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How much of this tax reduction is based on convoluted Hollywood accounting? If the tax on the value of the show is higher than the streaming revenues, doesn’t t

How much of this tax reduction is based on convoluted Hollywood accounting? If the tax on the value of the show is higher than the streaming revenues, doesn’t that imply that the valuation is bogus? Can someone explain how the numbers add up here?

WorldMaker 3y ago
I don't think a lot of it is actually taxes but that "blame it on the IRS" has been a PR spin win for Hollywood. (Some small amount of it is taxes, which muddies the waters just enough for plausible deniability and PR spin.) I think some of it is plain old opportunity cost and "vaulting". Streaming a classic on your own streaming network doesn't generate money like selling DVDs/Blu-Rays or another streaming network paying you to license it. I think a lot of it is probably residuals owed to writers and actors and other staff. Many of the shows being vaulted right now are the sorts of "steady trickle" viewership shows with presumably expensive residuals owed to current creative talent: enough people are watching that the companies see the residuals they are paying on it, but not enough people that they like how much they are paying for it. Maybe some of that is also how much of the vaulted shows are tied to writers and actors actively striking. It seems a bit unlikely of a coincidence in timing how many of these shows disappearing are happening at various stages in the strike. I would hope the National Labor Relations Board is paying close enough attention and taking notes to try to find out just how much is "coincidence" and how much is retaliatory income cuts.
atduskgreg 3y ago
The write off is based on the cost of creating the show. I think the article is wrong/sloppily phrased in its line about the value of the company. If they remove a show then it will never generate any future revenue so they can write the cost of producing it off as a loss. The real scandal here is how little viewership streaming shows get and how little revenue they generate off of that viewership. Particularly for how expensive these shows are. I wrote a couple of comments elsewhere in the thread about some specifics and consequences. But the takeaway is that the last decade+ of super expensive “prestige” shows on streaming has been a huge bubble that isn’t supported by the underlying revenue generated by the shows. In 2022 Netflix spent $16 billion on producing shows [https://variety.com/2023/digital/news/netflix-content-spending-cash-in-2022-1235496740/ https://variety.com/2023/digital/news/netflix-content-spendi...] to generate shockingly few viewing hours (which is why they will never agree to WGA demands to release viewership numbers in order to pay writers residuals; their stock would go to 0 if those numbers ever became public). The future of streaming is ad-supported cheaply produced reality TV, ie exactly what niche cable looked like in 2008.
- pjc50 3y ago
  > why they will never agree to WGA demands to release viewership numbers in order to pay writers residuals; their stock would go to 0 if those numbers ever became public Well, they're not going to have any WGA shows either any time soon, and maybe the WGA will start advocating for an investor lawsuit on this basis?
  - hindsightbias 3y ago
    I think the Matrix Architect would represent Netflix best here: "There are levels of survival we are prepared to accept."
- rjtavares 3y ago
  Ad-supported cheaply produced reality TV + added subscription for premium content. Basic cable + HBO.
- TheJoeMan 3y ago
  Why is it the bean counters need to perfectly pair the cost of show A with views of show A? And then cheaper B to B? There’s a synergy in having the whole platform. Your advice would be telling Apple to ditch the $10 headphone dongle because it has a low ROI, and they should be using the factory to crank out more iphones…
  - Jeff_Brown 3y ago
    That's not the exercise. The exercise is "make it if and only if it will generate more revenue than it costs[1]". That doesn't have to be because people watch it. A prestige show (Succession, say) can bring people to a platform where they end up watching something less demanding (Friends, say). Even if nobody watches the prestige show, therefore, it can still be worth it. That makes it hard to know what is profitable. [1] where "cost" includes "opportunity cost"
- pimlottc 3y ago
  Is there any sort of time limit for writing off the production costs? I guess it makes some sense when you scrap a project completely and take a loss in exchange for a write-off, but some of these shows have been available for years.
prepend 3y ago
I think you can monkey around with “Hollywood accounting” for profit sharing purposes as those are all civil offenses with private citizens suing, etc. But I suspect that studios play it straight with taxes as the IRS doesn’t mess around, it’s criminal investigations, officers are liable, and there’s whistleblower laws where the snitch gets 15-30% of what the IRS recoups [0]. So I bet the only way we find the true cost of these things is when they write them off and even then we know the true cost of the bundle, not each item. What they probably do is include everything legally allowed. This is still bad for studios as getting a $210M tax (corporate tax rate is 21%) reduction from a $1B write off is still way worse than breaking even since the write off is basically a $790M loss and break even is a $0 loss. So the studio doesn’t want to do this, it’s just less bad. I think it’s an example of optimizing after a mistake and doing this too much is a sign of bad management. [0] https://www.irs.gov/compliance/whistleblower-office https://www.irs.gov/compliance/whistleblower-office
- ToucanLoucan 3y ago
  > So the studio doesn’t want to do this, it’s just less bad. Less bad than what? Apologies if it was outlined in the article, I can't get it to load over my crap connection.
  - prepend 3y ago
    It’s less bad than losing everything. For example. Let’s say the movie costs $100 to make. And they value the movie at $100 based on future sales. And they have $1000 in profit from other stuff they do. So the cost of$100 and value of $100 offset each other so they pay taxes on the full $1000. Tax rate is 21% so they pay $210 and keep $790. But if they write off the value to zero that means they have a $100 loss. So you subtract that from the $1000 of profits and pay taxes on $900. Thats $189 in taxes. You subtract that from $1000 and keep $811. So if they don’t write it off in scenario1 they keep $790, but if they write it off they keep 811. They still spent $100 and made nothing so that’s bad. But they are able to keep an extra $21 so really only lose $79. Losing $79 is less bad than losing $100.
- deleted 3y ago
  [deleted]

WorldMaker 3y ago

I don't think a lot of it is actually taxes but that "blame it on the IRS" has been a PR spin win for Hollywood. (Some small amount of it is taxes, which muddies the waters just enough for plausible deniability and PR spin.) I think some of it is plain old opportunity cost and "vaulting". Streaming a classic on your own streaming network doesn't generate money like selling DVDs/Blu-Rays or another streaming network paying you to license it. I think a lot of it is probably residuals owed to writers and actors and other staff. Many of the shows being vaulted right now are the sorts of "steady trickle" viewership shows with presumably expensive residuals owed to current creative talent: enough people are watching that the companies see the residuals they are paying on it, but not enough people that they like how much they are paying for it. Maybe some of that is also how much of the vaulted shows are tied to writers and actors actively striking. It seems a bit unlikely of a coincidence in timing how many of these shows disappearing are happening at various stages in the strike. I would hope the National Labor Relations Board is paying close enough attention and taking notes to try to find out just how much is "coincidence" and how much is retaliatory income cuts.

atduskgreg 3y ago

The write off is based on the cost of creating the show. I think the article is wrong/sloppily phrased in its line about the value of the company. If they remove a show then it will never generate any future revenue so they can write the cost of producing it off as a loss. The real scandal here is how little viewership streaming shows get and how little revenue they generate off of that viewership. Particularly for how expensive these shows are. I wrote a couple of comments elsewhere in the thread about some specifics and consequences. But the takeaway is that the last decade+ of super expensive “prestige” shows on streaming has been a huge bubble that isn’t supported by the underlying revenue generated by the shows. In 2022 Netflix spent $16 billion on producing shows [https://variety.com/2023/digital/news/netflix-content-spending-cash-in-2022-1235496740/ https://variety.com/2023/digital/news/netflix-content-spendi...] to generate shockingly few viewing hours (which is why they will never agree to WGA demands to release viewership numbers in order to pay writers residuals; their stock would go to 0 if those numbers ever became public). The future of streaming is ad-supported cheaply produced reality TV, ie exactly what niche cable looked like in 2008.

pjc50 3y ago
> why they will never agree to WGA demands to release viewership numbers in order to pay writers residuals; their stock would go to 0 if those numbers ever became public Well, they're not going to have any WGA shows either any time soon, and maybe the WGA will start advocating for an investor lawsuit on this basis?
- hindsightbias 3y ago
  I think the Matrix Architect would represent Netflix best here: "There are levels of survival we are prepared to accept."
rjtavares 3y ago
Ad-supported cheaply produced reality TV + added subscription for premium content. Basic cable + HBO.
TheJoeMan 3y ago
Why is it the bean counters need to perfectly pair the cost of show A with views of show A? And then cheaper B to B? There’s a synergy in having the whole platform. Your advice would be telling Apple to ditch the $10 headphone dongle because it has a low ROI, and they should be using the factory to crank out more iphones…
- Jeff_Brown 3y ago
  That's not the exercise. The exercise is "make it if and only if it will generate more revenue than it costs[1]". That doesn't have to be because people watch it. A prestige show (Succession, say) can bring people to a platform where they end up watching something less demanding (Friends, say). Even if nobody watches the prestige show, therefore, it can still be worth it. That makes it hard to know what is profitable. [1] where "cost" includes "opportunity cost"
pimlottc 3y ago
Is there any sort of time limit for writing off the production costs? I guess it makes some sense when you scrap a project completely and take a loss in exchange for a write-off, but some of these shows have been available for years.

prepend 3y ago

I think you can monkey around with “Hollywood accounting” for profit sharing purposes as those are all civil offenses with private citizens suing, etc. But I suspect that studios play it straight with taxes as the IRS doesn’t mess around, it’s criminal investigations, officers are liable, and there’s whistleblower laws where the snitch gets 15-30% of what the IRS recoups [0]. So I bet the only way we find the true cost of these things is when they write them off and even then we know the true cost of the bundle, not each item. What they probably do is include everything legally allowed. This is still bad for studios as getting a $210M tax (corporate tax rate is 21%) reduction from a $1B write off is still way worse than breaking even since the write off is basically a $790M loss and break even is a $0 loss. So the studio doesn’t want to do this, it’s just less bad. I think it’s an example of optimizing after a mistake and doing this too much is a sign of bad management. [0] https://www.irs.gov/compliance/whistleblower-office https://www.irs.gov/compliance/whistleblower-office

ToucanLoucan 3y ago
> So the studio doesn’t want to do this, it’s just less bad. Less bad than what? Apologies if it was outlined in the article, I can't get it to load over my crap connection.
- prepend 3y ago
  It’s less bad than losing everything. For example. Let’s say the movie costs $100 to make. And they value the movie at $100 based on future sales. And they have $1000 in profit from other stuff they do. So the cost of$100 and value of $100 offset each other so they pay taxes on the full $1000. Tax rate is 21% so they pay $210 and keep $790. But if they write off the value to zero that means they have a $100 loss. So you subtract that from the $1000 of profits and pay taxes on $900. Thats $189 in taxes. You subtract that from $1000 and keep $811. So if they don’t write it off in scenario1 they keep $790, but if they write it off they keep 811. They still spent $100 and made nothing so that’s bad. But they are able to keep an extra $21 so really only lose $79. Losing $79 is less bad than losing $100.
deleted 3y ago
[deleted]