The Hollywood Economist (5 page)

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.

All 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. In return, Schwarzenegger agreed to make himself available for eighteen weeks of principal photography, one week (on a nonexclusive basis) for rehearsals—if any were required—and five days for re-shooting. In addition,
he had to make himself available for at least ten 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. The 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 then the most expensive independently produced movie in history. Another $90 million was spent advertising and marketing it.

Terminator 3
had a world box office gross of $433 million which, together with DVD, TV, and other rights, allowed the distributors to eke out a small profit, but Arnold Schwarzenegger, who had created his own “cash breakeven,” was the big winner. 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 bobble-head doll on the grounds that “Schwarzenegger is an instantly recognizable global celebrity whose name and likeness are worth millions of dollars and are solely his property.”

Ironically, whereas Schwarzenegger was crucial to making the deal, once the
Terminator
franchise had been successfully resurrected, his acting services were no longer necessary for future sequels. In 2007, Kassar and Vajna sold the rights to the franchise to the game company Halcyon for $25 million, which produced
Terminator Salvation
in 2009, the first of three planned sequels. Even without Schwarzenegger, who was by now fighting his own budget battles as governor of California, it did almost as well as
Terminator 3
at the domestic box office, though not as well in the Asian markets.

The difference between studio-made movies and independent-made movies is the former have an American distributor before they are filmed, or even green-lit, and therefore investors in them
are assured that they will be shown in theaters, while the latter don’t. And since it may take years of screenings, and endless trips to film festivals, before an indie film has a chance of finding an American distributor and many never do, raising money for them is a daunting challenge.

One ingenious device through which indie film producers overcome this problem is to recruit Hollywood stars who will work for them on the cheap and use their names to pre-sell the movie abroad. The same actors and actresses who quote Hollywood studios $20 million per movie will work on indie films for a small fraction of that fee. Often they accept “scale,” as the Screen Actors Guild’s minimum wage of $788 a day is called, or “near scale” of about $10,000 a week plus overtime. Instead of requiring private jets, luxury suites, and multimillion dollar perk packages as they do in studio films, the stars will fly on commercial flights, stay in inexpensive condos, and get the same per diem as the rest of the cast. Instead of receiving a sizable chunk of the gross receipts as they are accustomed to on studio films, for indie films stars will accept “net points” (even though they—or their agents—are no doubt familiar with David Mamet’s famous observation that in Hollywood, “There is no Net”). “The total cost of a star can
be less than that of running the office Xerox,” explained one knowledgeable producer. The willingness of top stars—including Keanu Reeves, Mel Gibson, Jim Carrey, Will Ferrell, Drew Barrymore, Al Pacino, Angelina Jolie, Pierce Brosnan, Leonardo DiCaprio, Charlize Theron, Tobey Maguire, Demi Moore, Sean Penn, and Julia Roberts—to work for near scale in the parallel universe of indie films allows indie producers to take advantage of a star’s cachet to finance the movies.

Ironically, in the era of the moguls, the Hollywood studios gained a similar advantage over stars by locking all their actors and actresses into long-term contracts in which they were paid a specified weekly salary regardless of the success of their movies. After the studio system collapsed in the late 1940s, the stars, represented by powerful talent agencies, quickly turned the tables on the studios. Now, no longer under studio contract, the stars auctioned off their services to the highest bidder from film to film. The studios still paid for their films’ publicity, but the stars now reaped the benefits of their cachet via product endorsement, licensing their images for games and toys, and a raft of other celebritized enterprises.

Despite the lure of enormous compensation from studios, which now include perk packages
and cuts of the gross receipts that can easily exceed $30 million a film, stars find occasional satisfaction in working for coolie wages in indie productions, making a distinction between, as one top Creative Artists Agency (CAA) agent put it, “commerce and art.” Some stars may find that roles in studio comic-book movies (that they share with live stuntmen and digital doubles) do not provide the acting opportunities, award possibilities, prestige, camaraderie, or even aura of coolness of indie productions. Others may want to work with a particular director, such as Woody Allen, Spike Jonze, or David Mamet, or burnish their fading image as an actor. They might also need to fill a hole in their schedule since, PR hype aside, there is not an endless cornucopia of $20 million parts in Hollywood. Also, when stars do “artistic” films practically pro bono they do not officially lower their $20 million quote.

Whatever the star’s motives, the indie producers get, if not a free ride, a means of financing their movies through a three-step process called pre-sales. Here is how it works:

Step One. The indie producer makes a pre-sale contract with a distributor overseas. In such an arrangement, the producer usually turns over all rights to exhibit the movie—including selling
DVDs and TV licenses—in a particular country in return for a minimum guarantee of money once the film is completed and delivered. The catch-22 here is that a foreign distributor often will not commit to a pre-sale contract if there is no American distributor or unless the film has a recognizable star (with a star the distributor has at least a chance of selling the DVD and TV rights). So indie producers must persuade or seduce a star into joining the movie—and here is where the genius comes in—for practically no money. With a star in tow, a producer can often make enough pre-sales to cover most, if not all, of the budget.

Step Two. Since pre-sales are no more than promissory notes, the indie producer must borrow against them from banks to pay for the movie. Before he can do that, he needs to guarantee the banks that the movie, once begun, will get finished and delivered to foreign distributors. What’s needed is a completion bond, which guarantees the banks that it will pay all cost overruns necessary to finish the movie and if the production is abandoned, it will pay all the money lost on the venture, which means that one way or another the bank will get back its money. Two companies, Film Finance, Inc. and International Film Guarantors, provide almost all the completion bonds for independent
productions. (Studios that internally finance their own movies do not need completion bonds.) Before either company will sell a producer a completion bond, the producer has to meet its requisites, which include buying full insurance for the star (so if he or she is injured or quits the completion bond coverer gets all the money back from the insurer) and turning over to the completion bond company the ultimate control of the budget (including the right, if anything goes wrong, to take over the production and bring in its own director to complete it). The indie producer also has to pay the company about 2 percent of the budget.

Step Three. With the completion bond in hand, and the pre-sales contracts as collateral, the producer then borrows the money from a bank or other financier. Since the completion bond companies are themselves backed by giant insurers, such as Lloyds of London and Fireman’s Fund, the banks take only a very limited risk in making such loans. John W. Miller, who recently retired as head of JP Morgan Chase’s movie financing unit, told me that in issuing billions of dollars in loans he did not read the scripts of the indie films he finances. “My bet is on the solvency of the distributors.” When these pre-sales contracts are with established international distributors, such as Sony
Pictures, Canal Plus, Toho Films, or Buena Vista International, that risk is, he said “negligible.”

Even after scaling all these hurdles, securing the money, and making the movie, the indie producer faces one further challenge: getting the movie into American multiplexes. Even with a completed movie and star, finding a distributor requires going from film festival to film festival, an odyssey that often proves unfruitful. (More than 2,000 indie films were submitted to the Sundance Film Festival in 2009, for example, of which about one percent were accepted.) However, the presence of a star greatly improve its chances, especially in those festivals, such as Cannes, Berlin, Venice, and Toronto, that depend on stars for publicity and photo-ops. As one highly successful indie producer explains, it gives the acquisition executives there more of an incentive to give the film a chance with distribution, because they figure that, even if the film is a hard sell, they can always promote the star. Selling the film ultimately is what it’s all about. So the Hollywood star as
homo ludens
, or at least seeking some kind of non-monetary gratification, winds up as the crucial element in a business model that has sustained a large part of independent films—and, for that, we can all be grateful.

In the arcane universe of Hollywood contracts, there are two kinds of money paid to stars, directors, actors, and other participants in movies. The first kind is called “fixed compensation” and is paid out, like any other wage, when the participant does his job. The second kind is called “contingent compensation,” which depends on how well the film does, is typically not paid until the revenues reach an arbitrary point artfully called “cash breakeven.” Whatever percentage a participant is supposed to get, whether it is based on gross or net points, it is triggered by this contractual definition. In some contracts in lieu of the star receiving any sizable fixed compensation, the cash breakeven is set at dollar one, which means his pay kicks in immediately after the print and advertising costs are reimbursed, but usually it is set high enough to allow a studio to recover most of its production costs. Not only may the definition vary from film to film, but it is not unusual for many participants in the same film to have different cash breakevens. For each participant it is defined not by any set accounting rules but by Hollywood’s prevailing Golden rule: Who has the gold makes the rules. The contentious negotiations, which center
around self-serving claims about how much gold any participant might add to the venture, almost irresistibly lead to the most powerful player getting the lowest cash breakeven, which means he or she will be the first to get paid. The problem here is that the money paid first to the more powerful players is added to the cost side of the equation for everyone else, which pushes them further away from reaching their higher cash breakeven. As a result, the less powerful, which includes writers, may never qualify for their contingency payments. Woody Allen jokes in his movie
Hollywood Ending
about a director being so lowly regarded that he received “quadruple cash breakeven,” and therefore the movie had to gross four times his breakeven point before he received a penny of his contingency pay. On the other hand, the handful of stars and directors who are indispensable to a movie getting green-lighted can dictate their own golden cash breakeven. And, to protect the egos of less privileged participants in the Hollywood Community, these golden cash breakevens are usually kept a closely guarded secret. But consider the golden terms Arnold Schwarzenegger got for
Terminator 3
. Brilliantly drafted by his lawyer, his cash breakeven clause specifies: