing of finance or politics.
That silicon valley and tech is taking over the world might be a result of this, but in any case, it's better for humanity.
Are you really suggesting that it's rare for employees to get hosed on options because they don't understand the terms in their contract? Because that's about the closest parallel I can think of. Net points sound like the showbiz equivalent of liquidation preferences. "Oh, no, you don't actually get a percentage of the $50 million sale because there are these investors that have a different kind of stock that says that they get at least a 5x return before you get anything..."
Tech contracts are pretty transparent by comparison.
Aside from value of options (which most people consider to be $0-$20k for the average $100-150k/yr job), all the other benefits of working in tech are straightforward and employee-favorable.
In an early stage startup, you're not likely to see worse than 2x participating, and 1x non is the standard for Series A financings now.
I disagree, look at the options given to Skype employees [1], being in the valley doesn't magically mean that your safe from the dark side of the force.
Skype was Private Equity, not normal VC/founder/team terms.
very rarely do founders fuck their employees over, relative to how employees are treated in most places. Founders vs. VCs or Founders vs. PE is more common, but founders at a late-stage company should be a lot more educated and resourced.
It's mainly at the idea to startup to series A stage where people are fairly universally honorable, at least among the top people.
The comments on the "how much did you earn as an early employee from an exit?" thread seem to indicate otherwise. Very few people ever saw their stock options amount to anything.
There are two factors in that thread. First, most companies never achieve a meaningfully successful exit (so those reports will be "my options amounted to nothing" and people will freely share that). Second, in the cases where they did, the employees who did well are somewhat less likely to be reading HN and (I surmise) vastly less likely to talk about it.
I had typed up my experiences over three exits in that thread, posted it and deleted it a few minutes later as it didn't add enough to the discussion relative to what it revealed about me.
You're getting into 'no true scotsman' territory here. Everyone in the film industry is very nice and decent as well, until you run into someone who isn't.
Like it or not, this is just the way capitalism works. It pays very handsomly to be corrupt, or to be a cartel member in a self-regulated industry. And it will not get better until we move to a new economic paradigm.
Wouldn't it be nice if Lodsys got out of the patent troll game, and into using it's lawyers to fight for net-profit-residuals for people who worked on films that earned huge profits over time?
The Problem With Music by Steve Albini (the original article Courtney Love was inspired by in her attack on the RIAA): http://www.negativland.com/albini.html
I disagree that it is the opposite. In fact I think it is more like LucasFilm is saying Just Sue Me. From the article Seth (I am assuming he is a reliable source as I know nothing about the film industry) seems to think that if LucasFilms was sued that they would lose (or settle), but luckily people, specifically Darth, are either to lazy or the amount they would win wouldn't cover the legal expenses of suing. So in effect LucasFilms is pretending like the risk of litigation isn't there and it is working out OK for them so far. Just like the experiences of PUD.
I wonder if you add in the marketing and distribution cost for bit torrent & associated search sites you can find that the movie companies should be paying them?
olllld article from 2009 rehashing longtime complaints of bitter Vader suit wearing actor. He didn't get a cut of the only-named-in-merchandise Ewoks toys. Boohoo.
http://en.wikipedia.org/wiki/Hollywood_accounting
Summary:
-Studios create a subsidiary corporation for each movie and they almost never show a profit.
-The studios charge the subsidiary service fees for services performed like distribution, which lowers net income to zero or less.
-They do this to avoid taxation and paying royalties to actors.
Quote from wikipedia: "Because of this, net points are sometimes referred to as "monkey points," a term attributed to Eddie Murphy, who is said to have also stated that only a fool would accept net points in his or her contract."
There are many more cases like this involving high profile people including Peter Jackson:
http://en.wikipedia.org/wiki/Hollywood_accounting#Examples