“NOBODY knows anything,” said the screenwriter William Goldman of the film business. But a great many people think they do. And they may soon get the chance to back their hunches with money. On April 20th America’s Commodity Futures Trading Commission (CFTC) approved the second of two exchanges that would allow trading of contracts based on films’ box-office takings.
It is an answer to a real problem. The six main studios, which have become dependent on small numbers of big-budget films, are finding it hard to spread risk. Investors who fled during the credit crunch have not yet returned. Independent filmmakers are struggling to sell the rights to foreign box-office takings in advance—something they used to rely on to pay for their pictures. There is a need to hedge against failure. But Hollywood is not convinced that the exchanges meet it.
Although the markets run by Cantor Fitzgerald and Media Derivatives have been approved, the contracts to be traded on them have not. Hollywood is lobbying hard to stop them. It has launched a separate effort to have Congress ban box-office futures. Politicians as diverse as Barbara Boxer, a California liberal, and Orrin Hatch, a Utah conservative, have spoken out against them. It is the equivalent of a coast-to-coast marketing blitz.
Some of the objections are silly. A joint letter from Hollywood’s trade associations points out that box-office figures, though treated as reliable, are in fact estimates by the studios. True, but this is surely an argument for better figures, not for a ban on trading. There are, however, more serious problems with the exchanges.
The first is the information imbalance in the film business. Cantor’s market is based on an existing predictive market, the Hollywood Stock Exchange, which uses play money. A study of that exchange, by Thomas Gruca of the University of Iowa, found that it errs in predicting box-office returns by an average of 31%. But the studios know a lot more than other investors. They know how audiences are responding to test screenings, on how many screens a film will play, and how much they are going to spend marketing it. Although such information leaks out, it does so selectively and unevenly. As a result, almost every trade by a studio would be an insider bet.
And it is highly unlikely that a studio would ever short one of its own products. In Tinseltown, more than in almost any other industry, rumour and reality bleed together. A Hollywood executive is powerful and successful largely because he is viewed as being powerful and successful. A film that is rumoured to be a dud tends, by means of “bad buzz” leaking to newspapers and the internet, to become a dud. So a bet against a film would become self-fulfilling—to say nothing of how hard it would be to explain to the talent
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