Monday the Commodity Futures Trading Commission approved the first of what you’d expect will be a steady flow of futures contracts related to movie box office. The initial contract will cover the opening weekend box office for Takers, a Sony crime movie slated to be released in the US in August.
The CFTC approved the contract on a split 3-2 vote, despite very strong opposition from the film industry. The movie makers argued, to no avail, that the contracts were frivolous, could easily be manipulated and served no hedging purpose and were not in the public interest. Hollywood does have another arrow left in its quiver, however. It is lobbying heavily in Washington to have Congress outlaw trading in movie-related futures as part of the financial reform legislation wending its way through Congress. The Senate has already okayed a ban; the House has not.
I have two observations:
1. The contracts might be fun–sort of like internet betting on presidential candidates–but I don’t see how they serve any national interest. I was surprised to learn from the Wall Street Journal, however, that serving the public interest is no longer a relevant issue in commodities trading. That requirement was removed from the laws governing commodities trading in 2000, presumably by the same laissez faire “geniuses” who repealed the Glass-Steagall Act, opening the doors to proprietary trading by commercial banks, and default “swaps” and other toxic derivative instruments. Who were those people?
2. I think the movie industry has a legitimate concern about the potential for attempts by contract holders to try to influence opening weekend box office. I can’t imagine that the industry is too worried about positive viral campaigns on the internet. But, given the falloff in DVD sales over the past couple of years, coupled with how soon after release box office revenues have begun to tail off, a negative social networking or other internet campaign has the potential to be very damaging.
That’s what Hollywood is saying, anyway. I don’t think that’s the issue uppermost in film companies’ minds, though.
Only about one in eight movies makes a profit. That’s partly because movie making is a high risk profession. But it’s also because Hollywood follows a series of complex, arcane accounting and operating procedures that have the effect of separating outside investors from their money in the most efficient manner possible. These investors seem to me much like the limited partners in oil and gas or real estate tax shelters. They get the ego satisfaction of rubbing shoulders with industry bigwigs, and the ability to name drop at social gatherings, but little else.
That’s because, until now, outsiders have only been able to exchange their money for a share of (usually non-existent) profits, not the revenue participations that all the insiders have. With the advent of commodity contracts based on revenues, outsiders have an alternative to accepting the bad deal they have been getting from the studios. I think it’s the potential loss of this hedge fund “dumb money” that really has Hollywood upset.