Hollywood's Financial Shell Game

The good news for Paramount is that when it comes to this year’s financials, it won’t even have to acknowledge that the film exists. “If you don’t release the movie, you don’t have any accounting impact for that movie,” says a studio veteran. “They increase earnings because they don’t have to take a loss and they improve their cash position because they haven’t spent marketing money.” The question of whether Paramount might have done better by releasing the film on its original date is, of course, impossible to answer.

There are other indications that Paramount may be managing for quarterly margins. Soon after the studio announced its decision to move Shutter Island, it announced a rich deal to supply movies to Redbox, the $1 DVD rental operation. (The agreement could deliver $575 million to the studio over five years.) Meanwhile, the two strongest and best-managed studios in the business—Warner and Fox—have joined with Universal to fight Redbox in court. They contend that putting movies into the hands of consumers for a buck soon after they’ve been in theaters will damage the business by undermining already-weak DVD sales.

It’s possible that Paramount can and will opt out of this deal after only a few months. Industry analyst Rich Greenfield seems to suspect that’s the plan and he’s noted that the agreement appears—once again—calculated to bolster fourth-quarter numbers. Other studios worry that Paramount won’t be able to resist that kind of candy next year any more than it can now.

Other Paramount decisions can be viewed through the same calculating mind-set, even though they may also simply be smart business. For instance, the studio refuses to spend more than $10 million to market Paranormal Activity—a fraction of the usual amount. Paramount argues that a big ad campaign would wreck the movie’s aura as something cool that audiences are discovering on their own. Maybe that’s true. But would it help the movie if the studio loosened up the purse strings?

And earlier this month, Paramount incensed theater owners by moving up the DVD release date of two films: G.I. Joe: Rise of the Cobra and the already-forgotten Jeremy Piven comedy, The Goods. Releasing G.I. Joe in November rather than December, when it would face tougher DVD competition, may enhance sales. It also means logging more revenue in the fourth quarter.

Obviously, Paramount executives have every incentive to please their bosses at parent company Viacom. And it’s not just about making a good impression. Their bonuses are influenced not just by the studio’s earnings but by its cash position—and many of their moves will enhance that, too. But again, all of these moves seem fraught with fiscal anxiety.

“The Paramount story isn’t clear cut,” a veteran executive observes. “You can draw inferences about it but it’s not black-and-white at all.” And given the vagaries of the business, it may never be clear whether the studio has made any short-term decisions that result in long-term pain. After all, who saw Paranormal Activity coming?

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Kim Masters covers the entertainment business for The Daily Beast. She is also the host of The Business, public radio's weekly program about the business of show business. She is also the author of The Keys to the Kingdom: The Rise of Michael Eisner and the Fall of Everybody Else.

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