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«Gross HysteriaDO THE STUDIOS REALLY OVERPAY TOP TALENT LIKE PETER JACKSON? By Edward Jay Epstein Posted Monday, Jan. 23, 2006, at 6:40 AM ET Jackson: ...»

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By Edward Jay Epstein

Posted Monday, Jan. 23, 2006, at 6:40 AM ET

Jackson: 500-pound gorilla?

Studio executives are hardly clueless when it comes to negotiating contracts with A-list talent, although the popularity of The-Moguls-Must-Be-Crazy stories in the media would have you believe otherwise. Examples abound: The Wall Street Journal reported that, "In order to sign actress Cameron Diaz and director Nancy Meyers, the [Sony] studio had planned to offer both women a share of the movie's gross box-office revenue from its first day of release on. It is a practice known as 'first-dollar gross' and it's standard fare for top-tier talent." Variety reported that "20 percent of the gross [of King Kong] is going to [Peter] Jackson." Wired reported that, "A deal worth $20 million against 20 percent of the box office gross [is] the kind of contract Tom Cruise or Tom Hanks generally get."

In fact, the Hollywood studios never give participants—not even gross players as powerful as Arnold Schwarzenegger, Tom Cruise, Tom Hanks, Jerry Bruckheimer, Steven Spielberg, or Pixar Animation Studios—an unadulterated percentage of the box-office gross, or the video store gross, or any other retail gross. As one top Viacom executive explained, "The first truism of Hollywood is 'Nobody gets gross—not even a top firstdollar gross player.' " What the top gross players do get are two kinds of compensation: fixed and contingent.

The fixed part is the upfront money that gross players are paid whatever happens to the movie. The contingent part is the percentage of a pool called the "distributor's adjusted gross" in Hollywood lawyer lingo. The players get their share of this pool after certain conditions are met, such as the movie earning back the amount of fixed compensation or reaching a contractually defined cash break-even point. The pool is "filled" with the money that the studio's distribution arm collects or, in the case of DVDs, gets credited with. With movies, the pool (eventually) gets the remittance from theaters (anachronistically called "rentals" from the days when movies were rented to exhibitors) left over after the theater owners deduct their share of ticket sales and house allowance and after the distributor deducts "off the top" expenses such as check collection, currency transfers, stamp taxes, duties, and trade-association fees.

With DVDs, the pool gets the "royalties" paid by the studio's home-entertainment arm to its distribution arm. It's a remarkable exercise in self dealing and produces an amount that represents only a small fraction of the studio's actual revenue. The standard DVD royalty is 20 percent of the wholesale price, but a few of the very top stars get a royalty as high as 40 percent. (There is also an alternative arrangement called 100 percent accounting, in which the pool is credited with the home-entertainment arm's total proceeds minus its manufacturing and packaging costs, but this is usually reserved for only full-fledged partners such as Pixar.) In the case of TV licensing, the pool gets the license fee minus the "residuals" paid out to actors, directors, writers, and guild pension plans.

To see how these "gross" participations work in practice, look at Arnold Schwarzenegger's 33-page contract for Terminator 3, which is still considered the gold standard for the super-gross players. For his fixed compensation, Schwarzenegger received $29.25 million—then a record sum. He got the first $3 million upon signing and the balance during the course of principal photography. His "contingent" compensation was 20 percent of the "adjusted gross receipts" of the distributors (Warner Bros. in the United States; Sony Pictures and Intermedia abroad). The "adjusted" part of the equation allowed the studio to deduct the items specified on Page 3 of the contract: "All industrystandard and customary off-the-top exclusions and deductions—i.e. checking, collection conversion costs, quota costs trade association fees, residuals, and taxes."

Schwarzenegger's lawyer, Jacob Bloom, is without peer in the entertainment business, but the best he could do here was to cap some of the collection charges at $250,000; he could not touch the residuals or tax deduction. Bloom did manage to get the all-important DVD royalty contribution to the pool raised to 35 percent (although only for Schwarzenegger). As good as this was, it meant that Schwarzenegger was entitled to only 7 percent of what the studios took in from their DVD sales.

Schwarzenegger's contingent compensation would not kick in until the film met the break-even point defined in the contract (click here to see how his contract defines cash break-even). Although the film achieved a $428 million world box-office gross, it just barely reached its cash break-even point, so alas, Gov. Schwarzenegger has earned only a pittance so far from his gross participation beyond his $29.25 million payday. Tom Cruise got a more immediate slice of the action for Mission: Impossible II. In return for his producing, acting, guaranteeing against cost overruns, and paying other gross players their share—including director John Woo's 7.5 percent—Cruise's production company got 30 percent of Paramount's adjusted gross receipts. Since the DVD royalty going into the M:I-2 pool was calculated at 40 percent royalty, Cruise would end up getting 12 percent of the DVD revenue. As part of his unique deal, Cruise did not take upfront fixed compensation (other than the minimum required by the Screen Actors Guild), and, in return, his 30 percent contingent compensation was not deferred until a cash break-even threshold was met.

In this light, Peter Jackson's compensation for King Kong was a relative bargain.

Universal paid $20 million in fixed compensation to Jackson's production company not only for his directing services, but also for the scriptwriting and producing services of his collaborators Fran Walsh and Philippa Boyens. (The Terminator 3 budget for script, producers, and directors exceeded $34.5 million.) And, making a sweet deal even sweeter, the New Zealand citizenship of Jackson and his team qualified Universal for a cash subsidy from the New Zealand government that could be as high as $20 million (and by itself could pay Jackson's entire fixed compensation). In addition, once the fixed compensation is earned back, Jackson's company also gets 20 percent of Universal's adjusted gross receipts, which means it will get at least an additional $20 million from movie rentals (which now have passed $200 million worldwide) as well as a huge payoff from future DVDs and TV rights.

Such deals are costly, but not crazy. The studios' business nowadays is entirely driven by one or two huge franchises that serve as worldwide licensing platforms. And the most predictable producers of these windfalls, such as Steven Spielberg, George Lucas, Tom Cruise, Jerry Bruckheimer, and Peter Jackson, are all gross players represented by savvy lawyers and agents who know all the ropes of the movie business. To be sure, not all their projects turn out to be billion-dollar franchises, but they have little downside. Look at King Kong: The upside for Universal was a Midas-touch licensing franchise that would enrich the studio with billions in revenues for years to come. But even if that gamble fails and there are no ape sequels, the studio will lose little if any money on the movie itself— even with Jackson's generous deal. In this big-stakes game, it makes great sense for the studios to recruit the best gross players, as long as the gross they give away is not really the gross.

How Arnold Schwarzenegger Defines Cash Break Even 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, mutuallyapproved 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%) 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% 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% home video royalty or if Producer is not accounted for at a 100% 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% 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% 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.



Concessions Are for Girlie



By Edward Jay Epstein Posted Monday, May 9, 2005, at 11:11 AM ET The nonstop anecdotes that stars give in celebrity interviews about the stunts they supposedly performed, their favorite hobbies, and how much they enjoyed working with other stars may serve to hype their latest project—a job they are contractually required to do—but they evade a central issue: The art of the deal has come to replace the art of movies. To understand how the new Hollywood really works, one need only read stars' contracts. Consider, for example, Gov. Arnold Schwarzenegger's agreement for Terminator 3: The Rise of the Machines. It's a state-ofthe-art exercise in deal-making.

The contract, which was brilliantly put together by the Hollywood superlawyer Jacob Bloom between June 2000 and December 2001—requiring no fewer than 21 drafts—runs 33 pages (including appendices). For starters, Schwarzenegger got a $29.25 million "pay or play" fee, meaning he would be paid whether or not the movie was made. (At the time, that figure was a record for guaranteed compensation.) The first $3 million would be delivered on signing and the balance during the course of principal photography. For every week the shooting ran over its 19-week schedule, Schwarzenegger would receive an additional $1.6 million in "overage." Then there was the "perk package"—a lump sum of $1.5 million for private jets, a fully equipped gym trailer, three-bedroom deluxe suites on locations, round-the-clock limousines, and personal bodyguards.

The producers Mario Kassar and Andrew Vajna did not agree to pay Schwarzenegger this record sum because he possessed unique acting skills—after all, the part he was to play (along with a digital double and stuntmen) was that of a slow-speaking robot. They also did not pay Schwarzenegger on the basis of his box-office track record. Indeed, his previous two films—End of Days (1999) and The Sixth Day (2000)—had failed both at the world box office and at video rental stores. Nevertheless, in the 10 years that had elapsed since Terminator 2: Judgment Day, Schwarzenegger's image had become so inexorably linked in video games and TV reruns to the deadly robot that he had become the crucial element of the deal.

Kassar and Vajna, backed by the German-owned movie financier Intermedia Films, had already bought the sequel rights to the Terminator franchise for $14.5 million from the bankrupt Carolco Pictures and the initial producer, Gale Anne Hurd, and had spent another $5.2 million developing a script. Finally, they had lined up more than $160 million in financing: Warner Bros. would pay $51.6 million for North American rights, the Tokyo distributor Toho-Towa would pay $20 million for Japanese rights, Sony Pictures Entertainment would pay $77.4 million for the rest of the world, and Intermedia would earn another $11 million by transferring the copyright to German tax shelters. But Warner Bros., Sony. and Toho-Towa had all made their deals conditional on Schwarzenegger signing on to play the robot. So: No Schwarzenegger, no money.

Kassar and Vajna had no real choice but to accept Schwarzenegger's terms (and they themselves would earn $10 million if the deal went through). Schwarzenegger's demands did not stop with the guarantee of $29.25 million. He also insisted on—and got—20 percent of the gross receipts made by the venture from every market in the world— including movie theaters, videos, DVDs, television licensing, in-flight entertainment, game licensing, and so forth—once the movie had reached its cash break-even point.

Such "contingent compensation" is not unusual in movie contracts, but, in most cases, Hollywood accounting famously uses smoke and mirrors to make sure to define "breakeven" in such a way that a movie never reaches it.

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 break-even point. But Schwarzenegger's contract, thanks to the ingenious lawyering of Jake Bloom, allowed for no such evasion. In the case of DVD and video royalties, the contract specifies: "For purposes of calculating Cash Break even only, Adjusted Gross Receipts shall include a 100% home video royalty (i.e. home video revenues less costs)."

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