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Friday, August 13, 2010

Hollywood Accounting

This story was interesting. The rights to "Who Wants to be a Millionaire?" are owned by Celador, who developed it in the UK. ABC/Disney signed a contract to develop the US version, in exchange for a share of the profits. It was ridiculously profitable for ABC/Disney. Celador sued ABC/Disney for failing to pay the share of profits, as specified in the contract.

The correct answer is "'Intellectual property' is not property." If I wanted to develop my own version of "Who Wants to be a Millionaire?", I shouldn't need a permit from anyone. It would be poor taste to make an exact copy of someone else's idea, but it shouldn't be illegal.

For the rest of this post, I'll ignore "'Intellectual property' is not property!" By that standard, ABC/Disney owes $0.

ABC/Disney agreed to pay Celador a % of the profits. They exploited a commonly-used legal loophole. The production company for "Who Wants to be a Millionaire?" was a separately-incorporated subsidiary of ABC/Disney. The licensing fee that ABC/Disney paid to the subsidiary was exactly equal to the production costs! The subsidiary had no net profits. Therefore, ABC/Disney owed Celador $0.

ABC/Disney's defense was "You should have known we would cheat you. Only an idiot signs a contract in exchange for a % of profits." A jury disagreed, and awarded $270M in damages.

This trick is also applied to movies and music. All sorts of frivolous expenses are charged to the movie/band. This leads to no profits and royalties, even for a mega-hit. Most band contracts specify "% of profits", leading to no royalties even if it's a mega-hit. The SAG and WGA union contract specifies "% of profits". The SAG and WGA union contracts specifically encourage "Hollywood accounting".

It would be much better to pay everyone a flat salary, and dispense with the "% of profits" nonsense. The "% of profits" clause fools clueless amateurs.

ABC/Disney exploited an accounting trick. However, Celador was an idiot for signing such an easily-exploitable contract. The correct answer is "'Intellectual property' is not property!" Technically, that makes ABC/Disney the victim, but it's always nice to see sleazy accounting penalized.


Scott said...

The IP issue is completely separable and is a distraction to this argument.

Disney signed a contract so this is about contract terms.

Yes, their accounting scheme is a common fraud, but is not unique to Disney. The small actor or musician has no chance of being paid by a big studio.

Did you know that Star Wars has never earned a profit? That's why the crew has never seen a royalty check.

Master Doh-San said...

One would think that people would have learned from Art Buchwald's experience with Paramount so many years ago.

But one would be wrong.

Greed and stupidity are a lethal combination.

Anonymous said...

I once worked with an ex-banker.

It was scary. Instead of devoting time, resources and thought towards providing better goods and services, working more efficiently etc., all he spent his time doing was thinking up scams to screw clients out of money. In fact it wasn't just clients. He wanted to screw anyone he met out of something.

All the time he spent scheming could have been better spent doing real productive work.

He would rather "loot" one dollar by some scam than earn ten dollars honestly.

This low-life always kept his scams under certain amounts of money and mixed up and confused to avoid getting sued.

He told different sets of people different sets of lies on different days.

Why? Maybe if he was ever hauled in from of a court, he could support whatever version of a story he wanted by his choice of witnesses.

Surely it was a lot of overhead to remember which lies he told which people?

The only way to deal with scumbags like this is to get as far away from them was possible.

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