Hollywood is an unusual kind of industry. We tend to deviate from the best practices and trends that companies follow in other industries.
The way studios and production companies handle their accounting is a great example of this. To people on outside of the business, Hollywood accounting seems unethical and possibly illegal. It’s neither. It’s just so unusual that onlookers get suspicious.
Doing things differently means outsiders have no idea what the hell goes on. That ignorance has spawned countless myths.
One misconception I can’t stand is one that’s been floating around for – I don’t know – forever. It says that 80% of movies lose money. The logical conclusion to this myth is that the 20% of movies that make money somehow cover the losses and make enough money for the distributors to stay in business.
I’d like to explain why the “rule” that 80% of movies lose money is 100% bullshit.
The Math Doesn’t Work
There’s no industry on the planet that loses money on 80% of its projects, but recoups it all on the remaining 20%, especially when they spend $25 million to upwards of $250 million on each (like filmmaking).
I compare this to the belief that brick-and-mortar stores don’t become profitable until Black Friday. In fact, some say that’s where “Black Friday” comes from because retailers move from the red into the black (accounting-wise) on that heavy shopping day.
Of course that’s nonsense too. Could you imagine the risk a store owner would take to lose money for 11 months and only profit as long as one day was a blowout? No one would open a retail store if that were the case.There’s no industry on the planet that loses money on 80% of its projects, but recoups it all on the remaining 20%. Click To Tweet
If you think about it, it would be mathematically impossible for 80% of films to lose money and then make so fucking much on the remaining 20% to still earn a profit.
That said, there are still plenty of projects that lose money. Some lose buckets of cash.
- JOHN CARTER (2012) lost $122–$200 million.
- 47 RONIN (2013) lost $97–$150 million.
- A WRINKLE IN TIME (2018) $86–$186 million.
- PAN (2015) lost $86–$150 million.
Those are just some examples within the last few years. They were all big-budget films, staring well-known actors, made by competent directors, based on strong intellectual property, and distributed by the big players. But they still tanked. Why they failed might be the topic of a future article, but the point is that losses happen even when a film looks great on paper.
Nevertheless, the aggregate of the massive flops you read about in the media and the small-time failures you never hear about doesn’t come anywhere close to 80% of all the film and television made in Hollywood (or anywhere else).
The truth is that the majority of movies break even and make a little bit of money. About 20% are blockbuster hits that create massive revenue.
The Origin of the Myth
I don’t know who started this “rule” or when. I don’t think anyone knows that. This is one of those nuggets of culture we can’t pin down.
But if I had to guess, it probably came from some douchebag who was trying to con an investor. “80% of movies in this town lose money,” he probably said. “But mine is guaranteed to make bank.”
It doesn’t help that the way distribution agreements are crafted supports the myth. If you were to break down a production company’s distribution report and reverse engineer the math (looking at the cash-in and cash-out), you’d see a film lose money on paper. But that’s only because the lion’s share of the profit gets transferred to the distributor.
So yeah, it seems like every bloody movie makes $0.
But of course we know that film and TV make money. Universal, Warner Brothers, and Disney aren’t exactly hurting for profit.
Furthermore, I think the industry wants people to believe they suffer from substantial expenses due to a high failure rate. “We work so hard,” they say, “But we only make money on every fifth movie!” This makes it easier to justify high distribution fees to “recover their losses.”
Reinforcing the myth might also give the studios some leverage in negotiations. They definitely don’t want investors comparing deals. They don’t want an investor to ask a question like “Why are you charging me so much? You guys are plenty profitable!”
Investors Screw Themselves
Too many investors attach themselves to titles. They latch on to a filmmaker (a writer, director, producer, etc.) without any accomplishments. The filmmaker doesn’t have any festivals wins, media buzz, or anything to use to sell the movie around the world.
Without anything to sell, the investor can only pray they get their money back. They hope the film will run the festival circuit, go viral, and make loads of money.
“Going viral” is not a strategy. It’s a gamble. So many independent investors lose their investments.
Making a movie and running the festival circuit (common method for indie movies) without any source of revenue or method of distribution is a flat-out losing strategy. It’s fucking stupid, but I see it all the time.
Besides, I’m pretty sure many investors aren’t that concerned with making their money back. They like to hang out on set. They fantasize about sleeping with the starlet-of-the-week. They want to befriend actors, directors, and writers (which is funny because most creatives don’t want anything to do with money people). They want to tell their friends they’re “part of the film scene.”
Accounting Practices Don’t Help
Part of the reason investors get screwed has to do with Hollywood’s accounting practices.
I firmly believe that there’s no foul play if all the parties in the distribution agreement uphold their end of the deal, no matter how one-sided that deal may seem. But there are plenty of instances when a deal closes were the distributor’s terms are so lopsided that they piss off the capital contributing partners.
That’s sort of what happened about eight years ago when Melrose 2, an investment firm, sued Paramount claiming fraudulent business practices. Rumor is that Paramount only gave them shitty titles, not the ones most likely to make big profits. Melrose 2 demanded a better deal.
Paramount settled in the end. The exact details of the settlement and the new deal are private, of course, but word is that Paramount complied with the investment firm’s demands because they didn’t want Melrose 2 to stop injecting cash into their films.
Things worked out for Melrose 2 because they had leverage. They could withhold future cash and take their investing dollars to another distributor.
But small-time investors who dump cash into independent films don’t always have that luxury. If they sign a bad distribution agreement, the distributor will just say “tough shit.”
Hollywood is a Business
Another reason investors get screwed is because they don’t really care about the business of content creation.
Look – Hollywood is a business. It’s the business of creating sellable content. When an independent company tries to sell a film at festivals, would-be buyers always ask two questions in quick succession: “What you got? Who’s in it?”
They don’t give a rat’s ass about the film’s message or story. They don’t care about its controversial political commentary, its social bravery, or whatever bullshit creatives try to pass off as value. They are in the widget business – they don’t even read scripts.
Good investors care about a film’s ability to put butts in seats, sell licenses to Netflix, and put hard products on Walmart’s shelves. Does it have Tom Cruise? Does it have Gary Oldman in crazy makeup? Does the starlet-of-the-week get semi-naked (or better yet, REALLY naked)? Those are selling points investors can get behind because they create money and in some cases big piles of money.
(As content consumers, we like to think we’re cultured, but our consumption habits are highly predictable.)
If a movie doesn’t have something to sell, good investors – the ones with money and experience – aren’t going to fund production. If 80% of movies truly lost money, all the serious investors would have abandoned film and TV a long time ago.
Thinking about investing in a film? Download this list of red flags that may indicate the deal won’t make you any money.
The rule that 80% of movies lose money is bullshit because all that money appears on the distribution side. There’s very little cash on the table for capital contributors and creatives.
If you want to invest in film, invest in filmmakers who can distribute or can have a distribution platform built around them. Aside from a small percentage of stars, distributors are the ones getting paid.