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If you are someone who wonders why movies are the way they are today, this book is essential reading. Edward Jay Epstein (site and blog), who has written about the economics of Hollywood for several years in various publications, explains in great detail where the money comes from and where it goes.

It is common now for media to report the box office grosses after every weekend, and except for establishing the relative popularity of films currently in release, the information is completely lacking in context.

For example, Gone in 60 Seconds cost $103.3 million to make and grossed $242 million. On the face of it, that looks like a success. However, the distributor (Buena Vista) only realized 40% of the world wide box office, amounting to $102.2 million. The rest of the money stayed with the movie theatres. From Buena Vista's gross, they deducted $67.4 million for advertising, $13 million for prints, and $10.2 million for insurance and other expenses. After these deductions, what was left was $11.6 million.

But of course, there are aftermarkets such as DVD. In this case, the film garnered $198 million in sales, but there's an industry standard that the film distributor only gets a 20% royalty. So Buena Vista Home Entertainment took $158.4 million of it and then Buena Vista the film distributor took $19.7 million for expenses and fees. Nicolas Cage had 5% of the gross and received $3.9 million, leaving just $16 million credited to the film itself. At this point, the film had grossed $440 million and was in the red for almost $80 million.

There were other markets, such as pay TV and free TV. However, at the end of 2008, eight years after the film was released, it was in the red $155 million.

This is typical of Hollywood accounting. On paper, the film ran a loss, but the film's theatrical distributor and home video distributor both made a lot of money off this film. In this case, since Disney ultimately owned the film, the theatrical distribution company and the home video company, the money all flows back to one place. However, it's a kind of shell game. Hollywood gets investors to put up money for the film itself, giving the investors part ownership of the film, but Hollywood takes all the money at the distribution stage, leaving the film itself with little or no profit to split with the investors.

This is what happens to independent productions. The producers are stuck raising all the money to make the film. They may get an advance from the distributor, but that money plus prints and advertising costs have to be paid back from the distribution gross before the distributor takes a fee. The distributors vacuum up all the cash, including their profits, leaving the producers to take a loss. These are worse odds than Las Vegas.

Epstein goes into great detail how Hollywood works every tax incentive it can to cut its own costs; how it raises money from investors and then skims the investment before putting the money into a picture; how it aims films at teenage males because they are the easiest group to attract to theatres and because they consume the most food from the concession stand; why sex and nudity are avoided; why stars are no longer necessary; how Hollywood appeases Wal-mart, which sells one third of the DVDs in the U.S; how Hollywood gets free advertising from merchandising partners; and why the Oscars are a complete deception.

It is possible for an individual to rise within this system to become a writer or director, but it's plain that unless that person is happy to be creating exactly what Hollywood is already churning out, there's little chance of getting anywhere. The book is fascinating but also somewhat sickening.

While the audience is distracted with the box office horse race or Sandra Bullock's marital problems, this is what movies are really about and anyone in the business or aspiring to enter it needs to know it.

(Update: You can hear a podcast with Edward Jay Epstein discussing the book here. Link courtesy of James Caswell.)