#4: The Taboo Question

       In the culture of celebrity gossip, money remains the great taboo topic. Forbidden is any question about the financial interest stars have in movies they are promoting, from the size of their paycheck to their participation in profits or the terms of their contract. If television hosts don’t abide by this tacit prohibition, they risk losing their access to the audience-pleasing big-screen players (and possibly their jobs). So celebrity interviews tend to be limited to anecdotes about stars’ putative feats, hobbies, and encounters with other celebrities.
If interviewers were not so restricted, the public might not be so mystified by the economic realities of Hollywood. Consider, for example, the demystification that might emerge from an unrestricted interview with Governor Arnold Schwarzenegger if he were to candidly answer questions about the contract for his last movie, Terminator 3. Here is what he would say if he candidly described the terms in his contract.

Q: Governor Schwarzenegger, is it true that the art of the deal is now the true art of Hollywood??
A: My lawyer Jacob Bloom negotiated a very artful deal for Terminator 3, especially since I was playing a robot...
1. Q. How much did you make?
A: That depends on whether you’re asking about guaranteed or contingent compensation. The guaranteed part is “play-or-pay,” of course.
Q. Meaning?
A. I get paid whether or not the movie is actually made.
Q. So you get your salary whether you do the work or not?
A. It’s a beautiful business that way.
Q. How much was that guaranteed “pay-or-play” fee?
A. $29,250,000.
Q. Plus bus fare...?
A. Actually, yes, the contract did include a perk package to cover essentials. It provided a lump-sum payment of $1.5 million for private jets, a fully equipped gym trailer, three-bedroom deluxe suites on locations, round-the-clock limousines, personal bodyguards--that sort of thing.
Q. So, let’s see--you made $30, 750,000 on this film?
A. Not including my contingent compensation.
Q. And what is that contingent on?
A. The movie reaching what is known as “cash break-even.” According to my contract, once the movie reaches cash break-even, I get a sum equal to 20 percent of the total adjusted gross receipts from every market in the world--including movie theaters, videos, DVDs, television licensing, in-flight entertainment, game licensing, and so forth.
Q. But doesn’t Hollywood accounting famously use smoke and mirrors to make sure movies never reach “break-even”?
A. Of course you hear about that happening to weaker players and girly men, but my contract--thanks to my lawyer, Jacob Bloom--is pretty tough. Take video and DVD sales, for example. Under the standard Hollywood contract, studios only credit the film with a video “royalty” equal to 20 percent of the sales. That means that if DVD sales total $20 million, only $4 million of that is counted towards reaching the break-even point.
Q. And in your contract?
A. The royalty is calculated at 100 percent of total video and DVD sales in determining my cash break-even. So if $20 million worth of DVDs are sold by Warner Brothers, $20 million is counted towards reaching the threshold where I begin collecting my 20 percent.
Q. Of course, you have to depend on the studios to tell you when that point is reached.
A. Not in my case. Jake Bloom--He is brilliant!--built a clause into my contract that triggered my contingent compensation once Daily Variety’s weekly box-office chart showed either that the total domestic box-office receipts had exceeded $155 million or that the world gross had exceeded $380 million.
Q. And did they?
A. Yes, by December 2003, the world gross had reached $421 million.
Q. Does this mean you were paid before all the other participants whose “cash break-even” agreement didn’t include a 100-percent royalty on home-video sales?
A. Yes. In fact, since the payments to me were added to the cost of the film, they effectively pushed those other participants even further away from reaching their break-even points. These things happen when you’re you don't have power in Hollywood.

Q. But can't the distributors deduct expenses some of their expenses, such as collection cost, check cashing costs, dues and...
A. Yes, it is an "adjusted" gross. But in my contract there are very strict caps placed on those expenses. Most of these expenses are capped at $250,000. So it amounts to petty cash.
Q. Now that your “break even” has been reached, wont your 20% of every dollar received amount to a small fortune-- especially with the money from world DVD and TV licensing still coming in?
A. There are winners as well as losers in Hollywood
Q. How about personal tax on this money? Isn’t there some withholding taxes in California...
A. They don’t apply. I am nor paid directly by the studio. All the money due me is paid to Oak Productions, Inc, which I own and control. Oak Productions, in return, “lends” my services to the production. So technically I don’t get any money personally from the movie itself.
Q: Does using a corporate front minimize your taxes?
A. You might say it better manages my exposure to taxes. For example, Oak Productions can-- and did-- enter into a complex tax-reimbursement scheme with the production to help me avoid additional tax liabilities that might occur abroad.

Q. In exchange for being so well compensated, did your contract require you to give media interviews?
A. Absolutely. It’s not as though I make all this money for doing nothing! My contract stipulated that I had to make myself available for at least ten days, seven of them abroad, for promotional activities in coordination with the initial theatrical release of the movie. This media work included everything from television and radio appearances to appearances at premieres and Internet chat rooms. But even if it were not part of my contract, I had a pretty good incentive to shamelessly promote Terminator 3 : my 20 percent of first-dollar gross.
Q. Thank you, Governor Schwarzenegger, for being so candid about money with our audience. They have been in the dark too long.
A. It’s all right there in my contract.

  How do studios make money? See Demystification #3.

 What Else Should Be Demystified?

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