Show business mesmerises everyone. Contrary to the Bard’s most hackneyed lines, the world is not a stage. Rather, it is a massive audience, pouring its admission fees into the coffers of America’s most successful export industry – Hollywood.
But where those dollars go afterwards is a mystery worthy of the most imaginative screenwriters. While the magic of theatre has been around for thousands of years, the real sorcery of Hollywood is performed by the accountants. Even the treacly slow thoughts of Forrest Gump, the dimwitted hero who captivated America, would quicken on learning that his eponymous film had grossed $662 mn at the box office while still managing to ‘lose’ $62 mn.
Of course, losing is a relative term here. Tom Hanks, the lead character in Forrest Gump, showed that he was only kidding about being stupid when he walked away from the studio lot with $31 mn – so far. Winston Groom, who actually wrote the plot for the film, was paid a mere $350,000 and was still awaiting a share of the profits in June. This is not an isolated case. Tinseltown specialises in reverse alchemy, turning gold into – well, tinsel.
Art Buchwald discovered that specialism when he claimed a share of the profits for Coming to America – only to find that there weren’t any. The judge in the case was as bemused as any lay person would have been at calculations that appeared to be the accounting equivalent of anti-gravity. But not all loss makers are false. Many movies do indeed lose money – and a lot of it. Hollywood is convinced that there is a formula for success, but as soon as anyone thinks they have the right combination of stars, script and director, the fickle public changes its mind.
And, in the meantime, the tyranny of the talents in Hollywood defies all attempts at cost cutting. Big names not only get gross points – percentages of the box office takings regardless of cost – they also command control of the capital expenditure. Robin Williams’s Baron Munchausen went through the roof with its orbital expenses. And Kevin Costner’s Water World is currently into its third hundred million – despite the fact that, notwithstanding heavy advertising, it could well be as exciting as a cold shower.
So why would anyone invest the annual budget of a small country in a one-off product which could bomb? And which, even if it is a hit, will have all its profits siphoned off on the way to the shareholder?
Who siphons it off anyway? According to attorney and industry critic John Cones, the movie moguls try to allow enough through to keep the shareholders happy, but most of it stops in the industry. A lot of money goes to the upper management, the talent, the agents and the attorneys.’ (Although not, he says, to critical attorneys.)
The position of investors in individual projects – the equivalent of Broadway Angels – is even worse. ‘I don’t think it’s safe to invest that way,’ suggests Cones. ‘I’ve been arranging finance for independent films for eight years. As far as I know, none of the investors have ever got their money back.’
But for the industry itself, one success pays for ten flops, according to Smith Barney analyst Jill Krutick. Her ‘buy’ ticket is on Disney. Animations are more of an industrial process, and they have a longer shelf life, with more spin-offs and fewer spivs than live movies. Krutick points with admiration to the estimated $1 bn profits produced by the Lion King; and an anticipated $700 mn from Pocahontas. They are still major investments, in the region of $60 mn, but they are much more bankable properties.
Better still, unlike their human counterparts, age (or scandal) shall not wither the image of Snow White or Pocahontas; the girth of a Lion King will never expand to Brandoesque proportions; and Captain John Smith’s blond locks will never need augmenting with a hair piece. Nor will the accountants need to launder the gross points out of the profit before the shareholders get anything.
But cartoons apart, there are other ways for shareholders to be sure that their returns are not diluted. One method is to go for multimedia – the Turner route you might say. Buy up an old film library that its present owners, preoccupied with today’s stars, will dispose of cheaply; then set up a whole network of home video sales, cable TV and pay-to-view operations which are used to exploit the products while mutually advertising each other.
Applied efficiently, as by Disney, the same formula can even be used for efficiently conceived new products. It may not be art – but then what is? Arnold Schwarzenegger?
And yes, since this is Hollywood, there can be happy endings. Stung by the revelations of Forrest Gump’s finances, Paramount sent its author a $250,000 advance against profits – non-returnable, one hopes.
But where there are happy endings, there are also cliff-hangers. With a few exceptions, such as Disney and Time Warner, the lesson seems to be that investing in films is a bit like investing in the Derby, where the favourites do not always win – and, by definition, most of the runners lose. Alternatively, one can invest and accept reasonable returns, confident that some of the glitter of the tinsel will rub off on you – but not much of the glistening of the gold, which will be serving only to help the stars shine brighter.
The Speculator
