Pirates, Forrest Gump & Accounting
A Hollywood Story
July 12th, 2018
Nearly everyone knows Forrest Gump’s fabled adage, “Life was like a box of chocolates, you never know what you're gonna get”, but his later maxim, “Don't never let nobody make a movie of your life's story” is less well remembered.
Winston Groom is the author of ‘Forrest Gump’ which was later adapted to the big screen in 1994 and was a critical and commercial hit. The film won Best Picture, Best Director, Best Actor and Best Adapted Screenplay amongst other awards and was inducted into the United States National Film Registry for being “culturally, historically, or aesthetically significant”. Aside from achieving critical and cultural success, Forrest Gump was an unprecedented commercial success. At the box office, Gump grossed over $650 million and was, at the time, one of the quickest movies to pass $100 million, $200 million and $300 million in box office receipts.
Despite Gump’s critical and popular acclaim, as well as its massive earnings from ticket sales, Paramount considered Gump to be a failure after netting a significant total loss for the studio. According to Paramount’s accounting books, the film resulted in $62 million dollars lost as a result of expenses made towards the creation of the movie, promotion, distribution and payment to the director and Tom Hanks. The director and star of the movie had contracts which would entitle them each to a cut of the gross profit while the author was entitled to only a percentage of the net profits. The net profits ultimately resulted in a “loss”, causing the author to make little of what he expected despite massive payouts for those involved in the direct production of the film.
In the movie business, the most significant losses which drive down total net profits originate in the calculation of overhead costs, specifically in production, distribution and marketing. For Forrest Gump, overhead fees came to a tidy $62 million for the director and main actor, $50 million in production, $74 million in promotion, $62 million for distribution and $6 million for interest charges. Inflated overhead costs such as these stifle net profits, ensuring those with agreements based on related profit figures are cut out of significant gains. At the same time, for the largest studios, the money spent is simply moving around the balance sheet. In effect, the company is paying itself, or another connected enterprise.
While Forrest Gump may be the most well-known example of “Hollywood Accounting”, there have been numerous examples of wildly successful movies being technically reported as unprofitable. Return of the Jedi, the conclusion to the original Star Wars trilogy, made nearly half a billion dollars in the box office against a budget of $32 million. Despite these figures, Lucasfilm continues to claim the movie was not profitable. In another example, the story creator for Coming to America sued Paramount for his share of the profits. The judge found the act of Hollywood accounting “unconscionable” and noted it was difficult to believe that the movie made no profit when its budget was less than one-tenth of its box office gross. Still, cases for legal precedent remain murky.
Besides improperly accrediting major contributors what they’re due, Hollywood Accounting has more widespread repercussions for the economy in relation to intellectual property (IP) theft. Victoria Espinel, the U.S. intellectual property enforcement coordinator for the Office of Management and Budget, calculated that IP theft costs the US over $58 billion annually. This number includes the loss of income and profits as a result of Hollywood Accounting practices. Losses as a result of IP theft also include over $20 billion dollars from the illegal pirating of movies as a result of the multiplier effect. The multiplier effect results when an increase in spending in one area has outsized repercussions throughout the economy, including larger outputs. Much of the $20 billion figure comes from examining the specific losses the economy faces from piracy. By pirating movies, money is being taken out of the economy. Under typical circumstances, money would be paid out to the distributor, studio, production, crew and cast who would later spend, thus putting money in the pockets of others to also go spend. The cycle would continue onward at a predictable factor. Removing this process thus decreases total GDP. An economist at the University of Kansas School of Business even goes so far as to say that the multiplier effect will eventually cease to play an important role in GDP as a result of piracy. His logic follows that piracy dampens film profits which could lead studios to spend less on films. This would have an outsized impact because the film industry affects many other areas of the economy. Apparently, it is not possible to know what you will find in a box of chocolates, life or the balance sheet of a studio in Hollywood.
Investing involves risk, including possible loss of principal. This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. Opinions reflect the market conditions when written.