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Hollywood Accounting Explained

Written by Phineas Upham

When Winston Groom sold the screenplay for Forrest Gump to Paramount pictures, he agreed to take a share of the profits from the film as payment for his work. It must have come as quite a shock to him when a movie so critically acclaimed ended up losing money. Groom did write a sequel, but refused to sell. He said that it would be a waste for his work toward another unsuccessful film.

But, was the film that was so beloved by both audiences and critics really so unsuccessful?

This is a textbook example of what is colloquially known as Hollywood accounting. It’s a shady practice that may or may not be illegal, which seems to depend on a case-by-case basis. Here’s how it works.

It all begins with a shell company set up by each studio. These companies exist whenever a new film comes into production, so the Next Hobbit film or even Star Wars Episode VII is likely to follow this model. The studio then gives the production money to the shell corporation to manage the funds for production.

Then things get a little gray.

As this money is transferred, the studio also levies fees against the shell corporation. These fees are supposed to represent real expenses the company has to put out. In the case of production, these expenses might cover costumes or lighting equipment in addition to hiring actors and actresses to perform.

The problem comes when studios charge fees for things that don’t actually affect them. For instance, when a studio like Paramount “pays” to advertise its films, it may actually be paying itself for distribution on its own platforms. These accounting practices turn a film like Harry Potter, a beloved blockbuster, into a loss for the production company.

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Phineas Upham is an investor from NYC and SF. You may contact Phineas on his Phineas Upham website