The Hollywood Economist 2.0

by Edward Jay Epstein

  The studios are in this powerful position because they have accrued over the past three decades an enormous reservoir of intangible good will with the chains that own the multiplexes by granting them such favors as readjusting the terms of their poorly-performing movies, extending their payment period, carving out zones to avoid destructive competition between the multiplexes, and providing them with a constant diet of franchised movies, such as Pirates of the Caribbean, Spider-Man, and Harry Potter, that fill their theaters with popcorn consumers. In return, the chains have given these studios a large measure of effective control over the booking and staging of wide openings, for example, inserting teaser trailers months in advance of the opening so that they can more precisely coordinate the marketing campaign. So if outside producers and financiers want to play in this game of wide-opening movies, which is where the big grosses are found, they have little choice but to pay the studios’ price of admission: the distribution fee.

  The fee varies according to the strength of the players. Studios usually charge a 30 percent distribution fee on the films they themselves finance. In Hollywood accounting, each of its movies is set up as an independent off-the-books company, and the 30 percent fee is treated as a cost paid to an outside entity, even though the distributor is also fully owned by the same studio. The result of this fictional division is that a film, after paying this enormous tariff, rarely shows a profit, even if the studio is making a profit from the distribution fee, and so the writers, directors, actors, and other participants in the profit rarely see anything but red ink on their semi-annual statements.

  When it comes to films that are financed by other people’s money, the distribution fee is the subject of often contentious negotiations. Most outsiders needing to reach a wide audience wind up paying about 18 percent. Since the actual cost of distributing a movie is 8 percent, a figure which includes the incremental cost of PR specialists, media buyers, customs clearance, transportation, and lawyers’ time, the studio makes as pure profit 10 percent of the gross revenues of a film on which some other party financed and took all the risk. Stronger players often negotiate the fee down to 12 percent, but that still leaves the studio a 4 percent profit on their gross, and hedge funds, which co-invest in entire slates of studio films, pay only 10 percent, yielding still a 2 percent profit. There are also “a few gorillas,” as a Paramount exec calls them, whose movies are so vital to studios, that they pay only 8 percent, the magic number at which the studio makes no profit.

  But such nonprofit arrangements are the exception, numbering in 2008, according to the Paramount executive, only three: Steven Spielberg’s deal with Universal, and Dreamworks Animation and Marvel Entertainment’s deals with Paramount. Most of these studio distribution deals with outsiders yield substantial profits on Other People’s Money. A top executive at Disney calculated, for example, that Disney made over $80 million in 2005 from outsiders (after deducting its actual costs of distribution). This skim, which goes to the bottom line, makes the six studios the biggest gross players in Hollywood.

  PART IV

  HOLLYWOOD POLITICS

  IN THE PICTURE

  In November 2009, Oliver Stone literally put me in the picture. I was seated at an oval table under an eerie light in what purported to be the office of the Chairman of New York Federal Reserve Bank. As the meeting continued throughout the night, people around screamed about the “moral hazard” of saving a failing investment bank. At one point, there was even a call from the White House dooming the bank in question. The frenetic scene is no more than a consensual hallucination directed by Oliver Stone for the movie Wall Street 2: Money Never Sleeps. (A sequel to his 1987 Wall Street.) The magnificently wood-paneled room is actually the executive conference room of an insurance company, MetLife, which is serving as a location for this part of the filming. The eerie glow comes from powerful lamps ingeniously suspended from helium balloons above us. The shouting is coming from actors Frank Langella, Eli Wallach, and Josh Brolin. Although I had only a bit part in this drama, it provided me with an opportunity to see how a Hollywood movie is made from the vantage point of the set.

  The project was initiated in 2005 by Edward R. Pressman, the producer of the original Wall Street, after he saw the fictional villain of Wall Street Gordon Gekko (portrayed by Michael Douglas) on the cover of Fortune, accompanied by a headline about the return of greed to Wall Street. Pressman reasoned that if eighteen years after the movie, Gekko was still the media’s icon for greed on Wall Street, a sequel was in order. He owned the rights for the sequel but sought to interest Twentieth Century Fox, which had distributed the original Wall Street. Getting a movie made in Hollywood when the hero is not a comic book character was not an easy task. Just getting a script that was acceptable to Fox took four years—and three different (and very expensive) writers. Even then Fox’s approval was conditional on the stars and director, as are almost all movie deals. Pressman persuaded Michael Douglas to again play Gekko, a role for which he had won the Oscar in 1988, and Oliver Stone (who had dropped out of the project earlier) to direct. Fox then agreed to finance it. Part of the $67 million budget could be retrieved from New York State and New York City’s tax credit programs (which effectively reimburse 35 percent of the production budget spent in New York).

  The Federal Reserve scenes were filmed over a long weekend about midway in the eleven-week shooting schedule. Through the seemingly endless retakes in which actors repeat virtually the same lines while extras behind them—each of whom is called by a number rather than a name—move to the exact same “mark,” or position, Stone gradually perfects the illusion. Between each take, the time on the grandfather clock in the office is reset to the exact time as it was at the start of the previous scene. The process is not unlike the never-ending day in Groundhog Day. But surrounding the illusion-in-the-making is an envelope of reality. It is peopled by a small army of technicians, including make-up artists, hair stylists, script supervisors, technical advisors, continuity girls, stand-by carpenters, wranglers, costumers, sound boom men, camera operators, film loaders, set decorators, and electricians. They work ceaselessly, rushing onto the set between takes, to maintain and repair the illusion. One of the advantages of a top director such as Stone is that he can get the best of the below-the-line talent, in this case such Oscar nominees as Rodrigo Prieto, the Mexican-born director of photography, whose credits include Frida, Brokeback Mountain, and Babel; Kristi Zea, the production designer, whose credits include Revolutionary Road, Goodfellas, and The Silence of the Lambs; and Tod Maitland, the versatile sound technician who won an Oscar for Seabiscuit.

  Stone himself is constantly moving around the set, viewing scenes from different angles and talking to the actors and extras, often in whispers. At other times, he confers with technical advisors, including two former SEC lawyers who had actually attended the Fed meetings, asking them about such details as how coffee cups would be placed on the table or how precisely a phone call from the White House would be answered. When any unexpected difficulties arise, such as when the camera dolly creaks audibly on its tracks, he jokes with the cast, having a gift for putting actors at ease. But even with the amicable atmosphere, he has to keep the movie running on a tight schedule. Just the below-the-line expenditures for Wall Street 2, which does not include the compensation for the stars, writers, producers, or the director, is running about $220,000 a day for interior scenes (exterior and crowd scenes can be much more expensive). So unless he shoots the planned number of script pages a day, he will run over budget. While Hollywood players are often depicted in the media as profligate spenders, the opposite is true when it comes to studio executives supervising a movie that they are financing. Before Wall Street 2 went into production, Fox went through the budget line by line, squeezing every penny it could out of the budget, even attempting to reduce the fees of major actors (all of whom have a “quote,” or established price per movie). If the shooting ran over budget, Fox could ask that scenes be cut out of the script to get
it back on track or use money from the post-production budget, which includes putting in visual effects (which are crucial in Wall Street 2 since some scenes are shot with blank backgrounds), adding sound, and editing. So Stone manages to adhere to the schedule, even when it requires him—and his assistant directors—working grueling fourteen hour days (as in the Federal Reserve Bank scenes). And, as it turns out, he completes the movie within a day of the targeted end of shooting.

  When I arrive at the wrap party at the club Spin, the cast, crew, and friends are huddled around plasma TV screens, watching clips from the movie. For most of them, it is their first opportunity to see how Stone actually realized the scenes they had worked in or on. As they watch, visibly impressed, they often cheer with the sort of gusto one might expect at a Super Bowl party when a touchdown is scored. Everyone embraces Stone, the hero of the evening, as he passes through the room. The club is owned by Susan Sarandon (who had acted in the movie) and features ping pong tables where Josh Brolin and Mel Gibson (who was not in the movie) engaged in a wild game. The celebration continued into the early hours of the morning.

  Unlike independent movies, which usually take years to reach the theaters, studio movies have a built-in release date from the moment they are green-lighted. Wall Street 2 opened at multiplexes across America on September 24, 2010. And during production Fox was already working on the advertising and marketing campaign, which required a huge investment in ads on cable and network TV. The worldwide P&A budget probably exceeded $40 million, which brought Fox’s total outlay to about $100 million. The original Wall Street did far better in earning critical acclaim and buzz than money. Fox’s share of the American box office was only $20.2 million—and it fared far worse in foreign markets. The problem Fox had then, and faces again, is that movies that involve complex issues, such as a financial crisis on Wall Street, did not draw the teen-age audience conditioned to expect the fast tempo of the studio’s superheroes. The $100 million gamble for Fox is that in the post-summer period, when the herds of teens are in school, it will be able to find an adult audience for the multiplexes.

  PARANOIA FOR FUN AND PROFIT: THE SAGA OF FAHRENHEIT 9/11

  Michael Moore had a problem in April 2004. He’d finished making Fahrenheit 9/11 but had no American distributor. Mel Gibson’s Icon Productions rejected the project back in April 2003. (Moore claims he had a signed contract before Gibson acquiesced to White House pressure. Icon executives deny any such contract existed.) Moore then went to Harvey Weinstein at Miramax, which since 1993 had been a wholly owned Disney subsidiary. Weinstein agreed to back the movie and signed a contract with Moore to acquire the rights. But in order to distribute the movie, Weinstein still needed the approval of his superiors at Disney because Weinstein’s contract explicitly prohibited Miramax, a wholly owned subsidiary of Disney, from distributing any film that was vetoed by the Disney CEO. When then-CEO Michael Eisner exercised his veto in May 2003, Miramax, though it still held the rights to the film, could not distribute Fahrenheit 9/11.

  By the time Eisner told Weinstein of his decision, the Miramax head had already given Moore $6 million from Miramax’s loan account. Weinstein agreed that this advance was to be “bridge financing” that he would recover when he sold off the film’s distribution rights. To make sure there was no misunderstanding, Disney’s senior executive vice president Peter Murphy, who was also at the meeting, wrote Weinstein a letter on May 12, 2003, affirming that this money was “bridge financing” and that Weinstein had agreed to dispose of Miramax’s interest in the film. For Moore, this $6 million in “bridge financing” was more than enough to make Fahrenheit 9/11. He acquired most of the footage from television film libraries at little, if any, cost and did not pay any of the on-camera talent (except for himself). On April 13, 2004, after Weinstein saw a rough cut, he went back to Eisner and asked him to reconsider his year-old decision not to distribute Fahrenheit 9/11. After getting a report on the content, which included footage from such sources as Al Jazeera and Al-Arabiya television, Eisner saw no reason to change his position. He again declared that Disney wouldn’t have anything to do with the movie.

  With the presidential election heating up, Moore needed to get his movie into theaters. Although Weinstein had told Eisner and Murphy that he planned to sell the film’s distribution rights after it was screened at the Cannes Film Festival, Moore had a more expedient stratagem. On the Fahrenheit 9/11 DVD, Moore says he resolved to get the film seen in America “by hook or by crook.” His hook was censorship.

  On May 5, 2004, the New York Times ran a front-page article headlined “Disney Is Blocking Distribution of Film That Criticizes Bush.” The story included the sensational charge that Eisner “expressed particular concern that [choosing to distribute Fahrenheit 9/11] would endanger tax breaks Disney receives for its theme park, hotels, and other ventures in Florida, where Mr. Bush’s brother, Jeb, is governor.” The source for this allegation was Moore’s agent, Ari Emanuel. Two days later, Moore claimed on his Web site that Disney’s board of directors rejected Fahrenheit 9/11 “last week.” In fact, the Disney board had not made such a decision in 2004; the project had been vetoed in 2003.

  Moore’s excursion from reality proved a boon at Cannes. On May 22, 2004, the Cannes jury defied putative efforts to censor Moore by awarding Fahrenheit 9/11 the prestigious Palme d’Or. Moore now had a golden palm in his hand and the media at his feet. With more free publicity than any Hollywood studio could afford to buy, Fahrenheit 9/11 now stood to rake in a fortune. And Disney, which still controlled the movie’s rights through its subsidiary Miramax, now got to decide who was going to profit from it. Disney had some experience dealing with Miramax’s hot potatoes. Rather than distributing the controversial Kids and Dogma, Disney allowed Miramax founders Harvey and Bob Weinstein to buy the films back and set up short-lived companies to distribute them. But those potatoes were as small as they were hot. In the case of Fahrenheit 9/11, Eisner wasn’t about to let the windfall escape into the Weinstein brothers’ pockets. Nor could Disney take the PR hit that would result from backtracking and distributing the movie itself.

  Eisner’s solution: Generate the illusion of outside distribution while orchestrating a deal that allowed Disney to reap most of the profits. Here’s how the dazzling deal worked. On paper, the Weinstein brothers bought the rights to Fahrenheit 9/11 from Miramax. The Weinsteins then transferred the rights to a Disney corporate front called Fellowship Adventure Group. In turn, that company outsourced the documentary’s theatrical distribution rights (principally to Lions Gate Films, IFC Films, and Alliance Atlantis Vivafilms) and video distribution rights (to Columbia Tristar Home Entertainment).

  Because of the buzz now attached to Fahrenheit 9/11, Harvey Weinstein extracted extremely favorable terms from these distributors, about one-third of what distributors typically charge. Their cut amounted to slightly more than 12 percent of the total they collected from the theaters. As a result, Fahrenheit 9/11’s net receipts, what remains after the distributors deduct their percentage and their out-of-pocket expenses (mounting an ad campaign, making prints, dubbing the film), would be much higher than those of a typical Hollywood film.

  Fahrenheit 9/11, now an event, took in more than $228 million in ticket sales worldwide, a record for a documentary, and sold 3 million DVDs, which brought in another $30 million in royalties. After the theaters took their share of the movie’s gross (roughly 50 percent) and distributors deducted the marketing expenses (including prints, advertising, dubbing, and custom clearance) and took their own cut, the net receipts returned to Disney were $78 million.

  Disney now had to pay Michael Moore’s profit participation. Under normal circumstances, documentaries rarely, if ever, make profits (especially if distributors charge the usual 33 percent fee). So, when Miramax made the deal for Fahrenheit 9/11, it allowed Moore a generous profit participation—which turned out to be 27 percent of the film’s net receipts. Disney, in honoring this deal, paid Moore a stunning $21 million. Moore
never disclosed the amount of his profit participation. When asked about it, the proletarian Moore joked to reporters on a conference call, “I don’t read the contracts.”

  What of Disney? After repaying itself $11 million for acquisition costs, it booked a $46 million net profit, which Eisner split between two subsidiaries, the Disney Foundation and Miramax. With his $21 million, Michael Moore had perhaps the happiest ending of all.

  THE SAGA CONTINUES

  While Disney made a profit on the paranoia in Fahrenheit 9/11, it led Eisner and other Disney executives to question whether Harvey Weinstein was worth the trouble he had caused the corporation. While Weinstein told journalists how much money he had made for Disney, an internal audit showed that Miramax under Weinstein, rather than adding to Disney’s profits, actually was hemorrhaging rivers of red ink. This reversal of fortune proceeded from a loophole in the original deal that Jeffrey Katzenberg, then Disney’s studio head, negotiated with Weinstein in 1993. The Weinsteins had demonstrated a superb gift for finding, shaping, and marketing independent films like Sex, Lies, and Videotape and The Crying Game. To give the brothers a powerful incentive to ferret out similar arty winners, Disney agreed to give them a performance bonus of between 30 percent and 35 percent of their film profits, a bonus that would be calculated each fiscal year. The deal also tied Miramax’s capital budget for acquiring and producing films to its annual performance. So, the more money Miramax made in a fiscal year, the more money the Weinsteins made and the bigger the capital budget of their Miramax division. The loophole was that Disney agreed to calculate Miramax’s profits in a fiscal year solely on the films released that year. In making what seemed like a minor concession to Weinstein so that he could use his discretion in timing the marketing of art films, Disney did not foresee how brilliantly he would game the calendar to create the illusion of profits for Miramax and the reality of huge bonus payments for himself and his brother, Bob. He simply shifted potential money-losing films into future fiscal years so that they didn’t reduce either his bonus or Miramax’s capital budget. To prevent Weinstein from overspending, Eisner later imposed a further condition on the deal: For every dollar Miramax exceeded its capital budget, a similar amount was deducted from the Weinsteins’ annual bonus. To avoid this penalty, Weinstein could delay releasing high-budget films in years in which he was close to exceeding his capital budget. As a result, even more films got dumped into Weinstein’s limbo of unreleased movies. For example, Zhang Yimou’s Hero, which had been acquired at Sundance in 2002, was held for more than two years so that its nearly $20 million cost would not count against the Weinsteins’ bonus. Hero was released in 2004, a year less profitable for Miramax in which no bonus would be paid anyway.