Book Review: The Hollywood Economist

The Hollywood Economist
The Hidden Financial Reality Behind the Movies
by Edward Jay Epstein
Melville House, 2010.


Edward Jay Epstein once wrote the Hollywood Economist column for Slate. But these are hard times in the media industry. So clearly, it’s time to compile those columns into a book – a sequel of sorts to his earlier elucidation of Hollywood economics, The Big Picture [link to my review]. As with any compilation of this type, there will be some repetition. But the column format forces him to get right to the point, and it is eminently skimmable for the most salient points.

Informed by his knowledge of industry financials, Epstein presents some truly fascinating nuggets of information. Who knew, for instance, that Tom Cruise was such a clever financier? He had enough star power that he insisted on 100% accounting, in which every penny of revenue gets counted when calculating his percentage, instead of Hollywood accounting. As a producer, he sometimes took more out of the movie than the studio – which made the powers-that-be at Paramount so mad at him that they dumped the War of the Worlds project.

Speaking of Paramount, the regime change that massacred over a hundred top executives left Paramount with no movies in the pipeline. They solved this problem by turning themselves into Dreamworks, by buying them and absorbing all their productions. The size of the egos involved is staggering – almost as much as some of the crazy value-destroying deals described in Epstein’s previous book.

Mysteries of film distribution

The focus on economics explains a lot of mysteries created by the sloppy news-cycle driven reporting from the news media. Indeed, Epstein points out that it is difficult for a newspaper to report the financial performance of a movie, as it is not fully known until five years after its original release date, when the ancillary revenue streams had largely been accounted for. But sometimes the manufactured controversy just makes you shake your head at how convoluted these things can be.

Take Fahrenheit 9/11. After being ditched by Mel Gibson's company, the movie finally got funding from Miramax, which paid out $6 million before Michael Eisner vetoed the project. Disney then treated the $6 million that had already been paid out as "bridge financing"  – except that it was actually enough money to make the documentary. So Michael Moore shows up with a completed movie, and Eisner again vetoed Miramax distribution.

Michael Moore's agent then pitched a story about "censorship" to the news media – which generated a lot of buzz and perhaps helped lead to a Palme d'Or at Cannes. Disney ended up subcontracting the distribution to Lions Gate et al, but managed to keep most of the financial rewards. The film's notoriety meant that it got a lowered distribution fee, causing Michael Moore's profit points to kick in, to everyone's shock. As Epstein explained in The Big Picture, profit points are intended to be worthless, because Hollywood accounting is designed to produce losses on even big blockbusters. Only if you understand the financials of the film industry can you appreciate the irony of the situation.

Another Miramax mystery is the shelving of films. This used to be a major pet peeve of film critics, who would see foreign movies disappear into Miramax's black hole, to emerge years later. But apparently these film critics never cared enough about economics to investigate the cause. Epstein did.

As it turned out, the Weinstein brothers were simply practicing the accounting trick of "bunching," much like individuals are advised to do for income tax deductions. The brothers’ percentage of profits was calculated year-by-year, and the capital expenditure for each film was realized in the year that the film was released. If they had an expensive film that was at risk of taking a loss, and they were already in profit for that year, they would shelve the film and avoid realizing the expense to Miramax’s paper profits. Later, when they had an unprofitable year, they would dump all of these films, trying to push Miramax as deep into the red as possible. See, they got paid if Miramax made money, but they didn’t have to pay Disney is Miramax lost money. Disney finally got tired of the charade, fired the Weinstein brothers, and released all the shelved films in a big bunch in 2005.

A real Hollywood distribution report!

In the Appendix, Epstein reproduces an actual Hollywood distribution report for a movie that’s closed its books, something that few Hollywood outsiders have seen. The complete distribution report for Midnight in the Garden of Good and Evil (1997) includes all revenues sources: theatrical, non-theatrical, free TV, pay TV, video, domestic, and foreign (by country). $70 million in revenues come back into the US, of which $52 million showed up on the statement (the $18 million difference went to Warner Home Video, since video royalties are only 20%). Warner Brothers made a profit on the film, but the separate Inc. setup for the film itself showed $85.5 million of losses, in the best Hollywood accounting tradition.

Oh, and the line item "Swank" accounted for 0.06% of that $70 million – less than the US Navy. If you’ve ever been involved with the business side of a college film society and wondered why nobody in the industry takes you seriously, that’s why.