The numbers behind the industry.
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-of-the-art
exercise in deal-making.
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.
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 "break-even" in such a way that a movie
never reaches it.
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)." 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. (Click here
to see how his contract defines cash break-even.)
Since these payments to Schwarzenegger pushed back
the cash break-even point of other participants—and
added to the costs of the movie—it effectively came
at the expense of less powerful talent (like writers) in
the contract game.
Schwarzenegger also could decide who worked with him. The
contract "pre-approval" clause gave him choice
of not only the director (Jonathan Mostow) and the principal
cast, but also his hairdresser (Peter Toothbal), his makeup
man (Jeff Dawn), his driver (Howard Valesco), his stand-in
(Dieter Rauter), his stunt double (Billy Lucas), the unit
publicist (Sheryl Merin), his personal physician (Dr. Graham
Waring), and his cook (Steve Hunter).
Finally, Schwarzenegger had the contract structured to give
him every possible tax advantage.
the money was to be paid not to Schwarzenegger but to Oak
Productions Inc., a corporate front he controlled. Oak Productions,
in return, "lends" Schwarzenegger's services to
the production. Since Schwarzenegger didn't get any money
personally from the movie itself, he had more flexibility
managing his exposure to taxes. For example, Oak Productions
entered into a complex tax-reimbursement scheme with the
production to help avoid additional tax liabilities that
might occur abroad. (Click here to
read the tax rider.)
return, Schwarzenegger agreed to make himself available
for 18 weeks of principal photography, one week (on a nonexclusive
basis) for rehearsals—if any were required—and
five days for reshooting. In addition, he had to make himself
available for at least 10 days, seven of them abroad, for
promotional activities in connection with the initial theatrical
release of the movie. This media work included everything
from television and radio appearances to appearances at
premieres and Internet chat rooms.
negotiation of this contract did not come cheaply—the
legal and accounting budget for the movie was $2 million—and,
by the time all of Schwarzenegger's demands were met, the
budget of the film had risen to $187.3 million, making it
the most expensive independently produced movie in history.
(Click here to see where that money
though Terminator 3 eventually had a world box-office gross
of $427 million (at least half of which is kept by movie
theaters), it barely broke even, except for Arnold Schwarzenegger,
who, of course, had created his own "cash break-even,"
and, under any scenario, made a small fortune from his image.
In the bygone days of the studio system, the studios had
exclusive contracts with their stars that allowed them to
reap the profits from the images their PR machines had created.
In the new Hollywood, the stars themselves reap the profit
their brand names bring to a film. So it is not surprising
that even after Schwarzenegger became the governor of California
in 2004, his holding company protected his image rights
by suing a small toy maker selling a Schwarzenegger-like
bobblehead doll on the grounds that "Schwarzenegger
is an instantly recognizable global celebrity whose name
and likeness are worth millions of dollars and are solely
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