Media Moneyby Buzz on 26/01/2012
This is a precursor post to a longer one
I’m going to do on intellectual property,
copyrights, etc., etc., and of course, etc.
To understand any media business you must understand this:
Mass media is based on the proposition of people cheating one another.
To hear any mass media company complain about online piracy is like hearing Jeffery Dahmer complain his victims were too fattening. All the major mass media companies subscribe to a business philosophy that is designed to cheat users and creators.
Let me walk you through a typical mass media deal — in this case how a movie gets produced and distributed — and you can see for yourself.
(And while this is specifically movie related,
trust me, every other medium has a similar system;
this example, in fact, is fairly straight forward.)
Assume you are a producer. You have an idea for a movie. You have a good script, a top director and bankable stars have signed letters of commitment, you have a budget: $100,000,000 (a fairly modest budget nowadays)
You go to Miracle Movies, specifically to their production arm: Miracle Studios. You show ’em your project, they say, “Great! We’ll loan you $111,000,000 to make it.”
“But I only need $100,000,000.”
“Yes, but we charge a 10% fee for loaning you the money over and above the interest. We’re going to keep $11,000,000.”
Well…okay, whaddya gonna do?
This is standard Hollywood rules of accounting.
So you go off and make your movie; 3 months of pre-production, 3 of actual production (using Miracle Studios’ own production facilities and sound stages per contractual obligation; they’re good but pricey).
To your surprise, the studio takes $15,000,000 from you. Seems the picture with the highest budget shooting on the lot pays all the studio’s overhead, so 3 months x $5,000,000 = $15,000,000 over and above what you’re already paying their prop / wardrobe / carpentry / make-up / craft services departments.
Luckily, your production manager figured this into the budget. The shoot goes remarkably smoothly, post-production (contractually obligated to use Miracle’s post facility) comes in on time & within budget, you wrap, deliver a print for studio approval, get it, and now it’s distribution time!
Your friends at Miracle Studios walk you across the hall to Miracle Distribution, a separate sister company owned by Miracle Movies but wholly unaffiliated (wink-wink, nudge-nudge) with Miracle Studios.
Miracle Distribution thinks your movie is great and budgets $150,000,000 for publicity and distribution (150% of production budget being the standard PR / distribution rate).
You gulp but whaddya gonna do?
You’re contractually obliged to use them.
So they loan you an additional $150,000,000 (bring your total debt up to $261,000,000 but hey, who’s counting?).
— and promptly shave 30% ($45,000,000) off as their distribution fee.
So the movie gets distributed and to your delight scores a whopping $600,000,000 at the box office! Huzzah, huzzah! Visions of sugar plums dance in your head.
Then Miracle Distribution reminds you of the cross-collateralization clause in your contract.
See, to make sure they don’t lose any money, Miracle Distribution is allowed to share the wealth among other films they release in the same time period.
Seems Miracle Distribution had one smash hit (yours), two break-even releases, two minor disappointments, and one major flop.
So they dump everybody’s box office in one big pool then divvy it up so your $600,000,000 blockbuster is now reduced to $300,000,000.
Oh, well, better than a poke in the eye with a sharp stick, right?
So they take their $150,000,000 PR budget loan back…plus interest (we’ll be generous and hold it at about 17% or $25,000,000). That leaves you with $125,000,000 to take back to Miracle Studios.
At Miracle Studios they reclaim their $111,000,000 then tack on their own 17% interest rate for loaning you the money, which comes to about $18,000,000 (give or take a few hundred thou).
That means you, the producer, are still in the hole for about $4,000,000 (which Miracle will write off as an investment loss on their taxes) despite having a box office smash.
But don’t worry, your career in Hollywood isn’t over; in fact, it’s just beginning:
Miracle Studios is eager to sign you to a long term contract to make more movies just like this one.
At these rates, they’d be crazy not to.
 “If it’s a good movie, you know it’s a Miracle!”
 “If it makes money, you know it’s a Miracle!”
 It’s a real kneeslapper how billionaires & their corporations are quick to ensure they stay rich by having those below them share the wealth, but consider it socialism if it’s suggested the money flow in both directions.