Peter Jackson's three "Lord of the Rings" movies have brought New Line Cinema extraordinary fame and fortune. The trilogy won 17 Academy Awards, including one best picture Oscar, and sold $2.91 billion in movie tickets around the globe. The movies also were a huge hit on DVD, with overall sales totaling -- well, if you actually happen to know, please call Jackson's lawyers.
The avalanche of money generated by DVDs has transformed Hollywood, swinging profitability from the multiplex ticket window to the Wal-Mart checkout line. Income from the sale and rental of new movies, television series and classic films accounts for as much as 60% of a major studio's profit, as DVDs have become a consumer electronics phenomenon. Yet even in a business that trumpets every nickel of box-office grosses, a title's precise DVD profit remain one of the industry's best-kept -- and, increasingly, most divisive -- secrets.
Jackson grew so frustrated with New Line's accounting of his films' revenues that he sued the Time Warner subsidiary in February, an unusual fracture in what had been a mutually beneficial partnership. Among the many allegations in his breach-of-contract lawsuit, the New Zealand filmmaker says New Line shortchanged him in its DVD payments for the first of his three films, "The Lord of the Rings: The Fellowship of the Ring."
"You might think that a studio that has received billions of dollars of revenues would try hard, even hustle, to pay all it owes to its visionary filmmaker," says Peter Nelson, a Jackson lawyer. "But that didn't happen."
Interviews with a dozen leading talent agents, managers, lawyers and studio executives suggest that DVD compensation is likely to be among the hardest-fought negotiating points for years. The battle over DVD royalties is not being fought just in the courtroom; it is an ongoing clash in any number of show business contract negotiations.
The stakes are indisputably high. DVDs have provided the fastest-growing segment of show business returns, with 2004 domestic DVD sales reaching $15.5 billion and DVD rentals grossing $5.7 billion, according to the Digital Entertainment Group. Videocassette sales and rentals brought in $3.2 billion, while domestic theater ticket sales totaled $9.5 billion last year. The DVD windfall has taken on even greater importance now that overseas movie earnings are slowing.
"They are the critical component to the success and profit of any film," says Amir Malin, the former chief executive of Artisan Entertainment and co-founder of the show business investment fund Qualia Canyon Capital. "It's the biggest piece of the revenue pie, far surpassing theatrical and television."
Even though Hollywood's labor unions have failed to make any headway in getting a share of DVD profits, individual movie artists are free to argue for a bigger slice of the proceeds. The studios say that any DVD concessions would bring financial ruin, but cracks are starting to appear in their previously united front, fissures that could ultimately provide the clearest view of the battleground.
Although Jackson's lawsuit does not specify a dollar figure for the alleged "Lord of the Rings" shortfall, and his attorneys would not provide one, industry experts estimated that the purported discrepancy could run in the tens of millions of dollars. New Line declined to comment.
Other filmmakers with far less money at stake also are going to court to verify DVD sales numbers. The husband-and-wife team that distributed "The Basket," a 1999 Karen Allen-Peter Coyote drama that grossed just $600,000 in domestic theaters, sued the film's home video distributor, MGM, on March 17 for $750,000, contending the studio underreported the film's DVD and video income by a wide margin.
"They hurt the little guy just as much as the big guy," says Matt Kohn, who with his wife, Sharon, released "The Basket" theatrically and is also the attorney bringing the lawsuit against MGM. MGM said it does not comment on pending litigation.
Lawsuits challenging Hollywood accounting are hardly novel: Thanks to some of its more bizarre accounting rules, studios in the past have claimed that blockbusters such as "Forrest Gump" and "Batman" failed to earn any net profits. This new breed of litigation alleges similar accounting. At the same time, the lawsuits reveal just how vital DVD income has become and how mysterious its revenues remain.
The studios insist that the DVD sales information they supply to actors, directors and writers is accurate and timely and that DVD audits are both routine and welcome. Yet even the town's most powerful agents and managers say they are not certain how much money a particular DVD brings in.
Unlike domestic box-office grosses, which are announced every week, there is no uniform and public DVD reporting. Some studios say accurate industrywide DVD sales numbers cannot be generated because Wal-Mart, which typically accounts for more than a third of all DVDs sold, does not make public its sales data.