Cash Break Zero

Hard times, according to the Los Angeles Times, have come to Hollywood: “Today, actors who used to make $15 million are making $10 million. The filmmakers who used to make $10 million are making $6 million. As one prominent agent put it, ‘Everyone is in free fall. It’s just brutal out there.’”Patrick Goldstein and James Rainey, “Hollywood Gets Tough on Talent: $20-million Movie Salaries Go Down the Tubes,” Los Angeles Times, August 3, 2009, accessed June 9, 2011, http://latimesblogs.latimes.com/the_big_picture/2009/08/want-to- make-10-million-a-movie-forget-about-it-hollywood-gets-tough-on-talent.html.

The news isn’t all bleak, however, for Hollywood’s top actors, directors, and producers. Though they’re being forced to settle for these embarrassingly small up-front paychecks, they’re getting a higher percentage on the back end. The key concept is cash break zero—the point where the money a studio spent making, promoting, and distributing a film is balanced by the income from ticket sales in theaters, cable rights, home rentals, and similar. Once that break-even number has been hit, actors and film-makers who are being forced to cut their up-front salary are getting a large chunk of the profits. This arrangement can lead to huge rewards, but the talent only rakes it in if they’re willing to bet on themselves making a movie that generates more money than it cost.

According to the Times, one exemplary winner is director Michael Bay, who pocketed $80 million for his successful—but not earth-shatteringly popular—movie Transformers. In the new Hollywood arrangement, just modest box-office success can translate into a giant payday. For those who make stinkers, however, they’re walking away with their reduced up-front salary and nothing more. One major result, finally, of tying compensation to profits is that the distance between the big winners and everyone else in Hollywood increases dramatically. Just like a few movies every year break through the clutter of entertainment options to become must-see shows, so too some paychecks rocket above the rest.

The question about whether stars should get less at the beginning but potentially much more later on is a hot topic in Hollywood, but it doesn’t connect with too many people’s actual lives. In the words of one successful producer, “The studio pays for the lead actor or actress, but after that, well, the talent is just getting grinded. Everyone else is lucky to be working.”Patrick Goldstein and James Rainey, “Hollywood Gets Tough on Talent: $20-Million Movie Salaries Go Down the Tubes,” Los Angeles Times, August 3, 2009, accessed June 9, 2011, http://latimesblogs.latimes.com/the_big_picture/2009/08/want-to- make-10-million-a-movie-forget-about-it-hollywood-gets-tough-on-talent.html.

Young people stepping off the bus in Hollywood and getting grinded is a long tradition. Even the biggest names tell stories about working the restaurant night shift six times a week so they’re free to audition all day long, and then getting nothing but bit-parts for years. Once in a while someone catches a real break, but most of the time what breaks is the actor. After absorbing endless rejections, there’s no direction left but the one leading back to the bus station, and then a long ride back home. The Hollywood blogger T. R. Locke provides a list of the reasons why:

• There are 120,000 SAG (Screen Actors Guild) actors in Hollywood.
• At any given time 85 percent of them are out of work.
• The average salary of a SAG actor is less than $10,000 a year.
• Most of them are just trying to earn the required $7,500 a year to keep their health benefits.
• Less than 1 percent are the ones you read about and know: the real stars, the actors who make million-dollar salaries.T. R. Locke, “I’m an ACTOR… Should I Move to New York or Hollywood?,” T. R. Locke, October 16, 2009, accessed June 9, 2011, http://www.trlocke.com/2009/10/i’m-an-actor…-should-i-move-to-new-york-or-hollywood.

The reality is sobering. In Hollywood the real paycheck difference—the salary separation dividing top talent from just the average—is $10,000 versus $80 million. When Michael Bay cashed his Transformer’s check, he got enough to pay the yearly salary of eight thousand actors. That $79,990,000 gap separating Bay from each one of those aspiring stars explains Locke’s good advice for Hollywood newcomers: “The best way to achieve your dreams is to wake up.”T. R. Locke, “I’m an ACTOR… Should I Move to New York or Hollywood?,” T. R. Locke, October 16, 2009, accessed June 9, 2011, http://www.trlocke.com/2009/10/i’m-an-actor…-should-i-move-to-new-york-or-hollywood.

Hollywood actors aren’t the only ones staring across giant wealth gaps. If a typical employee at Microsoft who has, like many Americans, a net worth of about $100,000, spends $150 at the bars on a big Friday night, it would be about proportional to what Microsoft chairman Bill Gates would do to his net worth ($57 billion) were he to blow through…$85 million. In fact, just one Bill Gates party night could pay a weekend-long bender for every single adult in Wyoming. And if Gates wanted to hire actors in Hollywood, he could get a year of services from six million of them. If every single man, woman, and child living in Rhode Island, Montana, Delaware, South Dakota, Alaska, North Dakota, Vermont, and Wyoming were actors, he could hire them all for a year.

Bill Gates is not the richest man in the world. The Mexican Carlos Slim is. Rounding the numbers off, and using the average Mexican per-capita earning, he could hire ten million people to work a year for him. In US terms, he could hire a personal assistant for every adult in Florida.

Wall Street executive Stephan Schwarzman earned $702,440,573 in 2009: about enough to hire twelve thousand teachers for New York City’s public schools. Oracle CEO Larry Ellison earned $560 million: enough to pay ten thousand junior-level software engineers. Occidental Petroleum CEO Ray Irani got $223 million: enough to pay five thousand gas station attendants. The list goes on. Reality imitates Hollywood: nearly every field of work has its stars.David, “12 Highest Paid People of 2009,” Business Pundit, December 28, 2009, accessed June 9, 2011, http://www.businesspundit.com/12-highest- paid-people-of-2009.

What Is the Star System?

The star systemIn the economic world, a winner-take-almost-all structure for distributing wealth. in the economic world is a winner-take-almost-all structure for distributing wealth: those who are successful in any particular field take home a vastly disproportionate share of the revenue. This is easy to see in the movies and some other places (big-time professional sports, for example), but what makes the star system a pressing issue in business ethics is that it seems to be expanding through our economic lives. To begin getting a sense of the expansion—exactly what it is and means—two distinctions may be drawn:

1. Individual worth versus salary (or income)
2. Vertical versus horizontal expansion of the star system

Individuals can separate from the larger population mass in terms of individual worthHow much money someone has., and in terms of salaryHow much money someone makes at work.. Loosely, the first is how much money someone would have if they sold everything they owned and concentrated the dollars in a single bank account; the second is the amount an individual gets paid each year to do something. These two measures may be very distinct—someone may be a star in one category and ordinary in the other. Indra Tamang is a Nepalese immigrant who served a wealthy New Yorker as butler for many years. In terms of salary, he could not be called a star. When his matron passed away, however, she left him just under $10 million (and cut her own children out in the process). That rocketed Tamang into the upper end of the net-worth scale, even while his always-modest salary went to zero.Coryn Brown, “New York Butler’s $8.4 Million Inheritance Includes 2 Dakota Apartments,” AOL Real Estate, aol.com, May 18, 2010, accessed June 9, 2011, http://www.housingwatch.com/2010/05/18/new-york-butler-inherits-8-4-million-and-dakota-condo.

At the other extreme, but still in New York, basketball player Eddy Curry received $10 million to play a single year’s worth of basketball for the New York Knicks, clearly establishing him in the top echelon of earners. Still, he’s not worth much. In fact, he’s worth around zero: his house is in foreclosure, and creditors are suing for his cars. It’s not clear where all the money went, but a pretty good clue comes from the fact that one of his creditors is charging a jaw-dropping 85 percent interest rate, and that’s only legal in Nevada.Trey Kerby, “Eddy Curry Makes a Lot, Spends a Lot and Owes a Lot of Money,” Yahoo! Sports, May 25, 2010, accessed June 9, 2011, http://sports.yahoo.com/nba/blog/ball_dont_lie/post/Eddy-Curry-makes-a-lot-spends-a-lot-and-owes-a-?urn=nba-243600. Finally, it’s clear that the Nepalese butler and the high-rolling basketball player are extreme cases. More typically, individual worth and salary dovetail: those who make a lot end up having a lot. Still, the difference between them remains as two dimensions of a star system.

The second distinction to draw through an examination of gaping wealth differences is horizontal versus vertical. Vertical wealth imbalancesThe distance between the top earners and the typical ones. measure the distance between top earners and typical ones. It’s the distance between the hyperrich, a Bill Gates in Seattle or a Carlos Slim in Mexico City, and the guy pouring cement at a Seattle construction site or the waitress serving tamales in a Mexico City restaurant.

According to Internal Revenue Services tax returns, in the fifteen years from 1992 to 2007, the four hundred wealthiest Americans have seen their average yearly income jump from about $50 million a year, to $350 million. That’s about $300 million of extra space between the big earners and everyone else.Sam Gustin, “Super Rich Made $345 Million Each in 2007 as Their Tax Rates Plummeted,” AOL DailyFinance, accessed June 9, 2011, http://www.dailyfinance.com/story/super-rich-made-344-million-each-in-2007-as-their-tax-rates-plu/19362705. As a parallel statistic, according to a Hofstra political science professor, “The ratio of executive salary to the average paycheck during the mid-twentieth century was about thirty to one. In the last decade it has ranged from three hundred to over five hundred to one.”David Michael Green, “America’s Race to the Bottom,” David Michael Greens (blog), The Smirking Chimp, December 12, 2009, accessed June 9, 2011.

Though there are many ways to measure the star system, there’s a common conclusion: in terms of pure dollars, the rich are getting richer relative to everyone else.

As against the star system’s vertical measure, horizontalWithin the star system, the number of fields of activity where large wealth imbalances are prevalent. expansion refers to the number of fields of activity where large wealth imbalances are prevalent. Some occupations fairly naturally lead to all or near-nothing incomes: wildcat oil drilling, hedge-fund managing, movie acting. Other fields seem naturally inclined to resist divergences. There aren’t many farmers on lists of the hyperwealthy. Plumbers frequently earn a solid income, but rarely climb above that. The idea of the star system’s horizontal expansion is that more and more careers resemble the first set of occupations, while fewer and fewer resemble the second set. It’s difficult to find raw statistics to prove this expansion, but it’s not hard to locate reasons for suspecting it.

One important reason the star system may be spreading is technological advancement. Justin Bieber, for example, is a cute adolescent boy from Canada with a nice singing voice and good instincts for catchy pop licks. Had he appeared forty years ago, he may have become known around his hometown of London, Ontario. With a lot of long drives and late nights, he may have become a star in his Canadian province and earned a nice concert income for a while. Thanks to YouTube, however, he was able to jump straight from singing a few songs a few times in remote Canadian towns to international superstardom. Similarly, lawyers that may once have become successful in a single courthouse can now buy cheap, late-night advertising on a cable network and set up branch offices around an entire state or even the nation. Anyone sitting at home with a laptop can use the camera to film themselves pitching some product or service and then display the commercial around the world using Google Ads for only a few pennies. What’s happening is that people who have a good product or service or pitch are today able to scale up their success very rapidly and inexpensively. No one is saying that it’s easy to become an overnight international sensation in any profession, but the opportunities to do that are expanding as our world becomes more interconnected.

One further point. Twenty years ago, if Justin Bieber had become successful in Ontario, he would’ve taken attention and economic opportunity away from some other aspiring singers in a Canadian province. Today, his success crowds out other potential preteen heartthrobs all around the world. Something similar has happened in corporate boardrooms as companies that used to operate in a state or a region have become international behemoths. It used to be that big-time CEOs managed hundreds of employees. The CEO of Walmart today is responsible for millions. For young and ambitious employees entering the Walmart company, that means, there’s a lot more competition than there used to be for that one slot on top of the pyramid.

Conclusion. The star system isn’t measured or defined by one specific statistic; it’s a constellation of ideas involving the increasing concentration of wealth within a profession—and within the economy generally—in the hands of a few individuals.