Posted by: Ben Steverman on April 9, 2010
Is greed good for the movie business? If regulators give their OK, within months movies could be trading on financial markets, with investors placing bets on which films will be the next summer blockbuster.
Up to six months before a movie’s scheduled release, traders would start buying and selling a futures contract linked to the film’s expected early box-office receipts.
Cantor Exchange says the market could give those in the movie industry financial flexibility. The firm says on its web site:
These features should make it easier for a new class of film investor to enter the market. [snip] …contracts will make it possible to estimate the future box office potential of a film project many months in advance, [so] film financiers will no longer need to rely on conservative internal estimates of box office potential.
Another proposal, offered by Media Derivatives, would be limited to institutional investors. But Cantor Exchange’s contracts could be traded 24 hours a day by both institutions and individuals. And the product appears aimed at the movie-loving public. Andrew Wing, the chief executive of Cantor Entertainment, said in a statement:
The number of people who visit movie theaters each year and form opinions about a film’s success is in the tens of millions. We believe that’s the reason the public response to this product has been very positive and we look forward to the start of trading.
It raises the possibility of movie buffs turning into day traders.
The MPAA and other groups sent a letter Apr. 8 to the CFTC warning that the futures contracts would be “harmful and burdensome” to motion pictures. The letter raises some important points.
First, there is no way of knowing that futures trading will be a good predictor of box office success. The letter calls the prediction method “false, unreliable and non-economic.”
In any case, trading could become a self-fulfilling prophecy, with negative market activity tarnishing a film before it is even released, either by souring the public or by hurting distribution and financing.
Finally, for Hollywood, trading could create conflicts of interest. The movie industry already runs on rumor and gossip. Once trading starts, much of that becomes a form of insider information.
The Futures Industry Association is sticking up for the proposal. In an Apr. 8 statement, the trade organization says there is a need for more effective risk management tools in movie financing, and points out the futures markets are well regulated.
The FIA has no view on whether or not the proposed movie futures contracts will succeed. We encourage the CFTC to evaluate these applications on their merits and let the marketplace decide.
Hollywood’s biggest concern is that these financial products will be successful. Well-connected people in Tinseltown — and there are many, from the assistant in the editing booth to the friend of the gaffer who gets a ticket to a preview screening — will have access to potentially lucrative inside information. Whatever the financial effects of box-office futures, this could easily distort the creative process necessary to make great movies.
UPDATE: The CFTC was slated to decide on the Media Derivatives proposal on Apr. 9, but the company now says in a statement that “at the request of the chairman of the CFTC and after individual meetings with commissioners,” it agreed to extend the deadline until Apr. 16.