Lessons From the Harry Potter Income Statement

First of all, here it is (source)

-167m net income from 612m gross revenue. What can we learn from this? Well here is some of the original analysis:

In that statement, you’ll notice the “distribution fee” of $212 million dollars. That’s basically Warner Bros. paying itself to make sure the movie “loses money.” There are some other fun tidbits in there as well. The $130 million in “advertising and publicity”? Again, much of that is actually Warner Bros. paying itself (or paying its own “properties”). $57 million in “interest”? Also to itself for “financing” the film. Even if we assume that only half of the “advertising and publicity” money is Warner Bros. paying itself, we’re still talking about $350 million that Warner Bros. shifts around, which get taken out of the “bottom line” in the movie accounting.

Here’s another example:

Here’s a hypothetical example of how this could work in practice, using round numbers just to make the point (these aren’t directly accurate numbers, but the concept is). A studio funds A Movie with a production budget of $100 million. It sets up AMovieCo Inc. and gives it the production budget money. The studio then spends another $50 million on marketing and puts that down as an expense as well — though, with some of the big studios, some of this money involves paying itself for advertising on its own properties. Still, even if we assume that’s real money spent, you might think that AMovieCo now needs to make back $150 million to be profitable. But… the studio (which, again, controls AMovieCo completely) then tacks onto all of that, say, a $250 million “distribution fee.” Now, while there may be some money spent on actually distributing the film, the number is almost completely bogus, and much higher than the actual expense for the studio. Very little actual money needs to change hands here — it’s just a fee on the books (a fee they are effectively charging to themselves). And it’s not just “distribution” but a variety of additional charges. On top of that, the studio may then charge “interest” on that money, even though it’s really just lending money to itself. What it all means is that rather than becoming profitable at ~$150 million (the actual money spent), AMovieCo now needs to earn over $400 million before anyone with a cut of the profits sees an additional dime from the movie, thanks to completely imaginary accounting entries on the books.

Distribution is control. That’s true in insurance, too.

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