The Hollywood Economist 2.0

by Edward Jay Epstein

  One ingenious device through which indie film producers overcome this problem is to recruit Hollywood stars who will work for them on the cheap and use their names to pre-sell the movie abroad. The same actors and actresses who quote Hollywood studios $20 million per movie will work on indie films for a small fraction of that fee. Often they accept “scale,” as the Screen Actors Guild’s minimum wage of $788 a day is called, or “near scale” of about $10,000 a week plus overtime. Instead of requiring private jets, luxury suites, and multimillion dollar perk packages as they do in studio films, the stars will fly on commercial flights, stay in inexpensive condos, and get the same per diem as the rest of the cast. Instead of receiving a sizable chunk of the gross receipts as they are accustomed to on studio films, for indie films stars will accept “net points” (even though they—or their agents—are no doubt familiar with David Mamet’s famous observation that in Hollywood, “There is no Net”). “The total cost of a star can be less than that of running the office Xerox,” explained one knowledgeable producer. The willingness of top stars—including Keanu Reeves, Mel Gibson, Jim Carrey, Will Ferrell, Drew Barrymore, Al Pacino, Angelina Jolie, Pierce Brosnan, Leonardo DiCaprio, Charlize Theron, Tobey Maguire, Demi Moore, Sean Penn, and Julia Roberts—to work for near scale in the parallel universe of indie films allows indie producers to take advantage of a star’s cachet to finance the movies.

  Ironically, in the era of the moguls, the Hollywood studios gained a similar advantage over stars by locking all their actors and actresses into long-term contracts in which they were paid a specified weekly salary regardless of the success of their movies. After the studio system collapsed in the late 1940s, the stars, represented by powerful talent agencies, quickly turned the tables on the studios. Now, no longer under studio contract, the stars auctioned off their services to the highest bidder from film to film. The studios still paid for their films’ publicity, but the stars now reaped the benefits of their cachet via product endorsement, licensing their images for games and toys, and a raft of other celebritized enterprises.

  Despite the lure of enormous compensation from studios, which now include perk packages and cuts of the gross receipts that can easily exceed $30 million a film, stars find occasional satisfaction in working for coolie wages in indie productions, making a distinction between, as one top Creative Artists Agency (CAA) agent put it, “commerce and art.” Some stars may find that roles in studio comic-book movies (that they share with live stuntmen and digital doubles) do not provide the acting opportunities, award possibilities, prestige, camaraderie, or even aura of coolness of indie productions. Others may want to work with a particular director, such as Woody Allen, Spike Jonze, or David Mamet, or burnish their fading image as an actor. They might also need to fill a hole in their schedule since, PR hype aside, there is not an endless cornucopia of $20 million parts in Hollywood. Also, when stars do “artistic” films practically pro bono they do not officially lower their $20 million quote.

  Whatever the star’s motives, the indie producers get, if not a free ride, a means of financing their movies through a three-step process called pre-sales. Here is how it works:

  Step One. The indie producer makes a pre-sale contract with a distributor overseas. In such an arrangement, the producer usually turns over all rights to exhibit the movie—including selling DVDs and TV licenses—in a particular country in return for a minimum guarantee of money once the film is completed and delivered. The catch-22 here is that a foreign distributor often will not commit to a pre-sale contract if there is no American distributor or unless the film has a recognizable star (with a star the distributor has at least a chance of selling the DVD and TV rights). So indie producers must persuade or seduce a star into joining the movie—and here is where the genius comes in—for practically no money. With a star in tow, a producer can often make enough pre-sales to cover most, if not all, of the budget.

  Step Two. Since pre-sales are no more than promissory notes, the indie producer must borrow against them from banks to pay for the movie. Before he can do that, he needs to guarantee the banks that the movie, once begun, will get finished and delivered to foreign distributors. What’s needed is a completion bond, which guarantees the banks that it will pay all cost overruns necessary to finish the movie and if the production is abandoned, it will pay all the money lost on the venture, which means that one way or another the bank will get back its money. Two companies, Film Finance, Inc. and International Film Guarantors, provide almost all the completion bonds for independent productions. (Studios that internally finance their own movies do not need completion bonds.) Before either company will sell a producer a completion bond, the producer has to meet its requisites, which include buying full insurance for the star (so if he or she is injured or quits the completion bond coverer gets all the money back from the insurer) and turning over to the completion bond company the ultimate control of the budget (including the right, if anything goes wrong, to take over the production and bring in its own director to complete it). The indie producer also has to pay the company about 2 percent of the budget.

  Step Three. With the completion bond in hand, and the pre-sales contracts as collateral, the producer then borrows the money from a bank or other financier. Since the completion bond companies are themselves backed by giant insurers, such as Lloyds of London and Fireman’s Fund, the banks take only a very limited risk in making such loans. John W. Miller, who recently retired as head of JP Morgan Chase’s movie financing unit, told me that in issuing billions of dollars in loans he did not read the scripts of the indie films he finances. “My bet is on the solvency of the distributors.” When these pre-sales contracts are with established international distributors, such as Sony Pictures, Canal Plus, Toho Films, or Buena Vista International, that risk is, he said, “negligible.”

  Even after scaling all these hurdles, securing the money, and making the movie, the indie producer faces one further challenge: getting the movie into American multiplexes. Even with a completed movie and star, finding a distributor requires going from film festival to film festival, an odyssey that often proves unfruitful. (More than 2,000 indie films were submitted to the Sundance Film Festival in 2009, for example, of which about one percent were accepted.) However, the presence of a star greatly improve its chances, especially in those festivals, such as Cannes, Berlin, Venice, and Toronto, that depend on stars for publicity and photo-ops. As one highly successful indie producer explains, it gives the acquisition executives there more of an incentive to give the film a chance with distribution, because they figure that, even if the film is a hard sell, they can always promote the star. Selling the film ultimately is what it’s all about. So the Hollywood star as homo ludens, or at least seeking some kind of non-monetary gratification, winds up as the crucial element in a business model that has sustained a large part of independent films—and, for that, we can all be grateful.

  THE ANGST QUESTION IN HOLLYWOOD: WHAT IS YOUR CASH BREAKEVEN?

  In the arcane universe of Hollywood contracts, there are two kinds of money paid to stars, directors, actors, and other participants in movies. The first kind is called “fixed compensation” and is paid out, like any other wage, when the participant does his job. The second kind is called “contingent compensation,” which depends on how well the film does, is typically not paid until the revenues reach an arbitrary point artfully called “cash breakeven.” Whatever percentage a participant is supposed to get, whether it is based on gross or net points, it is triggered by this contractual definition. In some contracts in lieu of the star receiving any sizable fixed compensation, the cash breakeven is set at dollar one, which means his pay kicks in immediately after the print and advertising costs are reimbursed, but usually it is set high enough to allow a studio to recover most of its production costs. Not only may the definition vary from film to film, but it is not unusual for many participants in the same film to have different cash breakevens. For each participant it is defined not by any set acco
unting rules but by Hollywood’s prevailing Golden rule: Who has the gold makes the rules. The contentious negotiations, which center around self-serving claims about how much gold any participant might add to the venture, almost irresistibly lead to the most powerful player getting the lowest cash breakeven, which means he or she will be the first to get paid. The problem here is that the money paid first to the more powerful players is added to the cost side of the equation for everyone else, which pushes them further away from reaching their higher cash breakeven. As a result, the less powerful, which includes writers, may never qualify for their contingency payments. Woody Allen jokes in his movie Hollywood Ending about a director being so lowly regarded that he received “quadruple cash breakeven,” and therefore the movie had to gross four times his breakeven point before he received a penny of his contingency pay. On the other hand, the handful of stars and directors who are indispensable to a movie getting green-lighted can dictate their own golden cash breakeven. And, to protect the egos of less privileged participants in the Hollywood Community, these golden cash breakevens are usually kept a closely guarded secret. But consider the golden terms Arnold Schwarzenegger got for Terminator 3. Brilliantly drafted by his lawyer, his cash breakeven clause specifies:

  Cash Breakeven shall be defined as the point at which there shall have been recouped from Adjusted Gross Receipts an amount equaling all actual distribution expenses attributable to the Picture (provided there shall be no double deductions for any item, including without limitation residuals), all costs of production of the Picture (including without limitation any pre-break participations, mutually-approved deferments and completion bond fee), actual interest and actual financing costs related to the Picture, a producer fee in the aggregate amount of $5,000,000 for Andy Vajna and Mario Kassar and an overhead charge to Intermedia Film Equities Limited equal to ten percent (10 percent) of the bonded budget (with no interest on overhead or overhead on interest). For purposes of calculating Cash Breakeven only, Adjusted Gross Receipts shall include a 100 percent home video royalty (i.e. home video revenues less costs, provided no such costs shall be deducted if such costs were previously deducted hereunder) to the extent that Producer is accounted by distributors at a 100 percent home video royalty or if Producer is not accounted for at a 100 percent home video royalty, with respect to any Adjusted Gross Receipts, such Adjusted Gross Receipts shall include and be calculated with a home video royalty equal to the home video royalty Producer receives with respect to such Adjusted Gross Receipts, but in no event less than a 35 percent home video royalty. For all other purposes (other than calculating Cash Breakeven), including the calculation of [Schwarzenegger] Participation and the Deferred Participation, Adjusted Gross Receipts shall include a 35 percent home video royalty, or if the agreement for the services of the director of the Picture so provides, then such greater home video royalty shall be included in the Adjusted Gross Receipts of the Picture for purposes of calculating [Schwarzenegger] Participation and the Deferred Participation.

  Take video and DVD sales, for example. Under the standard Hollywood contract, studios credit the film with a video “royalty” equal only to 20 percent of the sales. That means that if sales of a DVD total $20 million, only $4 million of that is counted toward reaching the breakeven point. In the case of DVD and video royalties, the contract specifies: “For purposes of calculating Cash Breakeven only, Adjusted Gross Receipts shall include a 100 percent home video royalty (i.e. home video revenues less costs).” So unlike weaker players, Schwarzenegger could count all the money taken in from DVDs and video, $20 million, less their actual cost, toward reaching the threshold where he gets his cut. Of course these payments to Schwarzenegger effectively came at the expense of less powerful talent (like writers) with higher breakeven points. But that is part of the contract game.

  Where does Hollywood’s money go? See the budget for Terminator 3 above. The internal breakdown of this budget is over 100 pages.

  THE SAD LESSON OF NICOLE KIDMAN’S KNEE—OR WHAT A STAR NEEDS TO GET A PART

  A star must be insurable. Cast insurance is the sine qua non for a movie to be financed. A production company cannot get a completion bond, which financing institutions insist on, unless it has insurance coverage for the star, especially if the star is deemed an “essential element” of the film. With it, if the star dies, becomes disabled or ill, refuses to perform, or abandons the film, the insurer agrees to cover the resulting loss—which may be the entire investment in the project. For example, if anything had happened to Arnold Schwarzenegger in Terminator 3, the insurers would have had to pay in excess of $150 million. (The insurance for Terminator 3 was $2 million.)

  For their part, insurers attempt to reduce their exposure to disaster by deciding whom not to insure. They not only evaluate the past history and claim pattern of stars, but they require many levels of medical examination and drug sampling before and during shooting. They may also place restrictions on activities—such as stunts—and assign “watchers” on the set to make sure that stars honor those restrictions. If stars present too great a risk, insurers can elect either to make the premiums prohibitively high or to refuse to insure them altogether.

  Nicole Kidman is a case in point. Kidman injured her knee during the filming of Moulin Rouge in Australia in 2000, resulting in a $3-million insurance loss, and then quit Panic Room in 2001, leading to the insurer having to pay some $7 million for the replacement actress (Jodie Foster). As a result, her public and critical acclaim notwithstanding, Miramax was initially unable to get insurance on her for its film Cold Mountain, which had a budget approaching $100 million. From the perspective of the insurer, Fireman’s Fund, she was a definite risk. As an insurance executive noted in an email, “While the doctors who did her surgery and her current knee doctor can say she is fully recovered, the fact remains that the doctor we sent her to for her examination noted swelling in the knee.” The executive goes on: “The other major fact that can’t be changed is our paying three claims for this actress’s knees over the years.”

  To get the necessary policy from Fireman’s Fund, Kidman agreed to put $1 million of her own salary in an escrow account that would be forfeited if she failed to maintain the production schedule, and she agreed to use a stunt double for all scenes that the insurer considered potentially threatening to her knee. In addition, the co-producer, Lakeshore Entertainment, added another $500,000 to the escrow account. Only after the completion-bond company, International Film Guarantors, certified that “Kidman is fully aware that she must get through this picture without a problem,” adding, “She fully understands this and will not allow anything to get in the way of her finishing this picture”—did she get her insurance—and her role in Cold Mountain. Having made the all-important move from borderline uninsurable to borderline insurable, she could make movies again. No matter how great their acting skills and box office drawing power, stars cannot get lead roles if they are uninsurable. Great acting skills and box office drawing power may make the star, but insurance is what it takes to make the movie.

  THE STARLET’S DILEMMA

  “Everything’s geared to fifteen-year-olds … I have girlfriends who are twenty-five in L.A. who are lying about their age because people tell them they’re too old. That’s how pathetic it is.”

  —Morgan Fairchild

  In Hollywood, where the radioactive half-life of a starlet’s fame may be briefer than her high school education, the effective career of an actress can be nasty, brutish, and short, or, in the lingo, “way harsh.” The opportunities for a pretty starlet in the romantic comedies, horror films, and the amusement-park films that are made for the Clearasil crowd tend to dry up when they hit thirty, one of Hollywood’s most insightful producers told me. They have to start acting “as opposed to simply gracing the screen with their gorgeous presence and many of those starlets are just not equipped for this second step.” Anti-aging camouflage, such as plastic surgery, Botox, collagen injections, and other elixirs may provide a bri
ef respite but eventually every actress comes up against the age stereotyping in Hollywood famously described by Goldie Hawn: There are only three ages for women: Babe, District Attorney, and Driving Miss Daisy. Some actresses succeed in breaking through this age barrier but even they find it a daunting challenge to escape Hollywood’s requisite and satisfy the youth culture, as Rosanna Arquette demonstrates in her interviews with Meg Ryan, Holly Hunter, Charlotte Rampling, Sharon Stone, Whoopi Goldberg, Martha Plimpton, and a score of other actresses in her 2002 documentary Searching For Debra Winger. Equally illuminating are Nancy Ellison’s photographs in Starlets: Before They Were Famous of gorgeously posed actresses who, having failed to make it through the Babe portal, vanished from Hollywood. As Martha Plimpton explains about casting, “It’s either, she’s a starlet or she’s an old hag.” Such ageism proceeds not from malice, ignorance, or disdain for the performers on the part of studio executives, but from their business model.

  When studios found that they could no longer count on habitual moviegoers to fill theaters, they went into the very risky business of creating tailor-made audiences for each and every movie they released. Like in an election campaign, the studios had to get people to turn out at the multiplexes on a specific date—the opening weekend. The principal means of generating this audience is to buy ads on national television. For this strategy to work efficiently, the studios find a target audience that predictably clusters around programs on which they can afford to buy time. They then bombard this audience—usually seven times in the preceding week to an opening—with thirty-second eye-catching ads.