How Hollywood Accounting Works
Hollywood accounting can take several forms. In one form, a subsidiary is formed to perform a given activity and the parent entity will extract money out of the subsidiary not in terms of profits but in the form of charges for certain "services". The specific schemes can range from the simple and obvious to the extremely complex.
Three main factors in Hollywood accounting reduce the reported profit of a movie, and all have to do with the calculation of overhead:
- Production overhead. Studios, on average, calculate production overhead by using a
- figure around 15% of total production costs.
- Distribution overhead. Film distributors typically keep 30% of what they receive from
- movie theaters ("gross rentals").
- Marketing overhead. To determine this number, studios usually determine about 10% of
- all advertising costs.
All of the above means of calculating overhead are highly controversial, even within the accounting industry. Namely, these percentages are assigned without much regard to how, in reality, these estimates relate to actual overhead costs. In short, this method does not, by any rational standard, attempt to adequately trace overhead costs.
Due to Hollywood accounting, it has been estimated that only about 5% of movies officially show a net profit , and the "losers" include such blockbuster films as Rain Man, Forrest Gump, Who Framed Roger Rabbit, and Batman.
All of this shows why so many big-name actors insist on "gross points" (a percentage of some definition of gross revenue) rather than net profit participation. The saying in Hollywood is "a percentage of the net is a percentage of nothing."
As pointed out by lawyers, filing a lawsuit to enforce the right to "points" in a motion picture is possible, but costly and problematic.  On the other hand it should be noted that the costs bearing on a movie are many and diverse, and only a fraction of gross revenues ever goes back to the studios. This explains why companies such as Orion Pictures can go into bankruptcy soon after completing such successful films as The Silence of the Lambs.