The
Hollywood Economist
The numbers behind the industry.
Studio
executives are hardly clueless when it comes to negotiating
contracts with top stars, although the popularity of The-Moguls-Must-Be-Crazy
stories in the media would have you believe otherwise. Examples
abound: the Wall Street Journal report that, “In
order to sign actress Cameron Diaz and director Nancy Meyers,
the [Sony] studio had planned to offer both women a share
of the movie's gross box-office revenue from its first day
of release on. It is a practice known as ‘first-dollar gross'
and it's standard fare for top-tier talent,” or the Variety
report that “20 percent of the gross [of King
Kong ] is going to [Peter] Jackson,” or the Wired
report that “A deal worth $20 million against 20 percent
of the box office gross [is] the kind of contract Tom Cruise
or Tom Hanks generally get.”
In
fact, the Hollywood studios never give participants—not
even gross players as powerful as Arnold Schwarzenegger,
Tom Cruise, Tom Hanks, Jerry Bruckenheimer, Steven Spielberg,
or even Pixar Animation Studios—an unadulterated percentage
of the box-office gross, or the video store gross, or any
other retail gross. As one top Viacom executive explained
“The first truism of Hollywood is ‘Nobody gets gross—not
even a top first dollar gross player.'”
What
the top gross players do get are two kinds of compensation:
fixed and contingent. The fixed part is the up-front money
that gross players are paid whatever happens to the movie.
The contingent part is the percentage of a pool—called the
“distributor's adjusted gross” in Hollywood lawyer lingo—that
the players get after certain conditions are met, such as
the movie earning back the amount of fixed compensation
or reaching a contractually-defined cash break-even point.
The pool is “filled” with the money that the distribution
arm collects or, in the case of DVDs, gets credited with.
With movies, the pool (eventually) gets the remittance from
theaters (anachronistically called “rentals” from the days
when movies were rented to exhibitors) left over after the
theater owners deduct their share of ticket-sales and house
allowance and after the distributor deducts “off the top”
expenses, such as check collection, currency transfers,
stamp taxes, duties, and trade association fees.
With
DVDs, the pool gets the “royalties” paid by the studio's
home entertainment arm to its distribution arm. It's a remarkable
exercise in self dealing, and produces an amount that represents
only a small fraction of the studio's actual revenue. The
standard DVD royalty is 20 percent of the wholesale price,
but a few of the very top stars get a royalty as high as
40 percent. (There is also an alternative arrangement called
“100% accounting” in which the pool is credited with the
home entertainment arm's total proceeds minus its manufacturing
and packaging costs, but this is usually reserved for only
full-fledged partners, such as Pixar.) In the case of TV
licensing, the pool gets the license fee minus the “residuals”
paid out to actors, directors, writers, and guild pension
plans.
To
see how these “gross” participations work in practice, look
at Arnold Schwarzenegger's 33-page contract for Terminator
3 , which is still considered the gold standard for
the super-gross players. For his fixed compensation, Schwarzenegger
received $29.25 million—then a record sum. He got the first
$3 million on signing and the balance during the course
of principal photography. His “contingent” compensation
was 20 percent of the “adjusted gross receipts” of the distributors
(Warner Bros in the US, Sony Pictures and Intermedia abroad).
The “adjusted” part of the equation allowed the studio to
deduct the items specified on page 3 of the contract: “All
industry-standard and customary off-the-top exclusions and
deductions– i.e. checking, collection conversion costs,
quota costs trade association fees, residuals, and taxes.”
Schwarzenegger's lawyer Jacob Bloom is without peer in the
entertainment business but the best he could do here was
to cap some of the collection charges at $250,000; he could
not touch the residuals or tax deduction. Bloom did manage
to get the all-important DVD royalty contribution to the
pool raised to 35 percent (although only for Schwarzenegger).
As good as this was, it meant that Schwarzenegger was entitled
to only 7 percent of what the studios took in from their
DVD sales.
Schwarzenegger's
contingent compensation would not kick in until the film
met the break-even point defined in the contract (Click
here to see how his contract
defines cash break-even.) Although the film achieved a $428
million world box-office gross, it just barely reached its
cash break-even point, so, alas, Governor Schwarzenegger
has earned only a pittance so far from his gross participation
beyond his $29.25 million pay day. Tom Cruise got a more
immediate slice of the action for Mission Impossible
2 . In return for his producing, acting, guaranteeing
against cost overruns, and paying other gross players their
share—including Director John Woo's 7.5 percent—Cruise's
production company got 30 percent of Paramount's adjusted
gross receipts. Since the DVD royalty going into the MI:2
pool was calculated at 40 percent royalty, Cruise would
end up getting 12 percent of the DVD revenue. As part of
his unique deal, Cruise did not take up-front fixed compensation
(other than the minimum required by the Screen Actor Guild),
and, in return, his 30 percent contingent compensation was
not deferred until a cash break-even threshold was met.
In
this light, Peter Jackson's compensation for King Kong
was a relative bargain. Universal paid $20 million
in fixed compensation to Jackson's production company not
only for his directing services, but also for the script
writing and producing services of his collaborators Fran
Walsh and Philippa Boyens. (The Terminator 3 budget
for script, producers, and directors exceeded $34.5
million.) And, making a sweet deal even sweeter, the New
Zealand citizenship of Jackson and his team qualified Universal
for a cash subsidy from the New Zealand government that
could be as high as $20 million (and, by itself, could pay
Jackson's entire fixed compensation). In addition, once
the fixed compensation is earned back, Jackson's company
also gets 20 percent of Universal's adjusted gross receipts,
which means it will get at least an additional $20 million
from movie rentals (which now have passed $200 million worldwide)
as well as a huge pay-off from future DVDs and television
rights.
Such
deals are costly, but not crazy. The studios' business nowadays
is entirely driven huge franchises that serve as worldwide
licensing platforms. And the most predictable rain-makers
for these windfalls, such as Steven Spielberg, George Lucas,
Tom Cruise, Jerry Bruckenheimer, and Peter Jackson, are
all gross players represented by savvy lawyers and agents
who know all the ropes of the movie business. To be sure,
not all of their projects turn out to be billion-dollar
franchises, but they have little down-side. Look at
King Kong: The upside for Universal was a Midas-touch
licensing franchise that would enrich the studio with billions
in revenues for years to come. But even if that gamble
fails and there are no ape sequels, the studio will lose
little, if any money, on the movie itself. So, even
with Jackson's generous deal, there is little downside risk.
In this big-stakes game, it makes great sense for the studios
to recruit the best gross players, as long as the gross
they give way is not really the gross.
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