Studios step up fight against box office futures markets

After losing a major regulatory battle over proposed box office futures markets, the major movie studios are going to Congress.

Financial reform legislation unveiled Friday by Sen. Blanche Lincoln (D-Ark.) contains a provision that would ban futures trading based on box office receipts.

The move came the same day that the Commodity Futures Trading Commission unanimously approved the creation of one of two proposed markets that backers say would allow movie studios and financiers to hedge the risk of their investments in motion pictures.

Media Derivatives, the Chicago company behind the market approved Friday, celebrated the decision, which has been aggressively opposed by the major Hollywood studios and several other industry groups. However, it still needs to receive approval for specific types of contracts related to box office that it wants to sell. Three of the CFTC’s five commissioners expressed at least some apprehension about the contracts, which must be approved by June 7, in their opinions issued Friday.

“The application filed by [Media Derivatives] for ‘box office return’ contracts raises significant concerns for me,” said Commissioner Bart Chilton, who had the strongest reservations.

A second box office futures market proposed by Wall Street firm Cantor Fitzgerald will be voted on by the CFTC by Tuesday.

The Motion Picture Assn. of America, joined by the National Assn. of Theater Owners, the Directors Guild of America and the Independent Film and Television Alliance, has waged a campaign in public and behind the scenes to stop futures contracts related to the movie industry. They have argued that the markets are ripe for manipulation and will create negative publicity for films before they are released.

MPAA staff, including Chief Executive Bob Pisano, have met with CFTC staff and lobbied members of Congress. Beyond the legislation proposed by Lincoln, chairwoman of the Senate Agriculture Committee, a hearing of the House Agriculture Committee is scheduled for Thursday at which Pisano and others from Hollywood are expected to testify, along with executives from Media Derivatives and Cantor Fitzgerald.

The two agriculture committees oversee futures markets.

Despite the barriers that remain with the CFTC and Congress, Media Derivatives CEO Robert Swagger said his company was working on partnerships with entertainment and finance companies that are interested in his company’s market.

“There are a lot of individuals that participate in film financing such as private equity funds, banking institutions and hedge funds,” he said. “There are also several constituents of the MPAA that we have been in dialogue with.”

Swagger declined to identify any companies with which Media Derivatives has held discussions.

Though the six major studios that make up the MPAA are all opposing box office futures trading, a senior executive at one independent studio said he was interested.

“We’re big about risk mitigation, so if it was a viable financing option we would of course look at it,” said Michael Burns, the vice chairman of Lions Gate Entertainment.

Burns was a co-founder of Hollywood Stock Exchange, an online box office market that doesn’t involve money. Cantor acquired it in 2001.

The MPAA and its partner groups have argued that, because box office futures are not directly connected to a product, trading them amounts to gambling and that negative perceptions based on upcoming movies with a low trading price could harm the industry.

"[We] remain united in our opposition to a risky plan that would be detrimental to the motion picture industry and the 2.4 million Americans whose livelihoods are based on this industry,” the group said in a statement.

Swagger, however, said that any companies that don’t like box office futures trading should simply not participate.

“This legislation is just to protect six large studios while smaller independents aren’t allowed to have this economic opportunity,” he said.

“How can an exchange that helps to create liquidity be criticized when it is bringing in new money so entertainment can be created?”