Movie Math

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While “Star Wars” buffs are counting on “Episode III, Revenge of the Sith” to redeem the reputation of the franchise, Hollywood teeth-gnashers are hoping it kick-starts a slumping movie market. Box-office action is down 6 percent from the comparable period last year, and, according to Entertainment Weekly, attendance figures are down for the third straight year.

Sound grim?

Only if your horizon is cluttered by short-term box-office hype.

In February, Edward Jay Epstein blew the lid off Hollywood’s dirty little open secret with his book “The Big Picture — The New Logic of Money and Power in Hollywood.” The open secret is this: A movie’s theatrical run is only the beginning of its life cycle; many more millions stand to be made in the DVD and television markets and through merchandising tie-ins.

“The permutations are endless,” Mr. Epstein writes.

Mr. Epstein calls it the “clearinghouse.” It’s not “built of bricks and mortar and doesn’t have a precise address,” he writes, but “it is conceptually an essential — and utterly real — part of today’s studio.”

The clearinghouse works like an interlocking system of offshore accounts. Even the industry’s biggest stars may not fully comprehend its back-scratching beauty.

Mr. Epstein offers the 2000 Nicolas Cage movie “Gone in 60 Seconds,” a product of the Disney-owned Touchstone Pictures, as an example. It cost the studio $206.5 million to make, factoring in production costs, advertising and overhead expenses. The movie took in $242 million worldwide, $139.8 million of which stayed in theater registers.

That leaves Touchstone about $100 million in the red, right?

How did Disney’s Michael Eisner get away with touting the movie as a “hit” in the company’s 2000 annual report? The answer is found in the clearinghouse, the highly lucrative after-market that pretty much shatters the industry mythology that attaches to the vaunted opening-weekend and weekly box-office tallies, which took off in the early 1980s.

The clearinghouse not only rescues the bottom line of movies that fare modestly at the box office, but it also keeps a significant chunk of money in studio coffers and out of the wallets of actors.

Follow closely: Buena Vista Home Entertainment International, also a Disney subsidiary, reported $198 million in sales and rentals of “Gone.” But only a fraction of that sum was credited to the movie, Mr. Epstein explains.

Buena Vista gave Walt Disney Pictures a $39.6 million royalty cut, a transaction that was treated as though the two companies were separate entities rather than corporate sisters. Distribution fees and other expenses claimed $20 million of that sum.

After various accounting tricks, Mr. Epstein writes, only $18.4 million of “Gone’s” home-entertainment take got credited to the movie itself — which, after deducting manufacturing expenses, left Disney with a $130 million profit on the home-entertainment release.

For Mr. Cage, who was entitled to 10 percent of the movie’s video gross, the royalty calculation meant he earned a little less than $4 million, as opposed to $19.8 million. That’s not chump change. “Without the royalty system,” a former studio executive told Mr. Epstein, “we would go broke.”

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