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The MPAA continues to argue against the establishment of a market for box office contracts. Here’s MPAA Interim CEO Bob Pisano’s letter to Commodity Futures Trading Commission chairman Gary Gensler, who will make a decision shortly on petitions by Media Derivates Inc. and Cantor Fitzgerald to start trading on box office contracts, beginning with the summer season entry Iron Man 2.
MOTION PICTURE ASSOCIATION OF AMERICA, INC.
1600 I Street NW
Washington, D.C. 20006
202.293.1966Thursday, April 15, 2010
A. Robert Pisano
Interim Chief Executive OfficerDear Chairman Gensler:
Thank you for meeting with me and my colleagues this afternoon. We think it may be helpful to follow up with the following points.
We appreciate that the immediate decision facing the Commission is acting on the application of Media Derivatives, Inc. (MDEX) for designation as a contract market. As we said, however, we do not believe the Commission should separate that question from the type of trading MDEX proposes, in particular given the novel, complex questions it presents. Indeed, even MDEX has joined these questions; the MDEX DCM proposal is predicated on trading in box office receipts futures contracts, not other more traditional contracts, and not as an abstract request to establish itself as a futures market.
Nonetheless, examining the DCM proposal alone, we contend that the Commission should deny it, as it clearly has discretion to do under the statute, because if fails to satisfy two key designation criteria, criterion 2 and criterion 8.
MDEX has no way to determine the legitimacy of futures or option pricing based on motion picture box office receipts. The application fails to satisfy designation criterion 2, Prevention of Market Manipulation on several fronts: There is no natural price competition between longs and shorts in an underlying commercial market. There is cash market pricing, no additional months of futures market pricing, and no actual cash market transactions against which to measure the legitimacy of the futures price.
The potential box office receipts for a motion picture can be materially affected by individual industry participants in a variety of different ways that would be exceedingly difficult for MDEX to detect. Exhibitors who contribute to the Rentrak numbers could, either intentionally or accidentally, misreport their data. A distributor could determine within the four-week period preceding a motion picture’s release to reduce or increase the number of theaters that would show the motion picture on the opening weekend.
A distributor for a variety of reasons could determine to substantially reduce or expand its marketing budget, which can materially affect opening weekend box office receipts. A major exhibitor could determine to show the motion picture on smaller or larger screens, which can materially affect audience interest and capacity. MDEX has no effective means to detect or prevent such conduct or to determine whether it was undertaken for valid business reasons rather than to manipulate futures prices.
In addition, MDEX cannot demonstrate that it meets Designation Criterion 8, Ability to Obtain Information. MDEX has no ability to obtain information that would provide a benchmark for legitimate futures pricing. MDEX states that its ability to prevent manipulation will be based on the requirement that studios disclose their proprietary information regarding box office receipts where the exchange believes such information is necessary to investigate or deter manipulation; however it has no authority to compel the motion picture industry or other private institutions to disclose any proprietary information and no such authority can be conferred on it by or pursuant to the designation of MDEX as a DCM. Studios have always carefully guarded this highly confidential and sensitive information.
With respect to the trading for which MDEX seeks DCM approval, the Commission has authority to deny a proposed futures contract that fails to satisfy the public interest criteria set forth in Section 3(a) of the CEA – price discovery and hedging. The proposed contracts on motion picture box office receipts do not fulfill either public interest. There is no dispute that they do not fulfill a price discovery function.
The record before the Commission is clear that the contracts would never be used for hedging. Underscoring this is the fact that the applicants seek to impose a firewall as a prerequisite for industry insiders to trade the contract. Such a firewall would defeat any informed or legitimate hedging use of the contract and therefore defeats any reasonable contention that a contract would be used for hedging. We respectfully believe that to satisfy the public interest, the statute contemplates something more than a bare, abstract argument for hedging, especially where, as here, the record of any is clear that the contract would not be used for hedging.
Consistent with the foregoing, we believe the Commission can and should conclude that where a contract does not satisfy the public interest criteria and instead, like the contracts at issue here, would be used only for speculative wagers on the performance of a particular product, approval of a contract would be inconsistent with the CEA’s public interests and with the anti-gambling proscriptions of the Wire Act, 18 U.S.C. § 1084. Approval is especially problematic where the product and the purported commodity are subject to the substantial control of a relatively small group of industry insiders, for example, studios and exhibitor chains.
We also respectfully submit that where the public interests factors are not met, the Commission’s discretion should also be informed and guided by the industry’s concerns that these contracts can actually be harmful to the economics of the motion picture industry.
As we have explained in prior submissions as well as in our meeting today, these contracts could, among other harms, damage the reputation of a motion picture before the public has even seen it, foist upon the industry a need to develop expensive compliance regimes with respect to employee involvements with such contacts, and potentially expose studios to new types of legal claims, such as if an estimate of box office receipts proved erroneous (even where such inaccuracies were the product of mere mistake).
Again, we very much appreciate the time you and the Commission Staff spent with us today. We will be happy to answer any questions and provide further information.
With best personal regards, I am
Sincerely,A. Robert Pisano,
Interim Chief Executive Officer
Motion Picture Association of America, Inc.
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Everything in this MPAA statement equally applies to the pork belly, corn and orange concentrate markets, which are the essence of the commodities markets. Ergo, it says nothing.
When something is incomprehensible, there is a reason. Because in substance, it is gibberish.
What Pisano really wants to say — but can’t — is that the components of the weekly box office market are too small; and thus, they can be manipulated.
Patrons buying $15 million of tickets, instead of $25 million of tickets, that is, for a movie’s opening.
That’s 3 million vs 5 million micro-decisions. That is the essence of a market.
Compare with a nasty frost that wipes out 1/3 of the orange juice crop. A bunch of speculators focused on 4-day forecasts, get to buy futures at a really cheap rate.
The reason Pisano cannot say the market it so small, is because his job is to promote movies. No marketing man wants to complain publicly that his industry metrics are too small.
anon
Your premise is flawed. There are many, many producers of orange juice and pork bellies, but there is only 1 “producer” of Ironman 2. So, in that sense, the MPAA argument is somewhat valid.
But, we’re on the same side here. The part that MPAA has never addressed is that the size of the market should prevent that manipulation. In the same way that you would have to buy billions, and billions (and billions!) of dollars worth of gold to move the price $1 by yourself, the size of the movie futures exchange market should make manipulation a near-impossible task.
See: http://www.moviexschool.com
Is it that the metrics are too small or that the number of competitors in each tournament is too small? I think the latter, and that this is what is implied in the statements about “no actual cash market transactions against which to measure the legitimacy of the futures price.” No weekend can serve as a useful model for any other weekend–there are too many variables but too few entrants. At least, that’s my reading of De Vany.
I’m going to quote Nikki from several months ago: “worst idea ever”.
box office contracts by individual film are the equivalent of betting on the orange juice coming from a single farm, not the entire frozen orange juice industry.
so just like someone could bet against the farm and then go burn down the orchard, a speculator betting against a single film could trash it or buy negative publicity.
an aggregate contract on the box office of the entire industry wouldn’t have this problem, but it wouldn’t be much fun for the gamblers this market is designed to attract.
Any market is subject to manipulation. The same can be argued about the stock market. Like the burning down the orchard example, someone can short APPL and then poison Steve Jobs. Sure someone can try to manipulate the market like this, but will it happen? Unlikely.
Not only is the market too small—and thus easily manipulated—as anonymous correctly notes, but with the SEC suit against Goldman Sachs announced today, I think Wall Street casino gambling is suddenly not so popular anymore. The politics of the situation will likely scuttle this ridiculous plan.
If we’re betting, then my bet is that the CFTC won’t allow this nonsense futures trading.
It’s fun when it’s Monopoly money—but when it turns real, it can turn very dangerous. Not just to particular studios or producers, but to the industry in its entirety.
I suspect that Commissioner Gensler is aware of the SEC’s suit against Goldman for fraud. Fraud for inducing parties to purchase home mortgage based securities that they determined would likely underperform, and were thus hedging themselves.
Replace “home mortgage” with “movie”…
Anonymous, just because you don’t understand something does not make it gibberish.
His first substantive comment is to say that there is no cash price in this market. Traditional futures contracts work because on any given date there is a cash price for a real item. If Orange Juice sells for a buck today, anyone who bought a futures contract at $1.10 loses money and anyone who bought a futures contract at $0.90 makes money. There is no such cash price in a movie market. It can sometimes take days or weeks for box office numbers to be finalized. Given that people will be making or losing money on box office reporting, without a clear cash price, any decision on when to take the strike price will be arbitrary and when box office numbers are adjusted up or down, as they always are, both the exchange and the studio involved could be open for litigation.
Pisano’s next point is to highlight the ways in which the futures market could be manipulated. The size of the movie market is irrelevant. A horse may only be worth $50,000 but might carry $1 million of bets in a given race. This exchange could attract far more capital than the movie industry generates because this kind of spread betting has inherent appeal for Wall Street investors. In fact, the movie industry’s relatively small size compared with the sums of money bet on Wall Street makes it a prime candidate for futures market manipulation. If an individual or entity stands to make $1 million from a movie’s success, but can make $10 million from taking certain positions on the exchange, where is that individual’s or entity’s interest going to lie? Movie box offices are already manipulated, Pisano is quite right to point out that this is only likely to increase if there is an exchange.
Pisano’s next point is on the ability to freely obtain reliable information. Studios are notoriously secretive. They are not going to share potentially sensitive pricing data with the market, which means insider dealing will be rampant. Even the most efficient markets in the world have an element of insider dealing, but this inefficient, opaque market would take that to a new level.
Pisano’s next point is to highlight that the main reason cited in support of the exchange is that it will allow studios to hedge their risks and thereby increase the capital they are willing to use to make movies. He goes on to point out that hedging in an opaque market, where the commodity price can be affected by the entity making the hedge, is the very definition of insider trading. It might be a great short term way of attracting more stupid money to Hollywood, but in the long term it creates massive exposure.
His final point is that this exchange will add a new cost layer to the industry. And he is right. The studios will need to have a compliance department responsible for shredding everything when the boiler room explodes. And then there is the cost of all the litigation. Attract Wall Street investors/gamblers, and their lawyers come too.
Pisano is right to cite the Wire Act. This looks, feels and smells like spread betting. What is the difference between gambling on a movie’s box office and the number of par holes made by Tiger Woods at the Open?
“Fan”–
You should identify yourself. That is so much more cogent and coherent than the average yack here, you deserve some credit. Thanks.
Thanks, ‘Impressed’, but I think I’ll keep the mask on for the moment. Helps keep my mild-mannered alter ego safe from controversy.
What is the harm to MPAA if this goes through? They put forward some general arguments about why this may be a bad idea and ultimately harmful to investors, but why do they care? If they are wary of the market, they don’t have to participate in it.
People are still going to produce and go to movies whether there is an exchange or not. Is the MPAA simply opposed to the idea of other people making money from side bets on their movies? Do they feel they are owed a cut of the action?
We should not be comparing film futures to commodities. Most of Pisano’s concerns relate to one fundamental issue: movies are differentiated products. Oranges, cattle, pork bellies all have vibrant futures markets. And yet they are undifferentiated products–commodities–and thus do not pose the same moral hazards as a movies exchange. For example, the price of a unit of frozen, concentrated orange juice is not easily manipulated by the producers. The output from each producer is undifferentiated. Thus it would take collusion on a grand scale to affect the market price.
Instead we should be comparing film futures to publicly traded companies. We trade options on publicly traded companies because of the stringent requirements necessary for the underlying stock to be listed. There are trading volume requirements, market capitalization size requirements and disclosure requirements that give us some assurance that any derivatives traded on stocks are protected from foul play.
Will a film futures exchange require the equivalent of the SEC for film production? and how much more will that cost the industry? Will such costs outweigh the potential for new financing sources for the industry?
more here: http://hollywoodandwall.com/film-futures-cost-of-preventing-moral-hazard-may-be-too-high/
Just because the hollywood box office is another “derivative” people automatically attribute it as another financial instrument of mass destruction. What people don’t realize that unlike mortgage backed securities, the cantor exchange utilizes a clearinghouse. The clearinghouse in effect takes out credit risk by making sure that both parties of the derivative contract have the assets to fulfill the obligation. What people need to start focusing on is the potential benefits created by the exchange. There is an economic value that this exchange will provide and that is it will allow film financiers to hedge their investments, thus bringing in more financing to the industry. Of course the major studios have deep pockets so financing is a non-issue, but this becomes beneficially for many of the smaller studios. This market is more than a place for people to wager their opinion on movies.