When it comes to how much money movies make, you may find numbers that simply don’t add up. Perhaps one of the best examples is Forrest Gump (1994), which had a $55 million dollar budget and sold more than $660 million in tickets by 1995 and was the third highest grossing film of all time when it was released. Despite that, Paramount reported zero profits, which doesn’t really add up. In fact, Forrest Gump reported a $31 million loss. Similarly, Return of the Jedi also never made a profit. So what is Hollywood accounting, and why are we wrapping Forrest Gump up into it?
If you really hate math, we promise there’s also a totally nuts Forrest Gump sequel waiting at the end for you. We’re not kidding.
Creative Accounting & Cooking the Books
Honestly, any kind of accounting that has some kind of preface that isn’t just “normal accounting” probably sets off some alarm bells in your lizard brain. Most of which are telling you “something fishy is going on.” We could keep giving examples, but you’d probably laugh someone out of the room if they told you The Lord of the Rings lost money, or that Harry Potter lost $167 million dollars. After all, why are you investing in movies if they keep losing money?
So what’s the rub?
At its base, Hollywood accounting reports a bunch of costs that functionally do not exist. The point is to balloon the paper cost of making a film as much as possible. You can think of a movie as a corporation designed to lose a bunch of money with shell companies that just siphon profits. Which is basically the opposite of how most shell companies work–they’re more often used to hide losses in an effort to make a given company seem more profitable.
But back to movies. Distribution fees (think the marketing for a film) can send upwards 30% of what a film makes back to the studio by reporting outrageous marketing costs.
Why Do Studios Want to Lose Money?
Well the short and obvious answer is that they don’t want to lose money. They just want to make it look like their films are losing money. In the 60s and 70s payouts for actors, writers, producers, and directors were based on the gross and net profits/income of any movie. That distinction may not seem important, but it is.
Gross profit is what you make after subtracting the raw production costs of your product. So if you’re selling a burger, the gross profit is the cost of the ingredients between the buns (and the buns themselves). Net income is the profit you’re left with after subtracting all the other costs. That’s advertising the burger, paying the guy who came up with the idea to use onions and mayo instead of one of each, paying the guy who’s going to pay the guy to shill your burger on social media. You can see how you can just stuff extra costs into the net profit category to drive it down now. That’s why you normally see the gross income when studios brag about how much money the next Avengers movie made, opposed to the net income.
Because payout is often based on profit (and defacto how successful a film is), many contracts, particularly for actors, are a percentage of the film’s first-dollar gross. The first-dollar means they get paid before other expenses are paid–which just means they’re prioritized. This is part of what makes Hollywood accounting so difficult to litigate–nobody really knows how much anyone else is making in relation to the initial contract they signed.
Conflicts of Interest
So now you know payout for people in the production pipeline is based on profit and not an agreed upon constant. The studio is the entity that determines who gets their payout–and in a market where everyone wants to get paid, they also want their cut. This means anything that isn’t net profit goes back to the studio, and money they take in can be listed under “recouping costs.” If profit is a pie given out to actors, writers, etc. in slices, ballooning costs are how studios take their slice of the pie. If there’s no net profit, well there’s no pie left to give out.
Mostly because the studio ate it all.
At least, this is what happens functionally. On paper, it looks more like this.
Our movie studio wants to make a movie, so they create a production company that exists to just make that movie. That production company, created by the studio, charges the studio for making the movie. Typically, this charge is very expensive (think that “YouTube ad you just saw is 30% of every dollar the movie makes” expensive). Once the movie comes out, this production company, created by the studio, is absorbed back into the studio. So while the studio says they paid this company a ton of money as part of the costs–they own the company now. The money, in essence, doesn’t go anywhere.
The Forrest Gump Sequel They Never Made
Alright we promised the Forrest Gump sequel.
Forrest Gump is a novel written by Winston Groom. He was promised 3% of the net profits (on top of a flat $350k) of the biggest film of that year–Forrest Gump. Notice how he was promised net profits and not gross profits. Since Forrest Gump “somehow” (you now know how) made “no money,” Groom didn’t see a penny of that 3%. Now anyone with a brain, including Groom, could see that he was getting the short end of the stick; Forrest Gump’s $700 million at the box office in 1995 would be over $1.25 billion today.
Groom was pretty outspoken about how Paramount was trying to weasel out of paying him–and eventually Paramount settled with him behind closed doors. While we don’t know the payout Groom received (though it was definitely a lot), part of the agreement was that Paramount would own the right to make a film off of a sequel novel to Forrest Gump.
This novel is called Gump & Co. and was published in 1995 (one year after the 1994 film). It’s telling that the first page has Gump telling the audience “don’t ever let nobody make a movie of your life’s story.”
Included in Gump & Co. is Forrest Gump being deployed to the Gulf War with an orangutan he met when he went to space. He also creates New Coke.
Hollywood did try to make this sequel happen, but screenwriter Eric Roth turned in the screenplay on 9/10, 2001–and the sequel had Forrest bumbling his way through the Oklahoma City bombing. So it was decided that the sequel would be shelved.
See if you know your Hollywood hairstyles here. How expensive do you thin they were?