DVD Sales Figures Turn Every Film Into a Mystery

Peter Jackson’s three “Lord of the Rings” movies have brought New Line Cinema extraordinary fame and fortune. The trilogy won 17 Academy Awards, including one best picture Oscar, and sold $2.91 billion in movie tickets around the globe. The movies also were a huge hit on DVD, with overall sales totaling -- well, if you actually happen to know, please call Jackson’s lawyers.

The avalanche of money generated by DVDs has transformed Hollywood, swinging profitability from the multiplex ticket window to the Wal-Mart checkout line. Income from the sale and rental of new movies, television series and classic films accounts for as much as 60% of a major studio’s profit, as DVDs have become a consumer electronics phenomenon. Yet even in a business that trumpets every nickel of box-office grosses, a title’s precise DVD profit remain one of the industry’s best-kept -- and, increasingly, most divisive -- secrets.

Jackson grew so frustrated with New Line’s accounting of his films’ revenues that he sued the Time Warner subsidiary in February, an unusual fracture in what had been a mutually beneficial partnership. Among the many allegations in his breach-of-contract lawsuit, the New Zealand filmmaker says New Line shortchanged him in its DVD payments for the first of his three films, “The Lord of the Rings: The Fellowship of the Ring.”

“You might think that a studio that has received billions of dollars of revenues would try hard, even hustle, to pay all it owes to its visionary filmmaker,” says Peter Nelson, a Jackson lawyer. “But that didn’t happen.”

Interviews with a dozen leading talent agents, managers, lawyers and studio executives suggest that DVD compensation is likely to be among the hardest-fought negotiating points for years. The battle over DVD royalties is not being fought just in the courtroom; it is an ongoing clash in any number of show business contract negotiations.

The stakes are indisputably high. DVDs have provided the fastest-growing segment of show business returns, with 2004 domestic DVD sales reaching $15.5 billion and DVD rentals grossing $5.7 billion, according to the Digital Entertainment Group. Videocassette sales and rentals brought in $3.2 billion, while domestic theater ticket sales totaled $9.5 billion last year. The DVD windfall has taken on even greater importance now that overseas movie earnings are slowing.

“They are the critical component to the success and profit of any film,” says Amir Malin, the former chief executive of Artisan Entertainment and co-founder of the show business investment fund Qualia Canyon Capital. “It’s the biggest piece of the revenue pie, far surpassing theatrical and television.”

Even though Hollywood’s labor unions have failed to make any headway in getting a share of DVD profits, individual movie artists are free to argue for a bigger slice of the proceeds. The studios say that any DVD concessions would bring financial ruin, but cracks are starting to appear in their previously united front, fissures that could ultimately provide the clearest view of the battleground.

Although Jackson’s lawsuit does not specify a dollar figure for the alleged “Lord of the Rings” shortfall, and his attorneys would not provide one, industry experts estimated that the purported discrepancy could run in the tens of millions of dollars. New Line declined to comment.

Other filmmakers with far less money at stake also are going to court to verify DVD sales numbers. The husband-and-wife team that distributed “The Basket,” a 1999 Karen Allen-Peter Coyote drama that grossed just $600,000 in domestic theaters, sued the film’s home video distributor, MGM, on March 17 for $750,000, contending the studio underreported the film’s DVD and video income by a wide margin.

“They hurt the little guy just as much as the big guy,” says Matt Kohn, who with his wife, Sharon, released “The Basket” theatrically and is also the attorney bringing the lawsuit against MGM. MGM said it does not comment on pending litigation.

Lawsuits challenging Hollywood accounting are hardly novel: Thanks to some of its more bizarre accounting rules, studios in the past have claimed that blockbusters such as “Forrest Gump” and “Batman” failed to earn any net profits. This new breed of litigation alleges similar accounting. At the same time, the lawsuits reveal just how vital DVD income has become and how mysterious its revenues remain.

The studios insist that the DVD sales information they supply to actors, directors and writers is accurate and timely and that DVD audits are both routine and welcome. Yet even the town’s most powerful agents and managers say they are not certain how much money a particular DVD brings in.

Unlike domestic box-office grosses, which are announced every week, there is no uniform and public DVD reporting. Some studios say accurate industrywide DVD sales numbers cannot be generated because Wal-Mart, which typically accounts for more than a third of all DVDs sold, does not make public its sales data.

But one studio said privately that it guards its DVD sales information because it does not want to encourage filmmakers and actors to seek more DVD money.

Even on public financial statements, studio rules differ. MGM disclosed its overall video revenue, but Sony, which led the just-completed MGM buyout, does not. Furthermore, studios have different ways to account for home entertainment rebates, returns, discounts and revenue sharing.

“The artists know the studios are generating a lot of revenue on DVD,” says Ken Kamins, a Hollywood talent manager whose clients include directors Jackson, John Boorman (“The Tailor of Panama”) and Paul W.S. Anderson (“AVP: Alien vs. Predator”).

“But the artists, especially the directors, are asked to do a lot more work to enhance the value of the DVD,” Kamins says. “We’ve moved well past the time where a director just slapped a vocal commentary on a disc. They now supervise six to eight hours of additional content. And that’s what gets reviewed and sells -- the bonus features, not the movie. Yet there’s no specific compensation for all of that extra work.”

Tired of walking into contract talks in ignorance, the leading talent agencies and management firms have assembled research teams to study DVD revenue and costs.

Still, improved DVD deals for actors, writers and directors have been elusive for all but the top echelon, with A-list names like Jackson, Steven Spielberg, Tom Cruise, Tom Hanks and Brad Pitt securing a greater percentage of DVD revenue.

Under current terms, almost all of a movie’s actors, directors and writers receive royalties that are based on 20% of a DVD’s net income (the remaining 80% goes straight into a studio’s coffers). Those few top stars and filmmakers are starting to get royalties based on 50% and more of a film’s net income, but the studios want to keep that privileged fraternity from growing by even a single new member.

In an attempt to rebuff the growing number of agents seeking similarly enriched DVD deals, the studios are offering a variety of other financial incentives, including larger bonuses based on box-office returns.

The studios maintain that the silvery discs, which for a popular title cost about $5 to manufacture, market and distribute and sell for about $15 wholesale, almost always mean the difference between a film’s profit and loss.

If a movie tanks at the box office, DVDs can offer the last, best place to stem the losses. DVD income can salvage failed television series and generate streams of cash from older movies. A movie frequently collects more money on DVD than in theaters.

“It’s not at all unusual for films that do $40 million to $50 million at the box office to do $50 million to $60 million on DVD,” says Dave Davis, a financial advisor to several movie studios.

Even a box-office blockbuster may reach profit only when it arrives on DVD shelves because movies have become so expensive to produce and market, with the average studio release running $98 million last year.

To understand a DVD’s importance to the bottom line, consider the smash hit “Meet the Fockers,” which has sold more than $500 million in movie tickets worldwide. Since theater owners keep about half of ticket sales, Universal Pictures netted about $250 million on the film’s theatrical release. But Universal pays about a quarter of its “Fockers” theatrical revenue to the film’s stars as gross profit participation, leaving about $187 million in the bank. Since the film cost almost that much to make, advertise and distribute, Universal will need DVD sales to generate any significant “Fockers” profits.

But precisely how much DVD income will “Meet the Fockers” spin off after it hits shelves on Tuesday? It may take more than a little guesswork.

Although studios often hype a film’s first week (or even first day) of DVD sales, most studios don’t release periodic sales information.

“As a matter of policy, we just don’t give out numbers,” says Stephen Einhorn, president of New Line Home Entertainment.

“It’s been traditional for studios to brag about box-office performance,” says Tom Adams, an experienced home video analyst who runs Adams Media Research. “But it’s also been traditional to keep the home video data very tightly held.”

Increasingly, agents and managers hire companies like Adams’ to investigate sales information for a particular title, partly out of concern that residual payments might be too low.

Despite the concerns over accounting, quite a few people besides the studios are making money from DVDs. One actress with just four lines in “A Bug’s Life” was paid $500 for performing in the animated film but has received tens of thousands of dollars in subsequent DVD royalties.

But in other cases, especially for actors who made movies decades ago, when video terms were not included in contracts, DVD sales bear no bonus check. If these older actors want DVD royalties, they either have to audit a studio or threaten legal action.

For the time being, the best that actors and filmmakers can hope for is truthful accounting on DVD deals.

“We don’t know the numbers,” says “Basket” producer Kohn, who estimates his film may have produced at least nine times the revenue MGM is reporting.

Kohn says in his lawsuit that he engaged an auditor who was barred from seeing numerous MGM documents but did find “material shortfalls, overcharges, discrepancies [and] irregularities” in his film’s DVD accounting. In one instance, he says, MGM deducted $7,312.68 for “Basket” returns from a bankrupt video chain that appeared to have ordered no DVDs.

“We wanted to have some fun on a movie that was a clean family film,” Kohn says. “If [MGM] was honest with us, it would have been fine. But this is heartbreaking.”