There's at least a chance that box-office receipts could enter the world of derivatives and hedge-betting. Depending on who you hear it from, this is either a great idea that will allow for more transparency, or it's something straight out of Apocalypto where decapitated heads bounce down steps like bloody face-slinkies. Others envision something out of The Producers, where some Hollywood scam artists suddenly have a vested interest in a movie actually failing. As all things, the truth is somewhere in the middle. Some bad things could happen, some good things may happen, and the rest I don't think anyone truly knows for sure.
So what's it all about?
Well, the simple version is this: Two companies (Cantor Fitzgerald and Media Derivatives) have been lobbying for box-office futures trading. If you're like me, you have no idea what futures trading is because if you're like me, when you have a choice between Futurama on the Cartoon Network and complicated Wall Street markety stuff, it's Zoidberg and the gang all day, any day. In other words, pray you're not like me. So I had to actually look some of this stuff up and if I insult any Goldman Sachs traders out there, well, let's just call us even.
Essentially, future contracts are derivatives traded on a futures exchange. I have no clue what I just wrote, so I'm going to explain it for the both of us. You're buying a commodity at a specific price with delivery of that commodity set at a specified time. The game is, the value of that commodity is subject to change. Therein lies the risk or reward. In this case, that specified time would be the box-office performance of the commodity. What you end up gambling is what that futures contract will be worth upon time of delivery. So, in terms of box-office receipts, let's say I'm buying a futures contract for Avatar 2 where I shell out 600 bucks. Let us also say it's been established that the movie is projected to gross $600 million domestically (a pretty astonishing number, but I'm throwing it out there). If the movie underperforms ... if it grosses, for example, a measly $500 million, I have lost out on some money. If the movie rakes in $800 million, I can now sell my purchased securities at a profit. Of course, there's also an opportunity to trade during the four to eight weeks the film is actively trading.
For third-party traders this is another opportunity to make (or lose) some money and to scare the living daylights out of each other on a daily basis and, in the long-term, maybe even the rest of the world. It opens a new market of trading. But how will it affect the studios? Glad you asked, because no one really knows exactly. Oh, there are plenty of people out there who claim to know, but you have two sides shouting at each other right now like it's weigh-in time.
We do know this: if the futures exchange allows studios to participate it would probably be in a movie studio's best interest to hedge their bets on the riskier ventures. Let's say Warner Bros. spent $300 million total on the next Batman. Naturally, they have a vested interest in that monster making some big money. But just in case, Warner Bros. is going to hedge their bets and short sell $100 million worth of Batman 3 securities. It's a smart investment. If the film "bombs" and makes "only" $200 million, well, they offset that lost $100 million with the $100 million in futures they sold. They just broke even. Boom. On the other hand, if the film makes $500 million, they profit and will happily take the $100 million hedge loss. In this particular case, the movie only needs to make over $200 million for the studio to profit from their $300 million dollar investment.
This sounds fantastic, Dre! Why wouldn't the studios be on board with this?
Excellent question -- you get a star! Odd as it sounds, the studios are vehemently against it (the one on-the-record exception being Lions Gate). They've been waving their arms up and down and barking into the ears of our friends in Washington (in fact, the Senate Agriculture Committee recently passed a ban on futures trading on box-office receipts. It's not exactly the end of the road but suffice it to say, it didn't help advocates of futures).
Now, a more cynical person (for more on "cynical" see: probably right) would say the studios are resisting solely because entering the world of derivatives would mean more accounting transparency. Studios hold onto their accounting logs like they are the Book of Eli. You know those funny little games the studios play on Sunday and Monday where it looks like X movie won the box-office weekend, only we later find out Y movie won a day or two later? Yeah, those games would go the way of cap guns.
On the other hand, a less cynical voice might wonder -- even if the studios would hate, hate, hate to open up their books more --- isn't the dollar the bottom line? Aren't they in the business of making money? And if this venture into derivatives would make them more money, wouldn't they be tempted to dab into it even if it meant more transparency? And why aren't the other guilds like SAG aboard? They don't have the same evil transparency fears, right?
These are all good questions. I'm guessing the studios would argue this: Look, Jack, making movies is a pretty high-risk game as it is. And yes, this could possibly lower our risk in cases where we decide to hedge our bets by short selling. But we're thinking of the potential disasters. Look at the nightmare these crackpots got us into only a few years ago. Making movies is already Russian roulette. Do you have any idea how much craft services costs on location? Hedging bets is great, sure. But do you know how many people work on a movie set? Do you know how many family members and agents those people have? No twist ending will be safe. No movie will get a fair shake. And you wanna know why? Because all of a sudden -- and for the first time in the history of this industry -- there will be too many people with a vested interest for a movie to fail. You are talking about an industry already fraught with gossip. Nobody gossips about oil. But they sure as hell gossip about every little pointless facet of a movie's production. Right now some of you freaks hope a Michael Bay movie falls flat on its face just so you can point and laugh at him. I get that. But for the most part, no one really has an interest in seeing a movie fail. But if just anyone can sell or buy futures on box-office receipts -- be they a major firm or a single trader -- all of a sudden every movie is vulnerable to sabotage. We never wanted box-office returns to be part of the discussion. Now everyone obsesses over the returns and it drives us NUTS. This would make it like fantasy baseball or something. Everyone would be interested in box-office expectations versus earnings. Because people love the movies and people love watching fires. This would change how box office was covered. Trust me, it would be a bigger deal. I don't need Wolf Blitzer reminding me I spent too much on Transformers 3.
Of course, price-fixing is illegal. Insider trading is illegal. But you and I both know price-fixing and insider trading happens all the time and there are enough lunatics out there to think or know they ain't getting caught. I'm already playing Russian roulette. Now you're asking me to put more bullets in the chamber.
... or something along those lines. So yeah, there are pros and cons. Personally, I couldn't care less about the transparency issue. And I'm not sure adding more risk to an already risky venture is a good idea. But I will say this: if derivatives allowed studios to take more risks by green-lighting more original features -- if we got more movies like The Fountain, Fight Club, The Fantastic Mr. Fox, or other great movies that start with the letter "F" -- then it would be a major win for the industry artistically. This way, Hollywood, you can still have your homogenized garbage and eat it too. So long as the market doesn't bubble burst you into the gutter.
Now you decide ...
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Dre writes for Film.com weekly.