Mike Fleming

The MPAA, its signatory studios, DGA, IATSE, NATO and Independent Film & Television Alliance have petitioned the Commodity Futures Trading Commission to deny approval of an application by Veriana Networks and Cantor Fitzgerald to bet on box office receipts of the opening weekend for major releases. In a letter to CFTC Secretary David Stawick, Paramount Pictures, Sony Pictures Entertainment, Twentieth Century Fox, Universal, Disney and Warner Bros all joined in the petition that opposes turning box office performance into a betting mechanism.

FOR IMMEDIATE RELEASEApril 8, 2010

ENTERTAINMENT COMMUNITY URGES REJECTION OF PROPOSED ONLINE MOVIE-FUTURES WAGERING

Coalition of creators, talent, craftspeople, independent production and distribution companies, industry workers and theater owners raise concerns about box-office wagering services

Washington, DC – A coalition of entertainment industry workers, creators, independent producers and distributors, business organizations and theater owners today urged a federal commission to reject a proposal to create an online motion picture box-office wagering marketplace.

In a letter to the Commodity Futures Trading Commission (CFTC), the Directors Guild of America (DGA), the Independent Film and Television Alliance (IFTA), the International Alliance of Theatrical Stage Employees (IATSE), 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 Media Derivatives, Inc. (MDEX) to create a designated contract market for the trading of financial derivatives based on film futures.

The letter explained that the proposal by MDEX is based on a faulty understanding of the film business and could potentially damage the industry and the economic interests of its workers.

“The designation of MDEX as a contract market is not warranted where, as here, its sole purpose is to provide a trading platform for instruments that do not constitute legitimate futures or option contracts, but are in essence wagers that are susceptible to manipulation.  Rather than providing a real and useful means for hedging risk or price discovery, these instruments will be harmful and burdensome to the motion picture,” the groups said in their letter.

The letter charged that establishing online box office wagering marketplaces will be “detrimental to the industry they ostensibly are created to serve.”  And it continued:

“MDEX Contracts create a panoply of negative effects and risks for the motion picture industry that do not now exist – from actually creating conflicts of interest for studio employees and independent contractors by providing the means to bet against the success of the product to complicating motion picture financing by creating new, but false, unreliable, and non-economic valuations of a motion picture’s success.  The risk of depressed box office receipts is more pronounced with box office futures because futures pricing, although lacking any reliable economic basis, could nonetheless affect a motion picture’s prospects by negatively affecting financiers’ and audiences’ pre-release perception.  Because the ultimate breadth of distribution can be revised up to the time of release and afterward, the MDEX market could affect distributors’ ability to secure screens if the MDEX Contracts are perceived to be trading negatively.  The harmful effect of negative publicity is not limited to theater showings.  Many prices for downstream licenses and other sources of revenue are driven in part by box office gross.

“Motion pictures slated to open in limited theaters (which can still involve openings in 625 or more theaters) and then broaden based on word of mouth could be ruined by futures pricing that casts it in the false light of a failed opening.

“Approval of the MDEX Contracts also will require studios and all other industry participants that have the power to affect futures pricing to institute and police anti-insider trading compliance regimes for MDEX contracts at great cost to them.  It is problematic whether any prohibition on insider trading would need to take into account inside information held by insiders who are not subject to the control of the studios.  There are many industry participants who have access to material, non-public information and could try to use that information to profitably bet on MDEX Contracts.  These range from financiers and their advisors, potential distribution partners, exhibitors (who have a right to see a motion picture prior to licensing it in the U.S.), talent, crew, agents and other representatives, special effects and other post-production vendors, trailer houses, festival screening committees and the employees, families, and friends of all these people.”

The CFTC is currently scheduled to take action on the MDEX application to establish a designated contract marketplace (DCM) on Friday, April 9.  The MDEX request to contract film futures is scheduled for action by April 23.

Separately, Cantor Futures Exchange, L.P. has a request for approval to register as a DCM for the trading of financial derivatives based on film futures, which is scheduled for April 20.  Cantor’s request for approval to contract film futures and options is pending in May.  The groups signing the letter today intend to file written comments about concerns about this proposal as well.