Opening soon: the box-office betting window
Over the Motion Picture Assn. of America's strenuous objections, a divided Commodities Futures Trading Commission on Monday approved a proposal by Media Derivatives to sell futures contracts based on the opening weekend box-office receipts for "Takers," a heist flick due in August from Sony Pictures. There are plenty of reasons to be skeptical of box-office-based derivatives -- for starters, there are too many insiders who have far more information than the general public does about a film's quality and the reaction of test audiences -- and that's why The Times' board editorialized against the proposal. The Senate also included a prohibition on such contracts in its bill to overhaul financial regulations.
Still, the film industry isn't just the MPAA, and it isn't presenting a unified front on the issue. A recent post in The Wrap drew my attention to a terse e-mail to the CFTC by consumer-electronics giant LG in favor of a futures exchanges for movies. Zia Zaman, chief strategy officer for LG in North America, wrote on May 25:
We often invest in film tie-ins such as Iron Man 2. Our Treasury function is always looking for intelligent hedges for our positions. Since we invest a great deal in specific feature films many months before a film's release, it would be beneficial for us to be able to hedge by buying a "short" contract based on domestic box office receipts.
LG was one of about a dozen major brands that provided an estimated $100 million worth of marketing for "Iron Man 2," according to Advertising Age. Companies are spending even more on licensing and merchandising deals with the studios, also well in advance of a film's release, former producer Buzz Potamkin told the CFTC. Those deals ...
In many cases, and most specifically in the case of potentially high grossing “franchise movies”, the L&M deals are made 18-36 months prior to the opening of the movie. At that point there is clearly no movie to see; perhaps even no cast or script to consider. Major investments are made in designing, manufacturing and marketing these licensed products. Yet the licensee has no readily available mechanism for hedging the risk. All the investment is tied to one “bet”, made 18-36 months ago, with the results dictated by one weekend. Don’t these parties deserve some way of hedging their substantial risk?
If he and Zaman are right, the availability of hedging instruments could persuade investors to provide even more funding for films -- if the futures exchange worked as advertised. That's a huge if, though. I'm not convinced that contracts approved Monday by the CFTC will attract a critical mass of buyers and sellers, given the aforementioned information asymmetry. I also wonder why films should be treated the same way as interchangeable commodities, such as corn or jet fuel. But with the studios increasingly dependent on outside investors to finance their movies, it's understandable why those investors would yearn for a way to relieve themselves of some of the risk that Hollywood has offloaded onto them. As film financier David Molner of Screen Capital International in Beverly Hills wrote to Sen. Blanche Lincoln (D-Ark.):
[S]tudios no longer own the majority of risk in their releasing slates – other parties do. These parties are either a) third party financiers who have put up capital as passive investors in risk-sharing arrangements with the studios, or b) third party producers who are “renting” studio distribution. When I started in the business, the very notion of “renting” distribution out to third parties was a rather new one – today it is an accepted fact of life. Since 2004, approximately $14 billion worth of third party capital has flowed into the studio side of the movie business. The truth today is that the majors no longer own the “majority” of capital at risk in the industry and those other participants have good cause to wish that reliable hedging instruments are put in place.
For its part, the MPAA urged Congress to stay the course on box-office futures. Here's a statement Monday from MPAA President Bob Pisano:
These proposed contracts fail to demonstrate that they serve the public purpose futures contracts should serve, they are highly susceptible to potential manipulation, and pose real possible economic damage to an industry that employs over 2.4 million men and women working in virtually every state in the country.... We support banning them as the Senate bill does, and hope that the final bill approved by Congress and signed by President Obama retains the prohibition.
-- Jon Healey