Akshay Kumar and Jimmy Stewart actually have a lot in common!  Reliable hard-working long-term popular movie stars who managed to combine a variety of crowd-pleasing roles with some solid acting turns.  But what I am talking about today is just economics.

Bollywoodhungama, who I love because they do things like this, pulled together a breakdown of how Akshay did with Airlift.  What’s most interesting about this, is that he is beginning to take the Hollywood tack towards profit sharing.  This is actually a bad sign for producers, because it takes a much bigger chunk of their profits.  And it is also a bad sign for tax-wallahs, because it leads to very creative accounting.

The way it works is, the initial budget for the film is much much lower, since the star lowers their rates to the ground (in this case, Akshay went from a standard 30-40 crore down to 8).  But, if the initial budget is lower, that means the film starts making a clear profit much sooner.  And if the star gets a guaranteed percentage of that profit, they quickly start taking in more than they would have at a flat rate.

At first glance, it seems like everyone wins here, since if the film makes no profit, the star gets nothing.  But, that initial huge salary a star commands isn’t based on a guess.  People pay Akshay 30-40 per film, because they know he can basically guarantee an opening of at least that much.  So rather than paying him a huge set amount up front and then taking in any profits that come, they are giving him a percentage of their profits, meaning the more the film makes, the more money they lose.

What gets really dangerous, is what Hollywood has started doing as a matter of course, which is to give stars a percentage of the gross, not the net.  In that case, it quickly becomes mathematically impossible for a film to ever make a profit.  Let’s say the budget is 40 crore and the film makes a 100 crore.  And you have promised the star 60% of the box office.  Suddenly, you are giving the star 60 crore, leaving only 40 crore to go back to the producers, which is just enough to cover the initial cost.  And if the same film makes 200 crore, you are giving the star 120 crore, leaving only 80 crore for the producers, half of which goes back to offset the budget.  What has happened in Hollywood, is that this pay rate is standard for most big names, and for the lower names, they get a cut of the net.  So in that case, if your film makes 300 crore (because you have a lot of big names).  Star A gets 40% of the gross, so 120 crore.  Star B gets 20%, so 60 crore.  Star C gets 10%, so 30 crore crore.  The actual budget was 50 crore.  Star D gets 20 percent of the net.  Star E gets 10%.  And Star F (this is their first film) gets a salary up front and 2% of the gross.  But wait!  We already spent 260 on the original budget and the gross payouts.  So the net is only 40 crore.  So Star D gets 8 crore, star E gets 4 crore, and Star F gets their initial salary plus, let’s go ahead and round it up, 1 crore.  And then the studio gets 27 crore, and that’s the profit they report to the tax wallahs.

And who started this whole funky accounting system?  Jimmy Stewart!  That’s right, Jimmy Stewart for the film Winchester ’73.  Jimmy and his agent Lew Wasserman worked out the figures, and offered that Jimmy would work for nothing if he could get a cut of the net.  And the studio ended up with a much bigger profit than anticipated, since they didn’t have to pay Jimmy’s salary up front, and then Jimmy got to keep a huge amount of that profit.  Plus, in America, that counts as capital gains, not salary, so is taxed at a lower level (I don’t know if there is a similar advantage in India or not).

The fact that Jimmy and Akshay are both thinking like this actual makes sense, since they are at similar points in their careers.  They are popular enough that they can command a certain set salary for every film and still guarantee the film will make a profit on top of it. So better to take a percentage of that profit, knowing that if you take a loss that on one film you will make it up on the next, than to stick to a salary.  Jimmy Stewart actually came up with this idea because he wanted to make Harvey at the same time as Winchester ’73, and he figured the if he made a percentage deal for both, the profit from one would offset the loss from the other.  The studio was thinking the same thing, and was excited about avoiding paying him a salary upfront for both at once.  And then both ended up being hits, and Jimmy hit the jackpot and Warner Bros. lost big time.

So, why isn’t everyone in India doing this?  Well, I suspect they are, it just isn’t being reported as clearly as it was in this case.  But more importantly, the really big names (the Khans), are looking at more than just a percentage of the profits, they want the whole thing.  There is a reason Aamir, Salman, and Shahrukh all have their own studios now.  Basically, they are too expensive for a realistic salary or profit sharing deal.  If you are looking at in terms of what they contribute to a films success, they contribute basically everything.  So their salary should be at least 100 crore per film (since that is a modest estimate of how much they will add to the box office), or maybe 80% of the gross.  Meaning they either have to under-estimate their value when negotiating, or they need to figure out another way to get the money they are owed.

They do low-ball a lot, of course.  Aamir especially, he likes to do films that interest him, even if he knows they won’t make enough profit to justify his participation.  Talaash, for instance.  And Shahrukh has said, with both Jab Tak Hain Jaan and Rab Ne Bana Di Jodi, he didn’t even talk money, but just did the films for the opportunity to work with Adi and Yashji again.  I mean, I’m sure they paid him SOMETHING.  But it wasn’t the reason he did the film, and it wasn’t as much as he could have made doing something else.

But they have also started producing their own films, so they can get that 100% of the profit they are due.  Even though this means they are carrying some of the cost as well, once their salaries are removed from consideration, you end up with a guaranteed massive profit.  And no need to split it with anyone else, beyond your fellow producers.  Shahrukh in particular is playing this game very well.  He has also learned the Hollywood trick of paying back your own studio for services.  In Hollywood, this has been raised to an artform, with studio subsidiaries being paid out of the budget for promotion, distribution, etc.  Red Chillies hasn’t gone quite that far yet, but if I am reading the credits correctly, I think Shahrukh is paying back to Red Chillies FX for all the work on his movies, which are also being produced by Red Chillies.  And for Dilwale, he also started a Red Chillies distribution wing.  So that means, if Dilwale made about 350 worldwide, and the official budget was around 100 crore, that is a profit of 250 for Red Chillies that they don’t have to share with distributors.  Plus maybe 20 to 40 crore paid to them from the original budget for the FX work.  And that isn’t even counting satellite deals etc. etc.  So if you are wondering why SRK seems kind of relaxed about it not doing as well as expected, it is because he is probably clearing more on this film, the rights for which he owns outright and which he distributed through his own company and paid his own company for the initial production work, than on any film he released before.