Film Futures: The envelope please!

Our age of technology has ushered in more ways of investing money and hedging bets. Futures products, along with ETFs and ETNs, have exploded. Lately, it seems as if there’s an investment vehicle for pretty much everything—everything, that is, except movies.

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A brief history of movie futures
Enter the Hollywood Stock Exchange, aka HSX (not a ticker symbol). Launched in 1998 by two Wall Street ex-pats turned Hollywood deal-makers, Max Keiser and Michael Burns, HSX provided a virtual trading platform for at-home movie moguls to trade the expected profits of movie openings.

Keiser is referenced  as saying, “I suddenly looked at the movie industry like Michael Milken viewed the bond market. The original business plan of HSX was an exchange for predictive products that would lead to re-monetizing the industry and breaking up the Hollywood cartel. Using this platform we would allow many, many, many more people to have access to funds.”

The pair heavily promoted the platform, burning through tens of millions in venture capital, but they couldn’t realize their goal of actually turning it into something that traded real dollars, not just imaginary ones. They faced one big problem that at the time seemed insurmountable: the lack of transparency in studio accounting made it impossible to execute the strategy.

Still believing that the strategy could be made to work, the two pitched the product as a virtual economy and spent millions in promoting it. Their efforts did in fact pay off, at least in one respect. Web traffic was brisk and trading volume zoomed to over 2 billion contracts per day. But Blue Sky laws and lack of CFTC (Commodities Futures Trading Commission) approval hampered their efforts to turn the model into a real exchange.

Despite online ad sales, the company was rapidly losing money. After a failed merger attempt with another fantasy market company, HSX was eventually sold in 2001 to Cantor Fitzgerald, a company that owns a profitable spread-betting business in the UK. [Note: Michael Burns went on to become Vice Chair of Lionsgate Entertainment (LGF) and Max Keiser hosts The Keiser Report.]

Virtuality to reality
It’s taken nearly nine years for Cantor to jump through the necessary hoops in order to turn Pinocchio into a real boy. The company recently announced that it expects CFTC approval by April 20th after which it will commence trading its contract futures.

Termed Domestic Box Office Receipts (DBOR), movie futures contracts will be offered approximately six months before a project is set to be released. Contracts will be introduced for trading via a preliminary auction and will continue trading until four weeks after the movie has opened whereupon the contract will be closed and trading will cease.

Each contract is valued at one one-millionth (1/1,000,000) of the total gross box-office receipts expected for the first four weeks of a movie’s general release. At the end of the four week period, trading accounts will automatically be cash-settled in the contract holder’s account.  (As an incentive to begin trading “for real,” Cantor is offering current HSX account holders $10 in hard currency per every $1000 in virtual profit (up to $100) before March 31st. )

DBOR trading will be on a 24/7 basis. Account holders will be charged a monthly $2 maintenance fee plus a 25 cent per contract commission fee. Unlike other commodity futures which only require a relatively small percentage of the contract value to be present in one’s account, DBOR account holders must post 100% of a contract’s value for long positions and 50% or more for short positions. (Check out the Cantor website for account details.)

The upside
Cantor CEO Andrew Wing (formerly an exec at Nielsen) says that his company’s movie futures will create liquidity and provide studios with a hedging mechanism besides making the little guy an active participant. “The Cantor Exchange will provide a new component into the film finance formula to combat the uncertainties of the home video market and the growing 3D marketplace,” says Wing.

Looking further down the road, Cantor is hoping that movie futures will provide a direct link to the financing of new film projects. The idea is that producers will be able to come to them and if their projects meet certain standards, they would become part of an Intial Contract Offering.

Another potential industry bonus is that DBOR futures may affect how deals get done. Perhaps instead of stars taking a piece of the back-end in exchange for a large upfront fee (which happens on projects with smaller budgets), they’ll opt for a futures position. Hollywood agents now have one more bargaining chip at their disposal; they’ll just have to learn how to use it.

Potential risks
According to Cantor, movie execs with early access to box office data will be barred from making trades, but what’s to stop other insider activity?

Specifically, who will be considered an insider? Actors? Directors? Movie critics? They all have the privilege of viewing the final product before it’s released as do test audiences and others at pre-release viewing events. It’s clear (at least to me) that some type of oversight is necessary. The next question is who will conduct it?

Besides the problem of insider trading, what happens if a movie ceases production or if production is stalled? Also, it’s not unusual for a studio to push back a movie’s release date months or even years into the future. For example, the release date of the last Harry Potter film (Harry Potter and the Half-Blood Prince) was pushed back from November, 2008 to July of 2009. It’s unclear what would happen to futures trading positions under these circumstances.

Summary
These are some big questions that anyone interested in trading movie futures should be asking and I’ve not found any place that addresses them. One thing is for sure, though, movie futures will be an exciting addition to the futures markets—maybe even more interesting than the underlying commodity!

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