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Authors: Edward Jay Epstein
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provided a good portion of the studios’ profits at least up until Germany attempted to close it in 2007. This “money for nothing,” according to the vice presidents at Paramount responsible for arranging these deals, had been earning annually $70 million to $90 million from them. Best of all, there’s no risk or cost for the studio (other than legal fees).
Here’s how it works: Germany allows investors in German-owned film ventures to take an immediate tax deduction on their film investments, even if the film they’re investing in has not yet gone into production. If a German wants to defer a tax bill to a more convenient time, a good way to do it is by investing in a future movie. The beauty of the German laws as far as Hollywood is concerned is that, unlike the tax laws in other countries, they don’t require that films be shot locally or employ local personnel. German law simply requires that the film be produced by a German company that owns its copyright and shares in its future profits. This requisite presents no obstacle for studio lawyers.
The Hollywood studio starts by arranging on paper to sell the film’s copyright to a German company. Then, they immediately lease the movie back—with an option to repurchase it later. At this point, a German company appears to own the movie. The Germans then sign a “production service agreement” and a “distribution service agreement” with the studio that limits their responsibility to token and temporary ownership.
For the privilege of fake ownership, the Germans pay the studio about 10 percent more than they’ll eventually get back in lease and option payments. For the studio, that extra 10 percentis instant profit. If studio executives don’t crow in public about such coups, it’s probably out of fear that such publicity will induce governments to stiffen their rules—as, for example, Germany periodically attempts to do by amending its tax code. When you’ve got a golden goose, you don’t want to kill it while it’s still laying eggs.
HOW DOES A STUDIO MAKE A
WINDFALL OUT OF BEING ON
THE LOSING SIDE OF A JAPANESE
FORMAT WAR?
Although rarely, if ever, discussed outside a corporate inner sanctum, studios make so-called replication output deals in which studios get paid large amounts from Japanese and other foreign manufacturers to support their formats. Consider, for example, Paramount and Dreamworks’ win-win replication deal with Toshiba. In August 2007, in a last desperate effort to prevent its waning HD-DVD format from losing out to Sony’s Blu-ray format, Toshiba offered Paramount and Dreamworks (which Paramount distributes) $150 million to put out the high-definition versions of their movies exclusively as HD-DVD. In such deals,the DVD manufacturer pays studios up front cash for the right to make its DVDs. Supposedly, it is an advance that the manufacturer eventually gets back from selling the DVDs back to the studio’s video division in much the same way a publisher earns back the advance it gives an author. In this case, Toshiba paid Paramount and Dreamworks a cool $150 million advance even though sales of HD-DVDs were so meager in 2007 that Toshiba was unlikely to ever earn back the entire advance. The wrinkle to the deal was that the studios, Paramount and Dreamworks, agreed not to continue releasing their movies in the rival Blu-ray format.
For Paramount, it was a particularly sweet deal because the payment was booked as a “reduction in cost of goods” for its Home Video division, which meant it did not have to allocate it to any of the titles released on DVD, or share it with writers, directors, stars, other participants, or even equity partners. Then came the real windfall: in March 2008, Toshiba abandoned the HD-DVD format, so the studios got to keep almost all of the $150 million, and then re-released all their movies in the winning Blu-ray format.
Replication output deals go all the way back to the days of videos, when in
Here’s how it works: Germany allows investors in German-owned film ventures to take an immediate tax deduction on their film investments, even if the film they’re investing in has not yet gone into production. If a German wants to defer a tax bill to a more convenient time, a good way to do it is by investing in a future movie. The beauty of the German laws as far as Hollywood is concerned is that, unlike the tax laws in other countries, they don’t require that films be shot locally or employ local personnel. German law simply requires that the film be produced by a German company that owns its copyright and shares in its future profits. This requisite presents no obstacle for studio lawyers.
The Hollywood studio starts by arranging on paper to sell the film’s copyright to a German company. Then, they immediately lease the movie back—with an option to repurchase it later. At this point, a German company appears to own the movie. The Germans then sign a “production service agreement” and a “distribution service agreement” with the studio that limits their responsibility to token and temporary ownership.
For the privilege of fake ownership, the Germans pay the studio about 10 percent more than they’ll eventually get back in lease and option payments. For the studio, that extra 10 percentis instant profit. If studio executives don’t crow in public about such coups, it’s probably out of fear that such publicity will induce governments to stiffen their rules—as, for example, Germany periodically attempts to do by amending its tax code. When you’ve got a golden goose, you don’t want to kill it while it’s still laying eggs.
HOW DOES A STUDIO MAKE A
WINDFALL OUT OF BEING ON
THE LOSING SIDE OF A JAPANESE
FORMAT WAR?
Although rarely, if ever, discussed outside a corporate inner sanctum, studios make so-called replication output deals in which studios get paid large amounts from Japanese and other foreign manufacturers to support their formats. Consider, for example, Paramount and Dreamworks’ win-win replication deal with Toshiba. In August 2007, in a last desperate effort to prevent its waning HD-DVD format from losing out to Sony’s Blu-ray format, Toshiba offered Paramount and Dreamworks (which Paramount distributes) $150 million to put out the high-definition versions of their movies exclusively as HD-DVD. In such deals,the DVD manufacturer pays studios up front cash for the right to make its DVDs. Supposedly, it is an advance that the manufacturer eventually gets back from selling the DVDs back to the studio’s video division in much the same way a publisher earns back the advance it gives an author. In this case, Toshiba paid Paramount and Dreamworks a cool $150 million advance even though sales of HD-DVDs were so meager in 2007 that Toshiba was unlikely to ever earn back the entire advance. The wrinkle to the deal was that the studios, Paramount and Dreamworks, agreed not to continue releasing their movies in the rival Blu-ray format.
For Paramount, it was a particularly sweet deal because the payment was booked as a “reduction in cost of goods” for its Home Video division, which meant it did not have to allocate it to any of the titles released on DVD, or share it with writers, directors, stars, other participants, or even equity partners. Then came the real windfall: in March 2008, Toshiba abandoned the HD-DVD format, so the studios got to keep almost all of the $150 million, and then re-released all their movies in the winning Blu-ray format.
Replication output deals go all the way back to the days of videos, when in
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