Back To The Futures

In March, we read that Cantor Fitzgerald was about to monetize the moviegoing industry by taking what the website had done with play money, and bringing it to the real world. For those of you who have not heard of HSX (short for Hollywood Stock Exchange), it is a site where you can bet play money on whether a movie will be a hit or a flop, and get little more than bragging rights if you are right. That site was bought by Cantor Fitzgerald back in 2001, and they hoped to lure people from movies into other commodities exchanges.

Somewhere along the way, they changed their mind about luring people to futures contracts for other commodities, and decided to create a futures exchange on a movie’s box office receipts. Gains and losses are based on people’s expectations of how well (or badly) a movie will do.

In the real market, contracts on the Cantor exchange will trade at $1 for every $1 million a movie is expected to bring in — a figure determined by traders — at the domestic box office during its first few weeks in theaters. So if “Robin Hood” is expected to bring in $100 million in its opening weeks, a single contract could be bought for $100 by a trader who thinks Russell Crowe’s role in the movie will drive sales far above expectations. If that trader guesses right, and the movie sells $150 million in tickets, the trader makes $50. [link]

While people’s expectations are one thing, they are not necessarily correct. Apparently, they were completely off about Avatar at HSX, with most users predicting that it would flop. Still, if your expectations don’t match up with the majority, you could always go short.

If a distributor thinks a movie it is backing will struggle at the box office, the company can sell contracts in the futures market. If the distributor shorts a $100 contract and the movie grosses $50 million, the distributor will make $50, thereby limiting the company’s total losses from a film.

Cantor is in the process of getting approval from the Commodity Futures Trading Commission (which regulates futures markets). It things work out, it looks like a movie which initially ruined your mood could then later improve it with your futures gains on its box office receipts.

The creation of this exchange is very timely, as The Economist just had an article last week about how, despite older populations and decreasing GDP, people are flocking to the cinemas. (Is it an inferior good? Discuss). Box office revenues are seeing surprising increases in the age of the internet, DVDs and piracy.

Since 2005 North American box-office receipts have risen by 20%. Ticket sales grew strongly during the recession, as people sought a cheapish night out, and have not slowed. Box Office Mojo, which tracks films, estimates that box-office receipts this year are running at 6% above last year’s level. Elsewhere cinema is healthier still. Ticket sales outside America and Canada have risen by 35% since 2005 and are now worth about two-thirds of the global total. A boom in multiplexes—that is, cinemas with at least eight screens—is unlocking latent demand. In 2006 Russians made a total of 89.5m visits to the cinema. Last year they made 132.3m. This is especially surprising in a country where the number of young people is falling. [link]

Despite growing profits, however, Hollywood is not happy about a futures exchange on itself. Felix Salmon writes, in an op-ed piece in the NYT:

Hollywood’s mouthpiece, the Motion Picture Association of America, has argued that the new market could tarnish “the reputation and integrity of our industry” and would constitute “unbridled gambling” — though there’s nothing “unbridled” about the regulatory strictures involved in being listed on a Chicago commodity exchange.

The real reason…is probably simply the age-old story of large, conservative institutions being averse to change. [link]

I don’t know what they mean when they talk about “reputation and integrity” (case in point: Starship Troopers), and they are only “shooting themselves in the fiscal foot,” as Salmon says, by resisting the creation of these contracts. He rightly brings up the case of futures on onions, a story that would bring a tear to one’s eye:

IN the 1950s, onion growers were often shocked at the low prices they were getting. Casting around for a villain to blame, they alighted on derivatives traders, and they persuaded Congress to ban any futures trading in onions.

Today onions are the only commodity for which futures trading is banned. Not coincidentally, onion prices remain extremely volatile: they doubled in 2008, and then fell by 25 percent in 2009. [link]

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1 comment for “Back To The Futures

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