Vagabond Kings and their Stolen Crowns
There are all sorts of clauses in the contract that allow items to be taken off the top, which make sense at face value. For example, the "percent of gross" doesn't start until after advertising expenses have been taken off the top, along with the costs of production. Makes sense. An investor shouldn't expect to get paid $10 million for 10% of a movie that makes $100 million if it cost $200 million to make. We're still in the normal math realm so far.
Here's how they engage in legal money laundering: they start paying themselves off the top. According to the accountants, the Lord of the Rings franchise lost money. It's really easy to see why. You see, New Line is owned by Time Warner, who also owns AOL. So all New Line has to do is cut a check to AOL for $500 million for "advertising," and you've relieved yourself of vast sums of money that would otherwise count as profit, but the money is still inside the belly of the same corporate entity. This is also how large companies get around paying any of those pesky taxes, because they have millions of dollars invested in accountants whose single career goal is the maintenance of internalized ponzi schemes to ensure that every single division of the company loses money on paper every quarter of every year. Just about every movie for the last few decades has lost money in the official accounting.
So, what's an author's estate to do? Well, it helps if you have the leverage of having another book that they want to film. Basically, Tolkien's estate walked into court and said that either New Line cuts them a check for $150 million right now, or they're yanking the film rights to The Hobbit. Funny thing, even though New Line lost money on Lord of the Rings, they couldn't get their checkbook out fast enough. They must have borrowed money from Ted Turner's midget wrestling league.
In any case, the short news is: lawsuit settled, The Hobbit is on.
Note: Mrs. SLW (an accountant) requires me to end any rant of mine on accounting practices with the qualification that I know nothing about accounting specifically, and that just because some accountants are evil does not mean that all of them suckle at Satan's taint. Some of them (especially mine) are positively wonderful human beings.