Betting on the box office?

Should a film’s projected opening weekend box office be traded on a futures exchange like derivatives such as soybeans and orange juice? A number of politicians and bodies including the Motion Picture Association Of America (MPAA) and the Independent Film & Television Association don’t think so and are counting on the Commodity Futures Trading Commission to throw out two separate proposals in the coming week.

On Friday [16] the Commission will vote on an application by Media Derivatives, owned by Chicago-based Veriana Networks, to set up a market that will allow professional traders to speculate on how much money, say, Tron: Legacy will take in its first three days in December. Contracts would be listed no more than 30 days before the film’s launch and trading would cease the day before opening weekend.

The first incarnation of Media Derivatives’ exchange, which would be called The Trend Exchange and might launch in the third quarter of this year subject to approval, would only apply to North American films rated by the MPAA and released on at least 600 screens. The five-person Commission needs to deliver a three-vote majority to approve the proposal, and it will hear a second application for an exchange submitted by Cantor Fitzgerald, owner of the just-for-fun Hollywood Stock Exchange, next week.

Opponents are skeptical, arguing among other things that the last thing anybody needs is another derivatives market given that these financial instruments were a major cause of the financial meltdown. They also fear market manipulation and a situation whereby studios bet against their own product. The two companies backing the proposals say the exchanges would be subject to stringent regulation and would allow studios to mitigate risk at a time when financing sources have become strained.

“It has large potential to harm the industry,” the MPAA’s chairman and interim president Bob Pisano (pictured below right) told Screen International this week. “Let’s assume there’s no manipulation.  Even then, if a huge short position got out there on a movie before it opened, that could become a self-fulfilling prophecy. Because it’s a financial instrument it could take on the patina of authority. Rumour and gossip are the currency of the realm here and would be very difficult to control. Very few people have reliable information about what a movie is like before it comes out.”

Rob Swagger (above right), chairman and CEO of The Trend Exchange, takes the opposite view. “How do they know a transparent market will have adverse affects? There are 20 or 30 websites out there that already predict how a movie is going to do before it opens. The benefit of an exchange like ours is we would be regulated. There cannot be manipulation because… our contracts have four-week product and it stops trading before the film opens. Plus the MPAA affiliates are already come under regulations, so there are firewalls in place for accurate accounting.

“The underlying asset is a movie’s performance,” Swagger said. “When you have average productions costs [in excess of $100m per film], and it can take two and a half years to make a movie and 40% of revenue occurs in the first three weeks, there’s a risk. The best way to mitigate that risk is through slate deals, but nobody knows how the public is going to react to the movie. An exchange simply offers an opportunity to hedge that risk.”

Swagger said he had received positive feedback from half of the MPAA members but declined to name names. In a report this week Lionsgate vice-chairman Michael Burns, whose studio does not belong to the MPAA, expressed interest in the idea.

Cantor Exchange president Richard Jaycobs said he did not think the studios would have anything to gain from shorting their own films. “Studios will always have an incentive to see the film do well, so in that sense they’ll never bet against the film,” Jaycobs said. “But they might take a percentage like 10% or 20% and routinely hedge it as a way to smooth out their revenue. Please keep in mind, studios already sell off big chunks of their interest in movies to private investors. Using a futures contract is no different.”