The Hollywood Economist by Edward Jay Epstein Read Free Book Online

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 recoupedfrom 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 accountedfor 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 iscounted 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”