Arriving at the start of the second week of the Writer’s Strike is a research report by Global Media Intelligence entitled “Do the Movies Make Money”” Their answer?

No.

As reported in the International Herald Tribune by Michael Cieply, Global Media Intelligence, which is a partner of Merrill Lynch, examined the revenue from all films distributed by the six major studios, Dreamworks, and the studio specialty divisions and reported that the film business overall runs at a loss. (They report last year’s loss at $1.9 billion against $25.6 billion in revenue).

What’s the reason? High guild residuals? No. The report fingers gross talent participation payments as the problem.

From the piece:

The report, by the research company Global Media Intelligence in association with its partner Merrill Lynch, concludes that much of the income – past and future – that studios and writers have been fighting about has already gone to the biggest stars, directors and producers in the form of ballooning participation deals. A participation is a share in the gross revenue, not the profit, of a movie.

Through the twists and turns of contemporary deal-making, major studios in theory give away as much as 25 percent of a film’s receipts under such arrangements.

The report notes that foreign and domestic DVD sales are declining while gross profit participation payouts, the kind given to stars like Tom Cruise and Tom Hanks, grew at one studio (Disney) by 37.6% over five years to $554 million. Meanwhile, the article quotes the WGA West which says that “movie residuals” (I’m assuming these are just writer residuals) totalled only $121.3 million in 2006.

The report’s conclusions underscore the difficulties in the current AMPTP/WGA negoitations. As the studio chiefs say, studio profit margins are squeezed. However, as the writers claim, shrinking profits have little to do with the current residual structure. In fact, between studio accounting and out-of-control gross participation deals, guaranteed residual payments, which are calculated as a percentage of ancillary media sales, are often the only way for anyone less than top-tier talent to see back-end participation on a film.

After reading the IHT piece, I tried to find a copy of this research report on the web. Most likely propietary for Merrill Lynch clients, it doesn’t appear to be posted on the Global Media Intelligence site. But what I’d be curious about is whether distribution revenues are separated out from profitability analysis. Typically, a studio’s distribution arm will take a distribution fee that is calculated as a percentage of box-office receipts. They also take video and foreign sales fees. What remains — after gross participation and distribution fees — is what’s credited back against the film’s costs. And yes, many films never see the balance sheet tilt into the positive. I’ve seen many indie-film business plans that simply look at box-office numbers and never try to figure out how much money is left for the producer after P&A, the theaters’ cut, and distribution fees. Especially because of the timing of this report, I’d be interested in reading a copy and seeing how it broadly or narrowly it defines studio return-on-investment.