Good movie? You bet
With Congress poised to crack down on reckless risk-taking by banks and Wall Street, it’s not the best time to be introducing new ways for speculators to conjure profits out of thin air. Yet that’s what Cantor Futures Exchanges and Media Derivatives want to do, by creating exchanges where people can bet on the performance of new Hollywood movies. Their proposals, which have received a preliminary blessing from federal regulators, have drawn stiff opposition from much of the film industry. And although it’s hard to take the studios’ warnings about financial shenanigans seriously — after all, Hollywood is known for its creative accounting — they have a point.
Cantor, a subsidiary of the Wall Street brokerage firmand Media Derivatives, an initiative from Arizona-based both want to sell a type of financial derivative called a futures contract for Hollywood’s coming attractions. The price of each contract would be negotiated through the exchange by buyers and sellers before the specific film is released, but the ultimate value would be determined by the movie’s domestic ticket sales — just for opening weekend in the case of Media Derivatives, or for four weeks of wide release in Cantor’s case. Each $1 million in box-office revenue would translate into $1 in contract value. Thus, if a movie sold $39 million worth of tickets in the U.S. and Canada during the relevant time period, the contract would be worth $39.
The idea is to give people a way to make an investment in how well a film will perform in theaters. Those who sign on as buyers are betting that it will do better than the market expects, while those who agree to sell are betting it won’t. For example, a Cantor contract for a film attracting a lot of buzz might be priced at $80. If its box office is a boffo $120 million in its first four weeks, those who had agreed to buy at $80 will make $40 — a 50% return on their investment. But those who’d agreed to sell will lose heavily, because each contract they’ve agreed to sell for $80 will actually be worth — and therefore will cost them — $120. On the other hand, if the movie flops and garners only $40 million in ticket sales, the results will be reversed, with buyers losing and sellers winning.
In theory, these contracts could function as insurance policies for studios, filmmakers and others whose livelihoods depend on a movie’s success. Those insiders could spend a certain amount to buy contracts that would compensate them if one of their films flopped, effectively limiting their losses. If the film succeeded, they would share part of the profits with the parties who took the other side of the bet. And in Media Derivatives’ offerings, which arethan Cantor’s derivatives, they could spend a fixed amount to limit potential losses, which would also cap the amount of profits shared if the film did better than expected.
So why do the Motion Picture Assn. of America, the Directors Guild of America and the union representing crew members oppose the exchanges so fiercely? Because they’re afraid the futures contracts would create powerful incentives for people to try to manipulate box-office results. For the first time, people with no stake in a film could be rewarded financially if it bombs. And futures contracts that sell poorly threaten to become self-fulfilling prophecies, as the news media spreads the word that “the market” expects a film to tank. These are scary thoughts for an industry whose grip over a movie’s image is already being weakened by Twitter, Facebook and other powerful forces on the Net.
What’s worse, though, is the risk that insiders would take advantage of their position to make sure their futures bets pay off. They don’t have to try to make a flop, a la “The Producers”; they merely have to be able to affect the outcome in ways that buyers of futures contracts won’t discover until it’s too late. Thea variety of hard-to-detect manipulations, such as reporting bogus box-office receipts, making last-minute changes in marketing budgets or altering the number of theaters receiving the film.
Cantor and Media Derivatives executives contend that they’ve designed their systems to protect against such manipulation. One problem they can’t overcome, though, is the huge information disparity between industry insiders and everyone else. It’s hard to predict hits and misses, but those who have worked on a film and have seen the finished product have a better idea of how realistic the box-office projections are. That sort of disparity breeds distrust, raising the chances that neither of the exchanges will attract much business. And unless they attract millions of customers, their contracts won’t generate enough money to insure filmmakers seeking to hedge multimillion-dollar bets. Not that studios, producers or directors would be eager to place large bets against their own work — there’s too much risk of bad publicity.
There’s also a fundamental difference between a futures contract on, say, gasoline prices and one on a movie. Paul Glasserman, an expert on derivatives at Columbia Business School, notes that both buyers and sellers of gasoline futures have legitimate risk-management motives. A buyer (such as a trucking fleet) might worry about prices rising, while a seller (such as an oil company) might want to keep them from dropping sharply. But there’s no such symmetry in movie futures, in which investors trying to hedge their bets on a film will have to rely on speculators to shoulder the risk.
The Commodities Futures Trading Commission approved the proposed movie exchanges this month, but it withheld judgment until later this year on the specific futures contracts that Cantor and Media Derivatives want to offer. Congress may intervene before then; on Wednesday, the Senate Agriculture Committee approved a derivatives regulation bill that, if passed and signed by President Obama, would ban futures contracts based on box-office receipts.
Considering the incentives for manipulation, the imbalance in important information and the impracticality of the exchanges as a way to hedge investments by studios and producers, the proposals from Cantor and Media Derivatives seem far more likely to boost speculation than attract the capital needed to produce more films. And the last thing the financial industry needs is innovative ways to attract more speculators.