Itching to bet on the next box office hit? Or flop? Wall Street types are readying products to give movie mavens of all stripes the ability — and the leverage — to make big bets on box office attendance.
There's also a legion of opponents — including big name studios and the Motion Picture Association of America (MPAA) — fighting the plan and, at the moment, they're winning. After making some impassioned pleas to Congress, the opponents succeeded in getting a ban on movie speculating into the Senate version of the financial reform legislation that is working its way through Congress — the only product-specific derivatives ban in the bill.
In a weird twist to this drama, regulators that oversee derivatives have given the idea of movie futures partial approval. Cantor Futures Exchanges (a unit of brokerage firm Cantor Fitzgerald) and Media Derivatives (a unit of Veriana Ventures) both filed plans with the Commodities Futures Trading Commission to set up financial exchanges that will allow moviegoers, studios and institutions to buy and sell futures contracts based on how much money they think a Hollywood film will generate at the movie theater. The trading firms received regulatory clearance last month to set up the exchanges, and are now awaiting final approval of the futures contracts — a ruling that's expected in June.
But as the plan inched closer to realization, industry opponents began speaking up. The Motion Picture Association of America, which represents the country's biggest movie houses, launched a heavy lobbying campaign at the eleventh hour, urging regulators and Congress to scuttle the deal. The group calls movie futures nothing more than glorified gambling and issued dire warnings of possible collusion and manipulation between insiders and rogue investors in the futures market.
"These proposals [are] brought to you by the producers of the derivatives debacle that plunged the world economy into the worst crisis since the Depression," said Bob Pisano, president and interim chief executive of the Motion Picture Association of America Inc., warned in a statement.
The feisty words convinced the Senate Agriculture committee to add a last-minute provision forbidding the practice to the Wall Street Transparency & Accountability reform package.
One obvious question: Why create a new leveraged derivatives product at a time when such financial instruments are the object of scorn? Proponents point to the popularity of the Hollywood Stock Exchange — a website that allows people to use fake money to buy and sell shares in actors and movies — and InTrade, an online trading exchange in Ireland that let's people use real money to make such bets, as good indicators that demand for such products is real. "The greatest participants on InTrade are U.S. citizens," even though it's offshore, unregulated and technically illegal for U.S. citizens to make online bets," says Robert Swagger, chief executive of Media Derivatives. He believes a U.S.-based government-regulated, transparent exchange will attract hoards of investors.
Proponents see it as a way to help a film industry that needs investors and capital. A flurry of studios, such as New Line Cinema, Paramount Vantage and Miramax Films, have recently downsized or closed. "The decline in production has been dramatic," says Richard Jaycobs, president of Cantor Futures. Clark Hallren, a managing partner at Clear Scope Partners, a financial advisory firm that is currently offering advice to Veriana's Media Derivatives, estimates that movie financing levels are only 10% of what they were 18 to 24 months ago.
Advocates contend movie futures could lower the risk investors face when putting cash into films, and that alone could help draw in more money. Basically, an investor, studio or filmmaker could sell — or "short" — movie futures contracts so that they would get a payoff if a film bombed, thereby limiting their potential losses.