Craftful accounting tricks that Hollywood majors often practice turn blockbusters that made hundreds of millions of box office into ‘flops’. Only on paper, of course. And the reason behind that is not saving on taxes. This is how the fat Hollywood cats are avoiding sharing net profit with cast and crew — those who worked hard on making the movie happen. Today we’ll tell you how the blockchain technology could bring justice here and solve plenty of other industry’s issues.

Hollywood’s creative accounting techniques

The 5th episode of the Harry Potter saga, Harry Potter and the Order of the Phoenix, earned more than $900 million in the world’s box office and became one of the most financially successful films of the decade. Which is not surprising at all, of course. What is surprising, however, is that according to the official accounting statement from the Warner Brothers Studio, the movie did not only fail to bring any profit, but was over $167 million in the red. How is that possible, considering the budget of the picture was $150 million, a few times less than the box office? Same thing happened to Return of the Jedi, the sixth episode of Star Wars. David Prowse, the actor who portrayed Darth Vader in the original trilogy, never got his per cent from the net profits. Because, technically, the movie that is ranked 15th in the history of the US box office and made $475 million with the budget of $32 million, never made any profit.

The answer to this tricky maths is a very intricate accounting that Hollywood majors tend to exercise. The most common first step when starting a new project, both in Hollywood and independent productions, is establishing a new company for that purpose, so-called SPE (special purpose entity; in the UK — SPV — special purpose vehicle). It’s usually done to make it easier to manage the money side of the production and protect the movie from potential risks. But the Hollywood fat cats find some more benefits in that. They manipulate the accounting using this daughter company to cut a bigger piece of the cake for themselves. After the theatrical release and run the studio charges basically their own company, this special purpose entity, with fees for distribution, advertising and interest fees, which leaves the movie itself without any profit. Cast and crew who worked on the film do not get any per cent of the net profit they were promised, simply because on paper … there is no profit!

These murky accounting techniques have been one of the Hollywood’s biggest issues for ages. The fact that years can pass between the development stage of the movie and its release makes it even more complicated to track money after it came in. There is no other industry where reporting systems are so intransparent and visibility of how one’s investment doing can only be tracked on annual or semi-annual basis.

Netflix и Amazon — new majors?

Luckily, the internet made film distribution more open and democratic. Content creators these days do not necessarily have to adjust to Disney’s or Warner Brothers’ tastes and requests. Netflix и Amazon have become somewhat of the new majors these days. They control users’ consumption across the globe and act as new distributors, collecting revenues and paying to the creatives. Same is happening in the music industry with Apple Music and Spotify. But with all the indisputable advantages of those platforms, still too much power is concentrated in their hands. They control the fanbase and compensation to artists, curate the content and take a considerable amount of profits, which lately has caused a couple of conflicts.

Creators in the film industry, as well as the entertainment industry in general, suffer the most. Not even mentioning piracy: in our digital age, when it has become so easy to replicate media files, the process often gets out of control and leads to the innumerable cases of the illegal content distribution.

Can blockchain help?

In other words, we are dealing with a crisis of trust between the key players at the market — creators, distributors and consumers. All the participants of the entertainment value chain do not trust each other and not without a reason. And it’s the crisis of the trust that blockchain is so good at solving.

Smart contracts — one of the most important applications of the blockchain technology — is a revolutionary invention first of all because they are triggered automatically. For example, you are a screenwriter based in LA. According to your contract, you are meant to get paid $10 000 on the first day of the principal photography which takes place in Cape Town. By the end of the first day, the smart contract is triggered and you’re getting paid. The only thing needed for it to be executed is a confirmation from someone, who is trusted by all the participants of the contract (for instance, notary; in a smart contract this person is called oracle) and was initially appointed in the smart contract as such, that the principal photography has actually started on this day.

Blockchain provides absolute financial transparency, because it allows not only track all the executed transactions (that cannot be altered or cancelled) in real-time, but also automatically distribute all the incoming money according to the conditions agreed upon and stated in the smart contract. Every single dollar invested in the film and spent at any of the stages of production, or that came in as a revenue, can be seen and tracked by everyone who’s taking part in making this picture. Blockchain can make the infamous Hollywood accounting transparent — those who invested in the project will be able to track where their money is, and both cast and crew — get paid what they were promised on time. However, what is needed to make this happen, is either for all the participants of the process to switch to cryptocurrencies, or to enable smart contracts to work in the traditional bank system. So, the bright future is not around the corner yet.

The new distribution model and end to piracy?

Of course we all love Netflix. They supply us with our dose of entertainment we so badly need. But any distributor — even so open-minded and democratic as Netflix — is still a middleman between the creator and the viewer. Including YouTube, which is also sort of a gatekeeper. Even though you can upload your video there, what happens to it next is completely up to the corporation. So far, there has been no way to deliver content from creators directly to consumers, bypassing middlemen and delegating them the rights to the content. But blockchain could potentially do that. Online-platform based on the blockchain technology can make the creator the only owner of their content and let them directly communicate with their viewers and fans.

It can give an opportunity to the creators of the content to register their project — whether it’s still in production or is finished — and track all the transactions around it, therefore getting the most of the revenue when bypassing the third parties, who control the fan-base and take a piece of the profits.

Blockchain can also help to bypass the middlemen when dealing with financial operations. Using cryptocurrencies to pay for digital content can help to execute secure payments while avoiding the third parties and reducing the transaction costs. Again, saving creator’s money.

A blockchain platform for video content will not only give creators control over the financial side of their project, but also over its distribution — it will enable the creator to register permissions, set up restrictions, generally — to define the way their content is distributed.

Smart contracts mentioned above will also help to fight piracy, because they will eliminate any suspicion that could pop up between different partners. Piracy is thriving not only because some people just don’t find it necessary to pay for content. Sometimes viewers are forced into illegal downloading because there is simply no way for them to find it from the descent source — for example, if the streaming service couldn’t reach the agreement with the rights holder to stream a film or TV-series in some particular region. However, those viewers would say thank you to the creator by paying if they had this opportunity.

The norwegian company White Rabbit has figured out what can be done here. They have developed a plugin that recognised the content being streamed and suggests the viewer to pay the service’s digital tokens to the rights holder. With every streaming, the smart contract gets triggered automatically, subtracts tokens from the user’s account and transfers to the rights holder who can exchange those into the traditional currencies. The members of the team hope that transparency and security of this service will motivate millions of so-called pirates out there to support their favorite artists and the industry won’t be losing $20 billion each year anymore. Oh, and distributing content with the decentralized ledger, we’ll get rid of the geographical restrictions as well.

Blockchain can also solve the copyright issue. So far copyright has been very complicated to regulate which led to a number of big scandals. The technology can track where the file originated, who uploaded it and when. Having once uploaded a file into the system, the artist can be safe and calm from then on. Spotify has already used this feature after they had to sort out a court case because of the unpaid royalties. The music giant bought the blockchain-startup Mediachain that deals with the copyright in the digital world.

Of course, we do not know yet whether the streaming platform working on blockchain will be able to compete with such giants as Netflix and Amazon anytime soon. Probably not. And it’s very unlikely that the Hollywood studios would voluntarily give up their opportunity to ‘fiddle’ with accounting. But the industry that has historically been very reluctant to any radical changes, and to new technologies in particular (remember how Blockbuster refused to buy Netflix for only $50 million?), is also gradually moving towards blockchain.

Apart from the ones already mentioned above, there are quite a few other interesting startups. Such as Vevue, for instance, the blockchain-based video distributor. They became pioneers of the blockchain-based distribution when released the first movie distributed this way, indie comedy No Postage Necessary by director Jeremy Culver. Another company is MovieCoin, whose CEO Christopher Woodrow produced such big titles as Johnny Depp’s Black Mass, Mel Gibson’s Hacksaw Ridge and Oscar-winning Birdman. Woodrow certainly knows how Hollywood works firsthand, that’s why the main goal of the project — to put an end to the dirty accounting. They already launched a blockchain-based film fund where you can transparently and securely invest in film using cryptocurrencies. Another tech company, LittleStar, developed an app to distribute video content directly from the creator to the viewer. Their goal is to empower the next generation of creators to distribute content on their own terms.