The Hollywood Economist (6 page)

Take video and DVD sales, for example. Under the standard Hollywood contract, studios credit the film with a video “royalty” equal only to 20 percent of the sales. That means that if sales of a DVD total $20 million, only $4 million of that is
counted toward reaching the breakeven point. In the case of DVD and video royalties, the contract specifies: “For purposes of calculating Cash Breakeven only, Adjusted Gross Receipts shall include a 100 percent home video royalty (i.e. home video revenues less costs).” So unlike weaker players, Schwarzenegger could count all the money taken in from DVDs and video, $20 million, less their actual cost, toward reaching the threshold where he gets his cut. Of course these payments to Schwarzenegger effectively came at the expense of less powerful talent (like writers) with higher breakeven points. But that is part of the contract game.

Where does Hollywood’s money go? See the budget for
Terminator 3
above. The internal breakdown of this budget is over 100 pages.

A star must be insurable. Cast insurance is the sine qua non for a movie to be financed. A production company cannot get a completion bond, which financing institutions insist on, unless it has insurance coverage for the star, especially if the star is deemed an “essential element” of the film. With it, if the star dies, becomes disabled or ill, refuses to perform, or abandons the film, the insurer agrees
to cover the resulting loss—which may be the entire investment in the project. For example, if anything had happened to Arnold Schwarzenegger in
Terminator
3, the insurers would have had to pay in excess of $150 million. (The insurance for
Terminator 3
was $2 million.)

For their part, insurers attempt to reduce their exposure to disaster by deciding whom not to insure. They not only evaluate the past history and claim pattern of stars, but they require many levels of medical examination and drug sampling before and during shooting. They may also place restrictions on activities—such as stunts—and assign “watchers” on the set to make sure that stars honor those restrictions. If stars present too great a risk, insurers can elect either to make the premiums prohibitively high or to refuse to insure them altogether.

Nicole Kidman is a case in point. Kidman injured her knee during the filming of
Moulin Rouge
in Australia in 2000, resulting in a $3-million insurance loss, and then quit
Panic Room
in 2001, leading to the insurer having to pay some $7 million for the replacement actress (Jodie Foster). As a result, her public and critical acclaim notwithstanding, Miramax was initially unable to get insurance on her for its film
Cold Mountain
, which had a budget approaching $100 million. From the perspective
of the insurer, Fireman’s Fund, she was a definite risk. As an insurance executive noted in an email, “While the doctors who did her surgery and her current knee doctor can say she is fully recovered, the fact remains that the doctor we sent her to for her examination noted swelling in the knee.” The executive goes on: “The other major fact that can’t be changed is our paying three claims for this actress’s knees over the years.”

To get the necessary policy from Fireman’s Fund, Kidman agreed to put $1 million of her own salary in an escrow account that would be forfeited if she failed to maintain the production schedule, and she agreed to use a stunt double for all scenes that the insurer considered potentially threatening to her knee. In addition, the co-producer, Lakeshore Entertainment, added another $500,000 to the escrow account. Only after the completion-bond company, International Film Guarantors, certified that “Kidman is fully aware that she must get through this picture without a problem,” adding, “She fully understands this and will not allow anything to get in the way of her finishing this picture”—did she get her insurance—and her role in
Cold Mountain
. Having made the all-important move from borderline uninsurable to borderline insurable, she could make movies again. No matter how great their acting skills and box office
drawing power, stars cannot get lead roles if they are uninsurable. Great acting skills and box office drawing power may make the star, but insurance is what it takes to make the movie.

In Hollywood, where the radioactive half-life of a starlet’s fame may be briefer than her high school education, the effective career of an actress can be nasty, brutish, and short, or, in the lingo, “way harsh.” The opportunities for a pretty starlet in the romantic comedies, horror films, and the amusement-park films that are made for the Clearasil crowd tend to dry up when they hit thirty, one of Hollywood’s most insightful producers told me. They have to start acting “as opposed to simply gracing the screen with their gorgeous presence and many of those starlets are just not equipped for this second step.” Anti-aging camouflage, such as plastic surgery, Botox, collagen injections,
and other elixirs may provide a brief respite but eventually every actress comes up against the age stereotyping in Hollywood famously described by Goldie Hawn: There are only three ages for women: Babe, District Attorney, and
Driving Miss Daisy
. Some actresses succeed in breaking through this age barrier but even they find it a daunting challenge to escape Hollywood’s requisite and satisfy the youth culture, as Rosanna Arquette demonstrates in her interviews with Meg Ryan, Holly Hunter, Charlotte Rampling, Sharon Stone, Whoopi Goldberg, Martha Plimpton, and a score of other actresses in her 2002 documentary
Searching For Debra Winger
. Equally illuminating are Nancy Ellison’s photographs in
Starlets: Before They Were Famous
of gorgeously posed actresses who, having failed to make it through the Babe portal, vanished from Hollywood. As Martha Plimpton explains about casting, “It’s either, she’s a starlet or she’s an old hag.” Such ageism proceeds not from malice, ignorance, or disdain for the performers on the part of studio executives, but from their business model.

When studios found that they could no longer count on habitual moviegoers to fill theaters, they went into the very risky business of creating tailor-made audiences for each and every movie they released. Like in an election campaign, the studios
had to get people to turn out at the multiplexes on a specific date—the opening weekend. The principal means of generating this audience is to buy ads on national television. For this strategy to work efficiently, the studios find a target audience that predictably clusters around programs on which they can afford to buy time. They then bombard this audience—usually seven times in the preceding week to an opening—with thirty-second eye-catching ads.

The studios zero in on teens not because they necessarily like them, or even because the teens buy buckets of popcorn, but because they are the only demographic group that can be easily motivated to leave their home. Even though lassoing this teen herd is enormously expensive—over $30 million a film—the studios profit from the fact that this young audience is also the coin of the realm for merchandisers such as McDonald’s, Domino’s, and Pepsi. The studios depend upon these companies for tie-deals that can add a hundred million dollars or more in advertising to a single film and can expand the primary audience for DVDs, video games, and other licensable properties on which the studios now bank on for their economic survival. Studios therefore place the lion’s share of their TV advertising—over 80
percent in 2005—on the cable and network programs that are watched primarily by people under twenty-five. The studios also incorporate music in their sound tracks that teenagers listen to, and try to cast the sort of babe-actresses that their crucial audience can relate to, if not fantasize about. Adrienne Shelley, the star of
The Unbelievable Truth
, for example, described her casting experience this way: “I get a call in my car on the way to an audition from the agent. He said, ‘What is really important is that they think you are fuckable.’”

Of course, for the ex-babe actress who is no longer able or willing to play this Hollywood game, there is always the possibility of starring in foreign and independent movies, especially if her name helps raise money abroad. But while roles in these more adult-oriented movies may be more artistically rewarding than roles as fantasy-bait in teen movies, they are rarely, if ever, as high-paying.

Unlike the dozen or so powerful star actors, directors and producers, such as Tom Cruise, Steven Spielberg, and Jerry Bruckheimer, who get a cut of the gross revenue of a movie, regardless
of whether the movie is in the red or black, most creative people who produce, write, direct, or act in movies get, in addition to their up front fees, a percentage of the net profits, called “net points.” No matter how much the movie seems to take in at the box office, these so-called “net players” rarely ever see a penny from their net points. The frustration that runs rife in Hollywood social circles is summed up in David Mamet’s
Speed-the-Plow
when the lead character says that what he has learned about the movie business is “There is no net!”

The reason net players realize little more than psychic income from their “points” is that studios set up each movie as a separate off-the-books corporation designed to produce revenue for the gross players, which include the studio itself since it takes a dollar-one distribution fee of up to 30 percent of the gross and an overhead fee of fifteen percent gross; equity partners who often are given direct cuts, called “corridors,” into discreet portions of the gross, and offset their financial risks; and any stars who are gross players. After these cuts, and the costs and interest (10 percent per annum) are deducted, there rarely is anything in the net pie.

Consider, for example, what happened with the revenue from Disney’s 2000
Gone in 60 Seconds
,
which was cited in Disney’s annual report as a smash hit. Produced by Jerry Bruckheimer, one of the top producers in Hollywood, and starring Nicholas Cage and Angelina Jolie, the teen car-crash movie cost $103.3 million to make and took in $242 million at the box office. While someone unfamiliar with Mamet’s dictum might assume that those holding net points—including the director Dominic Sena, the screenplay writer Scott Rosenberg, and Angelina Jolie—might get a pay-off, here is what happened to the nearly half-billion in revenues it generated at the box office.

Of that $242 million in ticket sales, the theaters kept $139.8 million or nearly 60 percent. So even though Disney’s distribution arm, Buena Vista International, is probably Hollywood’s most powerful distributor, it got only $102.2 million or about 40 percent of the world box office. From that sum, it deducted $90.6 million for out-of-pocket distribution expenses, which included $67.4 million for buying the ads necessary to reach a global teenage audience, $13 million for prints, and $10.2 million for insurance, shipping, custom fees, check collection, and local taxes, and this left an adjusted gross of just $11.6 million. And from this, the gross players, including Buena Vista (which had a 30 percent distribution fee), Cage,
and Bruckheimer, got another $3.4 million. At this point, after the theatrical release, the $103.4 million movie was about $95 million in the red.

Six months after the theatrical release,
Gone in 60 Seconds
was released in video stores, and garnered about $198 million in sales. But only a small fraction of this sum, $39.6 million, was credited to the movie because, according to the standard industry contract, it was entitled to only a 20 percent royalty of Buena Vista Home Entertainment’s total video and DVD revenues. The $158.4 million balance went to Disney’s home entertainment division. From the movie’s share of $39.6 million, the distributor deducted $19.7 million for its expenses and fee. The star Nicholas Cage, who had 5 percent of the gross, then got $3.9 million, leaving the movie with only $16 million from the video stores. So even with the video windfall, the movie was still nearly $80 million in the hole.

The net revenue flow came one year later from the pay-TV channels, which paid $18.2 million, which was top dollar because of its box office success. From that Disney deducted $2.7 million to pay the residuals to actors and unions, and
$149,000 for insurance and other expenses. So another $15.4 million was credited to the movie, which would have reduced the movie’s deficit to about $63 million, if it were not for the gross players cuts that were added to the deficit and the 10 percent per year interest. As a result of these charges, even with further TV licensing money trickling in, by 2008,
Gone in 60 Seconds
was $155 million in the red. And even with a half-billion gross, the net players would not see a penny.