It’s like how Peacock paid NBCUniversal $500M for The Office, even though Peacock is owned by NBCUniversal. Or how HBO Max paid Warner Bros $425M for Friends, even though HBO Max is owned by Warner Bros.
If a studio owns a streaming service, how exactly is that streaming service paying that studio for the content? Is the studio just paying itself? How exactly does that work and why do they have to do it?
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Sarbanes-Oxley. Google it, because this sort of red-tape gobbledygook applies to more than just streaming services and the entertainment industry.
It’s actually a legal requirement due to Anti-trust/Competition Law.
Both from a perspective of you can’t so grossly favor a member of your group and charge them zero or next to nothing while charging an outsider full price – that would be abuse of your market position.
And also from a tax perspective – you can’t simply make losses and shift profits between separate tax entities which are part of the same group to be tax advantageous.
There are often different business divisions who need to account for spending and income, even if it’s within the organization, as a means to assess performance.
Also, TV shows often have complex ownerships, with the production companies/producers owning a part or having contract stipulating royalties for shows being sold. So while Warner Bros. owns HBO, Bright/Kauffman/Crane Productions also has a stake and doesn’t care who the show is sold to.
Effectively boils down to the fact that subsidiary companies are financially and legally distinct entities from their parent companies. Parent company wants to move cash out of the subsidiary to use for other parts of their business (as others have mentioned, in this case, probably to pay royalties and such, but they also might just want to grow other areas of their business as well). Subsidiary company needs to acquire the legal rights to use parent company’s property. Rather than having two separate entries on the books where both trade these things for nothing in return, it makes more sense to just have the subsidiary pay for the rights.
Yes at the “studio” level it is likely just paper money getting moved around. But there are checks getting cut down below. Basically why boils down to office politics.
While you’re correct to say that NBC Universal is buying The Office from itself, in the office politics it is better to say the VP of NBC Streaming is buying The Office from VP of NBC Entertainment, producers of The Office, and anyone else with residuals. (Who exactly signs is unimportant). Yes this is encouraged by the bosses above the VPs but the $$ assigned to VPs are important.
So VP of NBC Entertainment has targets and bonuses. He makes money when he sells his shows. He would like to sell to Netflix/Amazon for $$$. So his bosses say we will give you sales dollars for playing nice with VP of NBC Streaming. Likewise the producers / residual holders get paid when shows re-sell. They would complain quite a bit with lawyers and such if the payments from The Office went from a lot to zero. So again a “sales” price is documented and used to payout 3rd parties.
Basically, it’s important for legal and accounting purposes that the money be transferred between the subsidiary companies.
It is complicated. TV shows and movies have things like syndication rights and some of the actors are due payments from selling these rights.
Friends, for example, is a series where the main actors have contracts stipulating that they get some percentage of the payment received by the studio selling these rights. So there would definitely be major legal proceedings brought by the actors if HBO Max didn’t pay Warner Bros. The actors would definitely claim that Warner is trying to avoid paying them their cut.
These kind of contracts are very common (actors, directors, screenwriters especially famous ones negotiate them). So firms try to have “arms length” contracts even between related entities.
Even within a big company, there are divisions and typically each division is held to their own financial goals. The head of one division is not likely to subsidize the operations of another division.
There are issues of taxes. Especially when it comes to subsidiaries that have operations in multiple geographies. Although a parent company may elect to file a single tax return, this isn’t necessarily tax efficient. A company wants to report profits separately especially if taxes in foreign jurisdictions are lower than domestic ones. This gets complicated very quickly.
Then there is long term strategy – the parent company might want to spin off subsidiaries in the future. This could be to have a separate IPO or to bring in money from a separate investor. In that case, keeping relatively separate accounts helps tremendously.
Imagine this scenario. I make a tv series and I’m owed syndication royalties for whenever it’s broadcast. Somebody needs to pay me to show the series and it doesn’t matter who the companies are. On a high level it may appear that NBCUniversal is paying itself, but the money is going from company A to company B so the people who are owed money by company B selling the rights can be paid.
Also, many companies will operate independently and just happen to be owned by a parent company. They still have to operate like any other company and send/receive money where it’s applicable. If I own two companies, for tax purposes at the very least I must show a transfer of money from one company to the other despite owning both entities.
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