The attempt by two companies to set up exchanges listing futures on how well films perform at the US box office has blown up into an angry public argument, and is forcing US regulators to think hard about what sorts of uses derivatives can be put to.
On May 19, the Commodity Futures Trading Commission held a public meeting to hear both sides of the argument, and help it in its deliberation over whether to permit such contracts.
The regulator has already approved the formation of two film futures exchanges: the Media Derivatives Exchange on April 16 and the Cantor Futures Exchange on April 20.
But the CFTC has not yet approved any contracts for them to trade, and it is by no means certain that it will.
When they concurred in the establishment of the exchanges, three of the CFTC’s five commissioners took the unusual step of placing on record their doubts about the merits of movie futures.
The proposed contracts are billed as a way to help investors in films, or their distributors, hedge their risk that a particular film will succeed or fail at the box office. The idea is that for a defined period before or just after a film’s release, the exchange will list a future whose settlement value will reflect its box office revenue in a given period, say four weeks, after its theatrical release. The amount people are willing to pay to receive this amount will reflect the market’s view of its likely size.
The dispute over whether such contracts should be allowed has become increasingly heated, with accusations flying in both directions.
The most vocal opponent of film futures has been the Motion Picture Association of America, which represents the Hollywood studios. Robert Pisano, the association’s interim chief executive, has attacked the product as tantamount to gambling and said it has no place in the film industry.
“We have never thought about hedging our risk or selling a movie short,” he said at the CFTC hearing. “The first time we do that will be the last time we ever work with those filmmakers and, once it becomes public in the community, it will be the last time many filmmakers will work with us.”
Pisano said the contracts would be easy prey for manipulation because of the inside knowledge possessed by those involved in the film itself. He also questioned the legitimacy of standardising a product when each movie is so unique.
Defending the incumbents?
But Richard Jaycobs, president of Cantor Futures Exchange, dismissed the MPAA’s concerns, accusing it of being motivated by self-interest. Because the MPAA represents the biggest Hollywood studios, Jaycobs argued that it is trying to prevent any mechanism that might allow smaller studios and independent filmmakers to secure a greater market share.
Speaking to FOi a week before the hearing, Jaycobs said: “We have been working on this exchange for two years – this is not a new initiative to the CFTC and neither are any of the issues. But since we went public with these ideas, I have been surprised by the reach of the MPAA’s power.
“They have lined up many people to speak about the negative attributes of this idea and, I must admit, they caught us by surprise. They are terrified of losing control of their monopoly on the film industry and are utilising all their resources to convince people this is a bad thing.”
Jaycobs added: “On top of that, I am not sure, given some of their comments, that the CFTC commissioners fully understand the detail of this product and issues at stake here. They just seem to have been echoing the concerns of the MPAA. All we want is a fair discussion about the merits of such an exchange and for the decision-makers to fully understand the issues before making a decision.”
Jaycobs also brushed off the specific concerns expressed by opponents. He said the futures would not be open to manipulation because of the robust nature of the way box office receipts are recorded. An independent company called Rentrak Theatrical collates information on movie takings from across the country.
Any effort to manipulate the final settlement figures, Jaycobs said, would have to involve box office takings being over- or underestimated by tens of thousands of tickets.
He was also at pains to allay concerns about the markets being manipulated by insiders. “We have incredibly sophisticated surveillance techniques – if someone is going to manipulate this market, we would know about it,” he said.
Jaycobs said this product was something Cantor had been interested in for more than a decade. But he stressed that it would not have been possible 10 years ago, because the technology to quickly and reliably collate box office receipts was not available.
“The US film industry is a $10bn a year industry. That is small by the standards of the US bond markets but it remains a valuable part of the economy that could be enhanced by this futures market,” he said.
After hearing testimony from both sides, however, the CFTC commissioners still seemed unsure of the new products. Bart Chilton, despite saying the products were “cool”, added that he was worried by the fact that the success of a movie relied on so few individuals. “There is only one producer of a movie, one studio, which has great influence – even control – over how well a movie will do.”
Chilton, it seems, is concerned about the role the studios might play in this market. An email received from his office argues that studios can directly influence the success of their films through, for example, the amount they spend on marketing, or the extent to which they release stars to do media interviews.
Given this knowledge and influence, should the studio be banned from participating in this market and, if so, how could the futures contracts act as a viable risk management tool?
But it is not just participants with everything to lose or gain who have strong opinions on this matter – apparently neutral but informed parties seem to as well.
The Futures Industry Association seemed initially to defend the idea. It issued a statement on April 8 rebutting the MPAA’s suggestions that movie futures could lead to “rampant speculation and financial irresponsibility”.
The FIA said: “No one can argue that the movie-making business is without risk or that there is no need for effective risk management tools. The potential introduction of innovative instruments for managing that risk should be applauded rather than criticised.”
But the industry body seems to have since adopted a more neutral standpoint.
“We are not taking a view on the proposed film futures,” a press officer told FOi. “We did issue a statement in response to comments from the movie industry about the regulation of futures in general but we have no comment on the particular contracts in question.”
Not so reticent in giving an opinion is Max Keiser, who once set up the Hollywood Stock Exchange – a virtual market in which investors can buy and trade virtual shares in celebrities and movies.
It was acquired by Cantor Fitzgerald in May 2001 and, according to Jaycobs, it now boasts more than a million users and 20,000 trades a day.
Keiser now lives in France and has a TV show called the Keiser Report aired on Russia Today, which describes itself as “a no holds barred look at the shocking scandals behind the global financial headlines”.
“This would not serve to hedge risk in any sense,” says Keiser. “All it would do is apply financial trickery and ultimately ruin yet another perfectly good American industry. It would spin a $10bn industry into $100bn of speculation and do to Hollywood what it once did to the US energy market.
“There is no underlying product and so it amounts to just sheer hype by Wall Street.”
Keiser believes it is fortunate that the MPAA has “figured out what a horrible thing this would be for the film industry” in time to save it.
This heated debate now looks set to continue until June 7 for the Media Derivatives Exchange and June 28 for the Cantor proposal – the final dates by which the CFTC must decide whether to validate the contracts for the new exchanges.
Despite the misgivings of some of the commissioners, it is still possible that a new market for film futures will get the go-ahead. The CFTC can only ban a new product if it specifically violates its code – not just because commissioners have doubts about it.