Take the 1983 surprise smash hit, “Return of the Jedi” for example. This movie was shot on a relative small budget of $32 million, but smashed all expectations, and raked in almost half a billion dollars at the box office. It has, however, to this day, never turned a profit.
The reason for this seemingly counter intuitive situation is down to Hollywood Economics. Film studios don’t simply subtract expenses from income for each movie they make to calculate their bottom line. They have a far more complex process of doing things. Each movie made is set up as an individual corporation against which all the expenses and profits are booked. Nothing too strange there.
But, here is where the creativity comes in. The studio then charges the movie corporation for all sorts of services they render, such as distribution, advertising, interest etc. If these charges as sufficiently large, the movie corporation will make a loss, regardless on the box office takings.
So, while most businesses try their utmost to maximise profits by limiting costs, it seems movie studios are able to maximise their losses to record profits.
Only in Hollywood.
