Unveiling the Truth Behind Blockbuster Success: Hollywood Accounting exposed by Travis Cody

Travis Cody is the author of multiple international bestselling books, creator of the Bestseller By Design program, and host of the popular podcasts Just Write and All Things Hollywood. Cody writes about a diverse range of topics. Recently, on a Twitter thread, he shared his insights on the intricate world of Hollywood accounting. In his tweets, he revealed how a blockbuster movie that seems to be a financial hit can still end up bearing loss. Through a series of examples and explanations, Cody brought to light the theory behind what he calls “the greatest form of legal money laundering ever invented.”

How does Hollywood work behind closed doors?

According to Travis Cody, “To truly grasp how remarkable Hollywood Accounting actually is, there are a few things you need to understand.”

Firstly, just as every coin has two sides, there are also two sides to every major studio: production and distribution. While production is responsible for making the film, distribution is associated with marketing and releasing the film. These segments operate independently and strategically to maximize tax advantages. 

Secondly, a major portion of the film’s box office profit, i.e., 50%, is claimed by the movie theaters, which significantly impacts the studio’s bottom line. Another factor that affects the film’s box office earnings is the fact that “most studios will spend an additional 75-100% of the film budget on marketing.”

Travis Cody explains it by stating, “If a movie has a budget of $200M… the studio will spend an additional $150-200M on ads.” Furthermore, Cody emphasized that these expenses become a reason why studios give much emphasis to “Billion Dollar” movies as they not only generate profit but a sufficient portion to cover the rest of the expenses. 

In Cody’s words

The movie theaters get 50% of the box office. That means our $200M movie with a $200M ad spend has to make $800M… JUST TO BREAK EVEN. If that movie “only” does $500M worldwide, using Hollywood Accounting, it will lose $150M.

So whenever you see a film grossing, say, $300 million, it’s important to understand that this figure doesn’t represent the actual earnings retained by the studio. A substantial portion of this amount is consumed by marketing expenses, and theaters typically claim 50% of the box office revenue.

Where does the “legal money laundering” aspect come into play?

Explaining where the “legal money laundering” aspect comes into play in the intricacies of Hollywood accounting, Travis Cody wrote,

As soon as the Production side announces a new movie, the Distribution side goes on the clock… as they will be the ones marketing it. Since the movie hasn’t started yet, the Distribution company covers all of its own internal costs (staff, overhead, expenses, and marketing spend)… The key part of this system is that Distribution treats ALL of their expenses (down to the paperclip) as an advance to Production. And since it’s an advance, they can legally charge Production compounded interest on that money. This interest starts building up from DAY ONE.

With the conclusion of this theory, a real question arises: “How much interest?”

Based on Cody’s observation of Hollywood’s account, he mentioned, “I’ve seen Paramount Distribution Reports listing compounded interest rates of 21%.” Travis, who has spent more than a decade working with one of the most financially successful film producers of all time, proved his point by giving some examples of acclaimed box office films. 

The 1994 film Forrest Gump, starring Tom Hanks and made on a budget of $55 million, was a major success at the box office. It became the top-grossing film in the United States that year and earned over $678.2 million worldwide during its theatrical run. Despite earning a whooping amount at the box office, “a year later, when he asked where his royalty check was, the studio told him the movie hadn’t made any money.” When he sued the studio, it was able to prove in court “how the movie had lost $68M.”

Travis Cody stated,

The movie made 12X more than it cost… and with Hollywood Accounting… it still lost more than the entire budget. That seems impossible until you understand how the studio uses interest to create the loss on purpose. This is why I call Hollywood Accounting the greatest form of legal money laundering ever invented.

Another example Travis Cody wrote about was the 2005 film Sahara. Like the aforementioned film, it earned modest box office success but still resulted in substantial reported losses, leading the author to vow never to sell rights to Hollywood again. 

Revealing the ace of his cards, Cody mentioned the renowned film Good Will Hunting, which was made on a budget of $10 million and ended up grossing $225 million at the box office. Travis Cody wrote, “Ben Affleck and Matt Damon… who both had NET profit deals… have yet to be paid. (Ben discussed this publicly not to long ago, actually. Never take a net profit deal if you sell to Hollywood.”

In his Twitter thread, Cody exposed the complexities and pitfalls of Hollywood accounting, demonstrating how blockbuster films can paradoxically lose money “on paper” despite massive box office revenues. While stating the issue, Cody even offered a solution, stating some crucial points to keep in mind while making a deal with any studio. 

He suggested, “Demand a bigger upfront payment; In addition to the money for the rights, Ask for an Executive Producer credit and Executive Producer Fee.” Lastly, he mentioned asking for a lower amount upfront and an Adjusted Gross Percentage on the back.

These measures to negotiate fair compensation can save authors from falling victim to the industry’s financial maneuvers.