Cannes: Deadline Crashes Palais Forum With Costa Gavras, … 
Yahoo Announces $1.1B Tumblr Deal With Vow “Not To … 
Kelly Rowland, Paulina Rubio In Talks To Join ‘X … 
Cannes: Latest Theft Affects China Film Group VP 
UPDATE: Yahoo Board OKs $1.1B Deal To Acquire Tumblr … 
‘Epic’ Toon Begins $14.5M Overseas Rollout 
Cannes: Sony Classics Wins Stateside Rights To Asghar … 
‘Fast & Furious 6′ Breaks Records In … 
Specialty Box Office: ‘Frances Ha’ Triumphs As … 
‘Saturday Night Live’ Season Finale Posts … 
‘Star Trek Into Darkness’ $164.5M Global: Lower … 
Cannes: Backup Media, Memento Bring Heat To Fest Helmer Jim … 
Cannes: Sundance Selects Acquires Dardenne Brothers’ … 
Cannes: Wrekin Hill Acquires U.S. On Gabriele … 
Bill Hader’s ‘SNL’ Stefon Farewell: Video 
Cannes: The Weinstein Co. Books ‘Suite … 
BBC Confirms ‘Doctor Who’ Season 8 
Finally, Cannes Dealing! Radius-TWC Nabs Director’s … 
Hammond On Cannes: Wet Fest’s Official Competition … 
‘Vampire Academy’ Adds ‘Modern … 
RATINGS RAT RACE: ‘Shark Tank’ Finale Up, … 
While Trend Exchange CEO Robert Swagger was holding a conference call crowing about CFTC approval, the MPAA issued this press release, inferring that Capitol Hill is getting involved. I hung up from to Swagger’s conference call feeling that he did little to dispel the skepticism that this is really providing any real benefit moviemaking, but instead that the Trend Exchange and Cantor Fitzgerald businesses will be built potentially at the expense of the industry. While Swagger implied that Trend Exchange will sell contracts four weeks before a movie opens, with wagering to stop right before a movie’s opening, I’ve seen language on the Cantor Exchange plan that will open the investing up to 12 months before the release of a film. Suddenly, intel from secret recruited screenings becomes coveted information that could be worth money. It’s hard enough to cover this game, but misinformation will be even more rife. Just today, I checked out a rumor that a movie was having problems and might move its release date, but couldn’t not corroborate. In the case of the current top film Clash of the Titans, Warner Bros and Legendary Pictures decided 12 weeks before release to do a quick 3D conversion. While some found the quality wanting, the higher ticket prices charged for 3D most certainly changed the film’s box office fortunes. Wouldn’t an institutional investor who found out that information have gained an unfair advantage in placing box office bets? It feels like there is still much to be concerned about here.
For more estimates listed by title, see box office results here...FOR IMMEDIATE RELEASE
April 16, 2010
ENTERTAINMENT COMMUNITY PRAISES PROPOSED BAN ON ONLINE MOVIE-FUTURES WAGERING
Coalition of creators, talent, craftspeople, independent production and distribution companies, industry workers and theater owners welcome efforts to prevent betting on box-office futures
Washington, DC – An entertainment industry coalition including creators, independent producers and distributors, business organizations and theater owners today praised a legislative provision that would prevent online motion picture box-office wagering.
The measure, contained in financial reform legislation unveiled today by Senate Agriculture Committee Chairman Blanche Lincoln (D-Ark) would bar futures trading based on box-office receipts. As Chairman of the Agriculture Committee, Senator Lincoln oversees the Commodity Futures Trading Commission.
“As Congress moves forward with financial regulatory reform, we are very grateful to Chairman Lincoln for seeking to put a stop to plans to allow wagering on box-office futures, which are based on a faulty understanding of the film business and could cause real financial harm to both the film industry and other Americans drawn in by an online gaming platform that could be easily manipulated,” the group said.
Earlier today, the Directors Guild of America (DGA), the Independent Film and Television Alliance (IFTA), the Motion Picture Association of America (MPAA) and its member companies and the National Association of Theatre Owners (NATO) urged the CFTC to deny a request from Cantor Futures Exchange L.P. to create a designated contract market for the trading of financial derivatives based on film futures.
The same coalition had earlier urged the CFTC to reject a separate proposal by Media Derivatives, Inc. (MDEX) to establish a designated contract marketplace. But the CFTC today approved that proposal, which was the first of two major regulatory steps needed before the company can conduct online wagering on film futures.
“We note that in making their decision, a majority of the commissioners raised the same concerns that we have about the contracts themselves, concerns related to whether they can be manipulated, whether they serve a true hedging purpose, and questions about whether the contracts should be approved,” the group said.
“Our coalition of film industry workers, creators, independent producers and distributors, business organizations and theater owners, remains 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.
“We believe that the Commission has ample discretion under the law to reject this proposal by Media Derivatives Inc., so we are disappointed that the CFTC has said the company can establish a designated contract marketplace.
“This is just one in a series of upcoming regulatory steps, including requirements to have prior approval from the CFTC before these questionable contracts can actually begin trading. We intend to continue to urge the CFTC to reject both the proposal from Media Derivatives to offer a box-office wagering service on its online marketplace, and a separate proposal that remains pending by Cantor Futures Exchange L.P. that would essentially allow real betting on what previously has been an online make-believe box-office gaming site.
“After the fiscal meltdown from which our country is still struggling to emerge, we have seen the danger of abusive financial practices. Now is the time to strengthen and stabilize our financial system, not the time to open the floodgates on an untested, and unwanted plan that could cause serious harm to an important American industry and its workers.”
Loading ...
Haven’t personally heard an argument yet that would make me really understand the ruckus. HSX (hollwood stock exchange) was trying to push the pie in the sky deal since most of us were scooting around carpets going mama.
Not to suggest they’re totally analagous, but I don’t buy state lottery tickets, I don’t go the casinos near to me to gamble, or let alone go to Vegas where you can bet on whatever accent Kevin Costner is going to botch next. Having no sincere belief I would be better outpredicting the box office a mere four weeks before release … I simply wouldn’t be placing any money there either.
It’ll be hard to budge me from the “simply don’t care” either way, and don’t get all the excitement, group.
Hopefully reason will prevail on this one. These exchanges are bad news.
MPAA opposes this because this gives independents a clear way to hedge and distribute movies. It levels the playing field so that any independent will a have a clear path to finance distribution etc with a liquid market. MPAA does not give a rats *ss about manipulation. The care about the monopoly over distribution.
Get your facts straight there is no inside information in Commodities/futures trading or else producers of commodities could not hedge. These are not stocks.
It’s amazing how blind people are to the real reason why the MPAA is against this but then again that’s why the “suits” run H-town.
Check your facts. The Independent Film & Television Alliance opposes this. See:
http://www.ifta-online.org/ifta-entertainment-community-praise-ban-online-movie-futures-wagering
Prior poster was correct. The MPAA opposes this measure since it threatens their monopoly control over the financing of movies. Exchanges make it easier for producers of product to hedge their risk which is de-facto financing.
Large studios become less relevant when producers can raise significant capital to distribute the film based on the futures market for box office receipts. Illiquid becomes liquid and control over what is distributed is turned over to a more democratic process. Competition in the film market would go hyper and the winner would be the best producer of movies a not to the one with legacy assets and largest balance sheet. Every Studio should oppose this and every actor,director independent should champion this as well as theater fans. Since movie industry unemployment/underemployment is now at 50% strong support should come from the average industry worker.
Protecting the public from manipulation is clearly not what the studios are trying to prevent.
Below is an example of how financing would work with an independent:
Independent xyz company has made a 10MM movie with moderate stars the sold foreign rights for 7MM
The movie future market is 12mm bid for domestic box office
xyz is able to raise 10mm in PNA since the financiers are able to hedge the domestic box office risk and have DVD ancillary as a back up.
xyz now has a 1000 screen release and a chance to hit a home run
Nowadays they would not even get released because the only market is the Studios and their own internal analysis. Clearly the futures market is better for xyz.
Wall Street’s value-added is certainly (more) suspect after today’s events.
Think of the fun market to be had with stock in completion bond companies.
It is all really very simple. If the studios don’t want this to happen, then all they have to do is threaten to withhold the official box office figures from the marketplace. They control all the information. The studios can brand the figures as estimates as they do on Sunday morning and then not release any further “official” figures. Rentrak collects box office data on behalf of the studios. As that data is never 100% complete or accurate, the studios gross up and correct the raw data to get to their official numbers. There is nothing that says they have to release these figures to the general public. The Rentrak overnight numbers are proprietary to the studios and exhibitors. These figures are not reported in the marketplace. The studios are free to withhold data from any 3rd party who plans on partnering with these exchanges.
Your assumption is incorrect. The studios gather their box office receipt data from the same data providers that these exchanges have contracted with. The issue is that the studios don’t necessarily report exactly what those box office numbers are, but with the advent of these exchanges, the ACTUAL raw data (point of sale, by the way) will be reported at 100% accuracy due to federal regulations governing the exchange (CFTC).
These attempts to hold these CORPORATIONS to the same accurate accounting standards that every other business needs to adhere to should be applauded, not condemned!
Wake up!!! This is the best thing to happen to movie industry. No more on your knees begging some studio for funds for your great idea with good cast. The market will provide you with a liquid point with people willing to risk money for your project. Big Studios hate that, since it dis-intermediates them and renders them less powerful over the industry.
Producers everywhere should be begging for this to happen. WAKE UP! You think the MPAA cares. Can we get some reporting on the real issue here!!!!!
Actors,Below the line should love this since it means more movies getting green-lit as well as a diversification from the same old movies as the public markets will be willing to bet on original ideas.
MPAA=Big Studios are going to cash in on their political chips to help save them from irrelevance.
Is the DGA a bunch of idiots! Why are they opposing this? Do they hate work for their members? Or hate the fact that more films will get made? What basis did they base their policy decision? I am quitting Q.T was right!
NATO of course the love the big studios a symbiotic relationship having only to deal with large blockbusters and with FOX no real separation.
What a Fraud. The Senator should be ashamed……trying to protect a monopoly under the guise of protecting joe public!!!
Asymmetrical information exists as a fact of life in any market. That is not a reason to outlaw betting. If you place a bet on a movie’s performance, you might have information the others don’t, or they might have information you don’t have access to. That’s part of the risk involved. As long as everyone understands the risks involved, I say game on. If you don’t like it, you are free to exercise you disapproval by not participating. You do not have the right however to stand in the way of other adults and control what they do with their own money.
Paul Theroux, sometimes the wants of the few must be denied in order to protect the needs of the many. But we’re not discussing a libertarian human rights issue here. People are already free to participate in the movie industry by investing in the underlying product. It’s true that all markets suffer from asymmetrical information, but that’s only part of the problem with this exchange. The regulatory body governing the exchange will put in safeguards to try to control the worst abuses of asymmetrical information. However, I know of no market where the subject of the exchange is also responsible for reporting the strike price of the commodity in question. To put it another way, a corporation can release information that can affect its stock price but it does not get to say what its stock price is. The orange growers of Florida can release information that might affect the price of OJ futures, but they do not get to set that price, nor do they get to set the price of OJ on any particular day. In these so-called exchanges, the movie studios produce the underlying asset, they control the information surrounding the underlying asset, they can help or harm the performance of the underlying asset through marketing, and they are the ones – give or take some information from Rentrak – who report the strike price of the underlying asset upon which the exchange is based. This is not just about assymetrical information, this is about assymetrical control. It is more akin to horse racing than any kind of commodity or stock exchange. And while in principle I agree with you that adults should be able to control what they do with their money, call a bet a bet. These exchanges should not try to dress up gambling as a financial investment – that’s just a long con to sucker more money into the market. This is raw gambling pure and simple. If they want to open an MDEX room at the Bellagio, go for it, and I wish you luck at the table.
The other big problem with these kind of exchanges is that they invariably bring with them an investment spiral; a wheelhouse of businesses who find ways to repackage risk, take off-exchange positions and amplify the effect of any success or failure. This creates a bubble, which eventually bursts, harming not just one or two companies, but the entire underlying industry. Happened with stocks in the Wall Street Crash, insurance in the early 1990s, tech stocks in the Dot Com years, and most recently with mortgages and other forms of traded credit. In all those cases, when the investment market constructed around the underlying assets burst, the entire underlying industry either collapsed, or received a mortal wound. The movie industry does not need any more drama.
Asymmetric information exists in every market. That is not the issue. Even if all the information were published the analysis and absorption of the material will be asymmetric. The issue is will the market for a movie be the members of the MPAA or will it start to open up.
The movie industry needs a lot more drama as evidence by the number of non-studio movies that go wide each year. Extremely disappointing.
Well said.
And as a postscript to LLEJU, I hope you are correct in your assessment of the financial benefits to an industry where unemployment is rampant. However, I think in practice this exchange will only strengthen the position of the studios. They are the ones with the financial clout to take real positions in the market and to leverage those positions to raise capital off exchange. Whether they do that is another question – their parent companies may just decide to pocket higher profits rather than increase investment in a declining industry.
Your model assumes that Independent XYZ can get a listing on the exchange. Without a release date and screen count, I don’t see how that’s possible. But the producers need a release date in order to hedge the risk and raise P&A to get the release date. Chicken and egg. The exchange will trade movies that have a clear release pipeline and that means studio productions, or movies purchased and released by studios.
And even if they can get a listing on the exchange, Independent XYZ’s movie will be far more expensive to hedge than the average studio picture, exposing Independent XYZ to greater cost, and giving a clear indication from the market that it has less chance of hitting its numbers than a comparable studio picture – which in reality it does.
The track record is clear of exchanges opening up markets for independents ability to grow and prosper. Almost all markets with forward hedging and price transparency have led to increased competition and production. I can’t think of one but one may exist that has not lead to greater production and competition.
Right now studios are the market. The chicken egg does not exist because the financing contract is essentially a contingent transaction itself requiring a wide screen release.
Any bid is better than no bid just ask any of the more than 1000 “busted films” over the past two years. I understand a studio movie may have better bids to start but I don’t understand how unemployed with 4-10mm worth of product down the tube is a better alternative.
The only reason the MPAA opposes this is the fear of increased competition which is completely rational.
I’ve asked this before, and I’ll ask again: reading the Cantor rules, it seems like the largest possible short hedge is $300K, and even that requires a special exemption AND somebody to take the other side. How is this providing any realistic hedging opportunities?
Once an exchange is set up the limits will expand but even more important is the over the counter market that is created simultaneously. “Big Boys” will trade look alike contracts (with lower brokerage) etc. The OTC market will be 10 times the listed market and they will grow together.
I agree the maximum short rule is counterproductive but the exchange is just starting. The Natural Gas Industry and every other exchange started small and grew as participants (hedgers,speculators, end-users) began to use the tools as best fit them.
Forward markets help everyone from corrugated cardboard makers to oil drillers to end users manage risk.
This market needs to start grow and prosper and the industry will grow with it. The problem is the way it will grow will shift the power balance.
Thank! That does answer one of my questions, regarding the low cap on short hedging. Still unclear is who would actually take the other side of a substantial short, knowing the movie’s own producers might be hedging…that would be pretty brave.
Fan, I encourage you to re-post your insightful explanation wherever these exchanges are being discussed online and send a note to the CFTC Commissioners and Congressional leaders engaged in this debate. Please! You have articulated a few of the real life concerns that everyone else seems to ignore. Especially rampant unemployment and the fragile state of an industry already under attack by piracy.
Swagger and his ilk seem to be the kind of Wall Street/Chicago Merc/Futures punks who were never willing to risk what it takes to be in the entertainment business but now think they can be its masters. Seriously, at its core, that’s the emotion driving these exchanges. People everywhere think they, too, can make better movies than Hollywood. But if they really believed that, they would make movies. Instead, they want to have something cool to talk about and make money off of the emotion of anticipation and the inaccuracy of gossip. Movies are not a measurable commodity and gossip can’t be regulated. The factors involved in creating successful entertainment are too complex to capture in a grid.
I see two more issues that haven’t been addressed, at least to my knowledge: the role of box office forecasts and the role of auditors. Academic research has shown that analyst forecasts can influence investors’ behaviors and thus stock prices. However, many of the forecasts for box office revenues come from the studios themselves, or from Hollywood “insiders” who have access to inside information, and so the forecasts can be directly manipulated by the studios (who may also be investors). To the extent that people trade on box office analyst forecasts, people can be manipulated. Who knows whether or not people will trade on these forecasts, but it seems like there are opportunities for studios to deliberately attempt to mislead the investing public of their assessments of their movies’ topline potential.
Second, I think Fan makes an excellent point about the reporting of actual movie performance. However, I think this can be remedied by requiring audits of revenue announcements by Rentrax. I know auditors are popular targets in the press – and deservedly so, because when they fail at their jobs, they can really hurt people – but the vast majority of audits are not failures (for example, Francis [2004, "What do we know about audit quality?", British Accounting Review] reports the overall audit success rate of Big 4 firms for audits of publicly traded companies at 99.72% as measured by lawsuits filed against auditors). Requiring that the box office numbers reported by Rentrax be audited would probably be an effective fix to that problem. However, it seems the regulators should require this, rather than relying on Rentrax to choose to audit their numbers based on their own business interests as the CFTC filing asserts they will.
To knowingly report a false number used for an index (or regularly published media) for any reason is wire fraud. There are several people in jail who did not know how serious this was. The idea that people will misreport is not crazy but the Brent Crude Oil market (highly liquid and traded) has the same issue and works just fine.
Commodities exchanges shift risk of price volatility away from producers and buyers of raw materials onto punters outside the supply chain. That’s good, because we want to preserve the supply chain. For the exchange to serve this function, there must actually be real futures — actual contracts between the producer and buyer — bought and sold.
Box office “exchanges” serve no such function. Neither producers nor suppliers can utilize the exchanges to hedge. The “futures” aren’t traded until after a picture is completed and the release is prepped. This “market” does nothing to generate revenue or hedge risk for the guy financing the picture or the guy who buys it to release it. It is merely a place where individuals place a bet with each other. It’s the difference between an organized pork bellies exchange that taps into gamblers’ desire to bet by having them trade real futures (thus creating a hedge mechanism) vs. two guys in a bar who bet purely between themselves on the price of next month’s pork bellies.
Supporters of these “exchanges” may argue that as a matter of principle people ought to be free to place box office bets online or pork-belly bets in a bar. But it’s plain chutzpah to try to justify such such markets by arguing that they have utility when the very safeguards touted by their creators keep their markets from being real “exchanges” in the first place.
So you are saying that if I am an actor with a box office bump I could not hedge my incentive compensation. Or if I am any person who derives his compensation as a percentage of gross theatrical receipts I can’t hedge that exposure on this exchange.
Or if I have the money to release a film wide you are saying I can’t hedge a portion of the exposure with the exchange. In every instance you are incorrect. The exchange encourages production by allowing risk diversification. So many more movies will be made for wide distribution if the participants had a way to hedge there risk.
Their risk..last sentence.
So you are saying that if I am an actor with a box office bump I could not hedge my incentive compensation.
ONLY NOMINALLY. YOU COULD BET ON THE FILM. IF YOU WON THE BET, THE WINNINGS ADD TO THE VALUE OF YOUR BACKEND; IF YOU LOSE, THEY SUBTRACT. THAT’S DIFFERENT FROM THE
FARMER WHO ASSURES A CERTAIN PRICE FOR HIS CROP BY CREATING A FUTURES CONTRACT, PUTTING PRICING RISK ONTO THE BUYER, WHO BUYS FORWARD TO HAVE PREDICTABILITY IN HIS COST STRUCTURE. BESIDES, WITHIN A $300K LIMIT, THE BET IS NOT SIGNIFICANT FROM A BROAD MARKET STANDPOINT. IF YOU ARE A BIG STAR, THE POTENTIAL VALUE OF THE BACKEND IS 100X THAT AMOUNT. FURTHERMORE, THE BET HAD NOTHING TO DO WITH YOUR DECISION WHETHER TO DO THE PICTURE, AND IT CERTAINLY HAD NOTHING TO DO WITH WHETHER THE PICTURE GOT MADE.
Or if I am any person who derives his compensation as a percentage of gross theatrical receipts I can’t hedge that exposure on this exchange.
A REAL HEDGE MARKET WOULD ENABLE A FIRST-DOLLAR GROSS PLAYER (WHICH IS WHAT I THINK YOU MEAN) TO SELL HIS PARTICIPATION IN ADVANCE. THE PARTICIPATION MAY BE WORTH ONLY $x, OR IT MAY BE WORTH AS MUCH AS $z. THE GROSS PLAYER WOULD SELL HIS PARTICIPATION FOR $y. IN RETURN FOR LOSING POTENTIAL UPSIDE, THE PARTICIPANT HAS A GUARANTEED VALUE FOR THE PARTICIPATION. THE BUYER IS EITHER A PURE GAMBLER OR WELL-CAPITALIZED ENOUGH TO BUY SUCH BACKENDS IN BULK, HAVING FIGURED OUT WHAT THE AVERAGE VALUE OF SUCH PARTICIPATIONS WOULD BE AND THEN BUYING THEM FOR LESS THAN THAT.
Or if I have the money to release a film wide you are saying I can’t hedge a portion of the exposure with the exchange.
MY UNDERSTANDING OF THE RULES IS THAT A RELEASING COMPANY IS EXPRESSLY BARRED FROM THE MARKET. OTHERWISE, A RAGING CONFLICT-OF-INTEREST ARISES: THE RELEASING COMPANY, HAVING BET AGAINST ITSELF, COULD THEN PROCEED TO TANK THE MOVIE. ALSO, THE RELEASING COMPANY IS THE ULTIMATE INSIDER. TO KEEP THE PLAYING FIELD LEVEL YOU WOULD HAVE TO KEEP OUT DISTRIBUTORS AND THEIR EXECUTIVES. BESIDES, IF THE BET IS CAPPED AT $300K, IT’S VALUE CONSISTS OF ONE TV SPOT — HARDLY A HEDGE. FINALLY, P&A IS THE LEAST RISKY PIECE OF A FILM’S FINANCING, AS IT IS CUSTOMARILY RECOUPED IN FIRST POSITION. IF A DISTRIBUTOR THINKS IT MIGHT NOT EVEN RECOUP ITS THEATRICAL RELEASING COSTS, IT WILL PROBABLY CONSIGN THE PICTURE TO THE HOME VIDEO BIN AND THUS IT WOULD NOT BE A TITLE THAT ANYONE WOULD BE BETTING ON.
In every instance you are incorrect. The exchange encourages production by allowing risk diversification. So many more movies will be made for wide distribution if the participants had a way to hedge there risk.
FOR THE SAME REASONS AS ABOVE, THERE IS NO MEANINGFUL HEDGE OFFERED HERE. FURTHERMORE, FOR A MARKET TO MEANINGFUL IN THE CONTEXT OF FILM FINANCING, IT WOULD HAVE TO BE AVAILABLE TO THE FILM FINANCIER GOING INTO THE PRODUCTION. THE FINANCIER HAS DEPLOYED HIS CAPITAL INTO THE FILM LONG BEFORE HE CAN BET ON THE EXCHANGE. ALL THAT THIS MARKET WOULD DO IS ALLOW HIM ONCE THE FILM IS DONE TO PLACE A RELATIVELY SMALL BET WITH SOMEONE ELSE ON THE FILM’S PERFORMANCE. IT WOULD BE LIKE THE OWNERS OF TWO FOOTBALL TEAMS BETTING AGAINST EACH OTHER BEFORE A GAME. UNLESS THE BET WERE A HUGE ONE, IT PALES NEXT TO THE HUNDREDS OF MILLIONS OF DOLLARS INVESTED IN THE TEAM. IT IS CERTAINLY NOT A HEDGE. CONVERSELY, IF IT WAS A MEANINGFUL BET THERE WOULD BE A DISTURBING CONFLICT OF INTEREST — LIKE THE PLOT OF MORE THAN ONE HOLLYWOOD MOVIE, THE OWNER WOULD HAVE AN INTEREST IN FIXING THE GAME. WHICH IS WHY DISTRIBUTORS CAN’T BET. WHAT’S MORE, AT LEAST THE TWO TEAM OWNERS HAVE A SOMEWHAT BALANCED LEVEL OF INFORMATION. BUT IMAGINE IF YOU PLACED AN ANONYMOUS BET ON A FOOTBALL GAME, LOST THE BET, AND THEN FOUND OUT THAT THE PERSON YOU JUST PAID OFF WAS THE OWNER OF THE TEAM WHO MAY HAVE HAD CRITICAL INFORMATION THAT YOU DIDN’T. FOR THAT REASON, THE FILM FINANCIER ISN’T EVEN ALLOWED TO BET (OR “HEDGE” IF YOU WANT TO GO ALONG WITH THE FALSE SPIN OF THOSE WHO SUPPORT THE “EXCHANGE”). BESIDES, THERE ARE ALREADY WAYS IN WHICH FILM FINANCIERS ATTEMPT TO DIVERSIFY RISK. THEY CAN CREATE A PORTFOLIO OF FILMS THAT THEY WHOLLY OWN. THEY CAN TAKE PARTIAL EQUITY INTERESTS IN A WIDER NUMBER OF TITLES. THEY CAN PRE-SELL RIGHTS. THEY CAN REDUCE NEGATIVE COST BUT GIVE AWAY MORE UPSIDE. THERE EVEN HAVE BEEN LARGE INSURANCE COMPANIES THAT SELL LOSS INSURANCE ON MOVIES.
Of all your points the only valid one is the size of the allowable short on the exchange is 300k. This needs to and will change yet immediately the OTC market that will start side by side with the exchange will make up for this initial oversight.
Your last example of movie producers buying more product to “hedge” is not a reduction of risk it is an exchange of risk. There is no meaningful market for a film now other than studios and Cantor is trying to change that.
Also the fallacy that P&A is the least risky part of the pie is often repeated but often not true. To release a film wide 8MM-15MM. To make the film may have been 7MM with all of that pre-sold foreign. In this example how is the P&A the least risky?
There is no problem with planning a release then de-listing if the market is not there the same way a film is financed off of scripts and attachments (foreign market) is the same way a domestic release will be financed of the cantor exchange.
The exchange is the first small step to democratizing film and film distribution.
Good set of thoughts. And pretty much answers all of the things I was thinking.
Thanks
Caustically Optimistic’s response is spot on. This exchange will do little or nothing to increase movie production. Swagger and the others pimping the exchange are driven by the desire to find yet another market to gamble on. They stand to make big money by dressing up raw gambling as an investment market.
At for those who work in the movie industry, at the heart of the divided opinion over this exchange is a desperate desire for a savior to reverse the tragic decline of the business. For those looking for a white knight to take the industry back to what it was, I would argue that the changes we’ve seen in the industry are structural, not cyclical. There is no coming back from this, because the problems are not on the supply side of the business, they are on the demand side. The movie industry is struggling with competition from video games, and the Internet. Compounding this competition is the fact that non-theatrical revenues are being chewed up by piracy. A whole generation of kids have grown up regarding movies as one of many forms of entertainment, and a lot of those kids prefer the interactivity of video games, or the quick hit entertainment of the Internet. This generation also don’t see anything wrong in ripping a movie off a file sharing service.
Sure, Hollywood is largely ignoring movie-goers over the age of forty, and women, but there is only a certain amount of incremental growth to be obtained from satisfying latent demand in those demographics.
The 3-D experience cannot be pirated. The blockbuster needs to be seen on the big screen to be fully appreciated. These are the kind of films that make for safe investments, and they are the ones with the best potential for ancillary revenue through video games and merchandize.
Even if this exchange goes ahead, the structural changes in demand and in the nature of what makes a safe investment mean that any additional production capacity created by this exchange is unlikely to be used to make $10MM indie movies.
This exchange is not going to alter the movie business for the better. Those looking for a white knight would be better off casting their gaze north towards San Francisco. When Silicon Valley finally decides to get into the movie business, we’ll see an influx of capital, and we’ll probably see an end to the most rampant forms of piracy. ISPs have the means to kill illegal file sharing – that they have not yet done so is interesting. Free content is a massive draw for their customers, and piracy is weakening the incumbent media firms, and devaluing their assets and stock prices.
LLeju, please don’t take this the wrong way, but putting aside your analysis, your numbers reveal a lack of in-depth knowledge of the economic fundamentals of the industry. The cost of a wide release is a significant multiple of what you suggest. Ditto re the negative cost of the average film that actually gets a theatrical release. The days when theatrical-grade budgets get fully covered out of the foreign pre-sale market are long over. And P&A is less risky because the P&A financier generally recovers his investment before a dime goes to recouping the negative cost (or that portion of the production cost not covered out of the foreign market). Your analysis is more wobbly than your numbers. To suggest that someone would “delist” and pull a picture prior to release because “futures” speculators think the movie will underperform exceeds the bounds of common sense. Having spent somewhere between $30m and $200m to make the movie and another $20m to $50m on prints and ads, studios must release even the films they think will underperform in order to reduce their losses. (In fact, if they didn’t, you wouldn’t have bad movies to bet against.)
But putting aside the numbers, consider how absurd it is to argue that the “exchange” will pull money directly into theatrical-level film production (which, practically speaking, requires at least $50m per picture), when those who who regularly turn to the capital markets for film financing see zero opportunity and plenty of downside. The film industry is incredibly capital intensive and film companies large and small (including the biggest studios) are always looking out for new and innovative ways to introduce other people’s money into the business. Why would those whose livelihoods depend on constantly raising fresh capital be in such opposition to this if it created real hedging or capital-raising opportunities?
Look, if you want people to bet on how well a movie will perform, fine by me. Start the movie equivalent of a sports book. If the demand for a legitimized “exchange” is really there, then call it for what it is (an online betting parlor), move it off-shore, and have fun. But to dress it up as a legitimate futures exchange with the imprimatur of federal regulatory approval, all in the name of helping the beleaguered film industry, is playing a game that’s harmful to the health of the very industry that you claim your gambling activities will some how help.
For the reasons below I withdraw all arguements in support of the exchange:
1. As a capitalized producer I don’t want any competition from other independents
2. As an purchaser of films I don’t want other producers to have alternative outlets to finance distribution (lowers aquisition costs)
3. The more out of work above and below the line people the lower my production costs
4. The less films released the longer any film in the theater will run increasing the value of current production
5. Less american independent films mean less competition in foriegn markets and higher bids.
5. I will use fear, charges of maniulation, and many one off examples of how any attempt to create a market won’t work this time to keep and edge.
Thank all of you for the discussion. I withdraw all prior arguements.
All good points LLeju.
I can respect the rigts if the various, interested parties to approach these exchanges and products with caution and scepticism – in fact such comment and discussion is healthy and constructive when new, innovative and complicated financial products are being developed in any arena. It may be that after such dialogue a concept fails, but that is no reason not to have the dialogue.
However, the MPAA have already decided they will not tolerate the exchanges in any shape or form and are prepared to say just about anything to ‘win’ this fight, and have no interest in joining any sensible debate about the merits of any proposed system. Their reluctance to even acknowledge that an ability to hedge financial risk of film production would be attractive in principle, or work with the developers to identify and address percived weaknesses or issues, undermines slightly the sensible observations made, and makes one question what is really motivating the aggresive, last minute objections.
It was quite telling that one of the loudest objections came when they noticed one aspect of the MDEX exchange that they interpreted as requiring them to share transparent, accurate box office gross figures.
Box Office receipts can already be “wagered” on through many offshore sportsbooks and non-US exchanges such as Intrade. Intrade right now has multiple binary strike contracts on 4 upcoming movies.
If the “cast and crew” of these movies aren’t already making a killing in these markets, perhaps inside information on these productions isn’t so secretive after all?
The internet is like a chat room on steroids. Nothing is kept under wraps regarding movie buzz – everyone has access to it. In fact, the rumor mill started cranking yesterday about what a disaster the Green Hornet movie is becoming, and that isn’t scheduled for release until December.
The Trend Exchange is targeting institutional traders only, and these contracts would not be available to your average Joe on the street unless they traded them through an intermediated broker who had a clearing relationship with an approved FCM.
It’s the Cantor Exchange offering that would allow you to trade these movie futures through your credit card. These are two separate business models being proposed. The CFTC staff TWICE recommended Trend Exchange approval to their commissioners, but the “political animals” that head the CFTC were frightened by the media blitz created by the entertainment industry against it.
And know this – their objections are directly related to the attempts at transparency into box office receipt calculation that these markets would offer. The Trend Exchange would have access to the exact raw data from the theaters (point of sale) that the studios have. Yet a review of all box office reported data over the past 2 years shows a standard deviation of 2% between the actual raw data and the studio-published box office number.
So much is tied to box office numbers (merchandising, future distribution, compensation, royalties, other contracts) that the studios like to “massage” these numbers to help their bottom line.
These attempts to hold these CORPORATIONS to the same accurate accounting standards that every other business needs to adhere to should be applauded, not condemned!
Also, these products are being proposed as exchange-based, federally-regulated, centrally-cleared instruments. The mortgage-backed derivatives that caused the recent financial meltdown were over-the-counter (OTC), off-exchange, UNREGULATED instruments.
That were intimately tied and relied on the underlying regulated instruments? Right? At some point, their value eclipsed the value of the underlying assets? In other words, without the legit market the OTC market would not have thrived.