Hollywood: fancy films and finances

Perhaps the only thing more creative about Hollywood than its films is its way of doing business. Accountants and marketing executives in the big studios do business in a realm that belongs to them only. When it comes to keeping the books, the footwork can make Gene Kelly look as if he had just learned to walk.

The financial razzle-dazzle works, though, to the extent that the studios can afford to produce pictures that do not make money.

"Nobody knows to this day what makes a successful picture," says Milton Goldstein, president of Melvin Simon Productions. "But I know that if a picture works at all, I'll do very well. If it doesn't work, OK, then I'll need one out of four or five to pay for the rest. Which is what is happening. It's amazing that even over the last 10 years you hear the same numbers, one out of four or five make it."

The movies that do make it pump huge sums back into the industry, and salaries for people working in the motion picture business tend to be large.

Filmways, for example, spent about $2 million on the production of independent producer Rick Friedberg's first film, "PRAY-TV," and it may never make it out of the can and into the theaters -- regardless of the production quality. A decision to release the film along with a minimum amount of promotion would cost another $2 million, at least. Yet the odds are 5 to 1 that the picture, any picture, will not turn a profit.

A decision to ignore a $2 million investment would not sit well in most industries, but it is run-of-the-mill in the motion picture business. It is not the industry's only, or even its most peculiar, oddity.

For example, theater owners must decide whether they will show a movie -- and how much they will pay for the privilege -- before they have even seen it, frequently before it has been made. The process is called "blind bidding" and is standard practice for getting movies from the studios into the hundreds of theaters.

Theater owners generally see a one-page summary of the movie -- stars, director, screenwriter, plot, etc. -- but have little knowledge of the content. They bid on that basis. Needless to say, not every film lives up to its billing. One theater owner in North Carolina even took out a newspaper ad advising potential customers that his current feature, Robert Altman's "Quintet, " was the worst movie he had ever seen.

Many theater owners say they would not buy movies if they knew they contained excessive violence, profanity, or sex -- items the one-page summary does not cover. The owners would also like to be able to base their decision on how much money a film is likely to make.

Studios apparently make their own rules when it comes to accounting. A studio may toot its horn when a movie really packs the fans in, but when those who have a piece of the film -- profit participants -- start asking for their share, the tune changes. Months can pass before any profit checks are handed out. The movie "Alien" was the fourth-biggest moneymaking feature film in 1979, taking in $125 million in ticket sales and about $62 million in rentals (money paid to the studio by the theaters).

Eight months after its release, May 25, 1979, the $10.7 million movie had put showed a $2.4 million loss, according to an expose by Charles Schreger of the Los Angeles Times. Not a penny had gone to the profit participants: the writers , producers, and director.

More than a year after its release, with $125 million in ticket sales, the movie, according to Fox, showed the profit to be only $4 million.

The way it works is that the studios, which finance and distribute the movies , pay themselves from the revenues for everything from promotion costs to 15 to 25 percent just for lending their names to the production. And the studio pays itself first, off the top.

Even the most junior marketing executive in the industry can slice up gross revenues more ways than Betty Crocker can cook hamburger. There is box office gross, film rental gross, gross after distribution, gross profits, and gross participation.

The first 30 percent from the film rentals goes directly to the distributor. Then come production costs, including promotion and the ever-present overhead, all of it "plus interest." Most of the films showing now were made when interest rates were about 22 percent, "and that interest clock keeps running until the production costs are paid off," says one studio marketing vice-president.

Distributing a film, bringing in the income from it, is an art unto itself, primarily because distribution varies widely with each picture. How much a the movie company takes in depends entirely on the kind of deal struck with each theater or theater chain owner.

The distributor, basically, goes to the exhibitor and says, "In the summer of 1982, we will release these movies. How much will you pay us to show them?"

The exhibitor looks at the description of each picture, and if he sees "Superman II" on the list, he will probably start offering guarantees -- bidding against the other exhibitors in his territory -- based on the fact that the original "Superman" was a bona fide blockbuster. He might guarantee $100,000 in return for being allowed to show "Superman II."

Otherwise, exhibitor and distributor strike a deal for film rental. By definition, film rental amounts to a percentage of the box office sales minus the cost of operating the theater. The percentage itself depends on what deal was made.

The rental agreement uses phrases like "90-10, vs. 70 percent for the first week." That would mean that the exhibitor pays the distributor 90 percent of his box office take (after operating costs), except for the first week, when the distributor would only receive 70 percent. That's the film rental. The exhibitor's profit is "10 percent vevs. sus 30 percent for the first week" of ticket sales minus cost.

For "Alien," the box office receipts after a year were $125 million, and film rentals came to $61.4 million. The specific rental agreements varied from theater to theater, week to week.

Guarantees can be a tricky business for the exhibitors. "The Empire Strikes Back" is about as close as the industry gets to a sure thing, and exhibitors were climbing all over one another offering the distributor, 20th Century-Fox, guaranteed rental fees. The movie had taken in $50 million worth of guarantees before it had finished production.

Other sure things have proved harder to swallow. "Exhibitors figured that since 'The Exorcist' was such a hit, the sequel, 'Exorcist II,' would do very well, so they offered sizable guarantees. And they ate their shirts," says Ashley Boone, marketing chief for the Ladd Company. "You take John Travolta. There were no guarantees for 'Saturday Night Fever' and very few for 'Grease.' But they bid their guts out for 'Moment by Moment' and got killed. They were very cautious about 'Urban Cowboy,' which turned out to be one of the 1980 summer's few big successes."

At the other end of the scale, the movie "Breaking Away" almost had to be given away. It arrived on the heels of two other films about youth and sports -- both of them flops -- and "we had to negotiate," says Mr. Boone, who used to handle distribution for Fox at the time. He means that to get the film shown at all, the company had to agree to minimal rental fees. "In New York City, on the East Side, we actually rented the theater, but then it broke past records for the theater."