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Finance allah shmoop we'll have new Some accountants cook the

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books Ah those hollywood accountants You know they just make

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up numbers to mess with poor naive innocent little actors

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and actresses Brad pitiful is making a movie about an

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alien who comes to earth and gets elected president brad

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gets fifteen percent of the movie's profits as compensation Well

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the flick is a block but a a monster hit

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doing two hundred million box the box office another one

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hundred million in licensing revenues from netflix the network's youtube

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and like well brad has his eye on a shiny

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new g six jet and has all said to buy

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one when the studio says sorry no profits Well how

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can this be He wonders the studio accountant lucky jim

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here does the math Well the two hundred million dollars

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was just box office sales and the theaters keep half

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the money So that's one hundred million bucks to us

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Same deal with the aftermarket hundred million So only fifty

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million came to us Brad says don't i get fifteen

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million of that new small thing called production costs while

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we needed toe actually make and then market your movie

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Well the movie cost eighty million dollars a shoot And

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then we spent thirty million dollars to market it Well

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brad sighs thinking about a much smaller plane and says

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well then okay that's one hundred fifty million to you

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and one hundred ten million in expenses So we made

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forty million dollars and i get six million write Well

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here comes the book cooking paradigm that eighty million dollars

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wasn't spent the day before the movie rolled out into

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theaters It was spent years beforehand and renting money costs

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money so the studio had to use its credit I

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even rent money from banks and partners to fund the

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movie's production Well the studio borrowed eighty million bucks for

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five years in fact and then another thirty million for

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two years The market it now this is extremely risky

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capital And if this movie had bombed then the banks

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might have lost everything So if you were the bank

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would you charge just three percent for that extremely risky

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capital You have no way So the studio could have

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rightly told the producer tio go fund himself you know

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to fund the movie elsewhere and get whatever interest rate

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on the money he could find and the studio would

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match it And surprise surprise Other than in somalia there

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were no takers Not a single lender was willing to

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take on such enormous risk even at a twenty percent

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interest rate So the studio generously loans the production money

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at fifteen percent interest and here's the math fifteen percent

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on eighty million dollars for five years That's twelve million

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of interest per year for five years or so sixty

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million dollars in total And that fifteen percent interest rate

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was a gift The real market price was more like

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twenty percent Well then fifteen percent on the thirty million

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for two years to market it Yeah at another nine

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million dollars of interest costs So what happened here Well

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the interest charges ate up all the profits Yes the

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film had operating profit ignoring interest costs over forty million

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dollars But it had to rent the money to go

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make the film the rental cost or the interest costs

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of the money with sixty million dollars for the production

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and nine million for the marketing Oh and there's this

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other little thing called a distribution fee that studios taken

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Return for pushing the film into the difficult to deal

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with theater owners and usually that's thirty percent off the

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top but those are details So were the books cooked

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here No not at all If making movies was such

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an easy profitable business well there would be legions of

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venture capitalists throwing money at the business the way there

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are in silicon valley with computer software engineers Unfortunately hollywood's

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heyday was a half century ago and economically hollywood is

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dying The studio and the banks behind it have to

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charge a very high interest rate to accommodate for the

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sad fact that most movies don't make back the money

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invested in them Most movies lose money so the one

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in ten movies that actually make money have to be

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Hey for all the rest of the studio only charged

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three percent interest for years I work out great for

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brad pitiful in his profit sharing story In a world

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where the movie made forty million dollars in revenue and

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had only ten million in interest costs With then thirty

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million of you know pretax profit well then brad would

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have gotten fifteen percent of thirty million or four point

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Five million in bonus dough But that's not the way

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things work The books aren't being cooked here People They're

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just being zapped by interest costs It's almost enough to 00:04:33.104 --> [endTime] make you lose your

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