I’m a big Hollywood studio and I want to make a movie called Big Movie. It’s expected to break box-office records.
The first thing I do is create a holding company called Big Movie Holdings, Inc. While it was started by me, it is actually a completely independent company. I will do a deal with this company: it gets the rights to produce, market and hold the movie rights to Big Movie on one condition: it hires me to do the marketing and distribution.
So Big Movie Holdings, Inc. goes off and makes the movie. It finds a gullible new writer who agrees to work for a percentage of the movie’s net profits (because he’s a dumbass.) Big Movie Holdings, Inc. spends $50 million making the movie, and then as per the contract, they come to me for the marketing. I charge them $200 million (even though it may only cost me $2 million to market the movie.)
Finally, Big Movie comes out. It grosses $200 million. Since it only cost $50 million to make, you’d think that means a profit of $150 million. But since they have to pay me $200 million for marketing and distribution, unfortunately Big Movie Holdings, Inc. lost $50 million. So that writer doesn’t get paid because his deal was with Big Movie Holdings, Inc. and they lost money.
Meanwhile, I pocket $200 million and go on my merry way.
That’s Hollywood Accounting in a nutshell.
Return Of The Jedi for example made $390 Million on paper. But once the accountants got involved it wasn’t so. To this day it has never “gone into profit”
Harry Potter sequel grossed 938 million but ended up losing 137 million.