The inevitable box-office futures racket will finally launch next week, with Cantor Fitzgerald making good on the long-awaited promise to let you bet real money on the prospects of Hollywood films. Regulators have approved, and Cantor is counting on a healthy share of players at the Hollywood Stock Exchange (which Cantor owns) to bite at the opportunity to gamble their cash on Avatar, Valentine's Day and the like. But the real value is for studios: Finally, flop insurance has arrived!
While it's nice of the president of Cantor Futures Exchange to propose this as a new kind of day-trading for film wonks ("I've worked in the futures industry for a long time," Richard Jaycobs told the NYT. "And none of the products has the overall appeal that this does. This just has a tremendous potential audience."), let's think about this for a second. The film industry is too volatile and too dependent on human caprice and ego to ever make a reasonable market for casual speculators. It works on HSX because it's free.
Here, however, where a contract earns you one dollar for every million a movie makes over its projected domestic gross, it's kind of weak sauce. If Inglourious Basterds were projected to make $50 million, for example, a $50 contract would have paid you $70 in profit on its $120 million gross. Not bad, right? Except that Basterds made an additional $193 million internationally -- more than 60 percent of its eventual worldwide gross. Foreign is where the real money is; anybody who follows box-office close enough to gamble here knows that. And they'd eventually want a cut.
Furthermore, Basterds never would be projected at only $50 million by the "traders" determining the numbers, which will probably always be inflated and then explained away by anticipating IMAX and 3D surcharges, shrinking theatrical windows, marketing strategies (or the lack thereof) and whatever other variables Hollywood presents.
This inflation, coupled with the ability to sell contracts -- i.e. to "short" a movie -- makes the exchange a pretty extraordinary opportunity for studios to hedge on expected bombs or disappointments. Consider The Love Guru, which Paramount bottomed out with in 2008. That film made $32 million domestically. Let's say it was projected to gross $80 million. If Paramount knew it had a stinker on its hands, it could sell a few hundred thousand contracts at $80 apiece. That would earn the studio $48 per contract, netting them $9.6 million on 200,000 contracts, $14.4 million on 300,000 contracts, so on, so forth.
The NYT vaguely reports that the exchange has worked around this predicament: "Conflict-of-interest issues are handled by limiting the amount a company can hedge through the exchange, so that a distributor could never make more money by betting against a film through futures than by having that film succeed in theaters." But they don't need to make more money. Even getting a nice chunk of the marketing budget back would make studio execs feel better about themselves in the morning.
The only way this can all work, of course, is if Jaycobs's prophecy is accurate, and people do flock to seek fortune in the market. And the only way that'll happen is if they can be sure that the studios haven't rigged the game in their favor by sandbagging or abandoning films they can recoup good money for on the exchange -- all while convincing those projectors not to believe the tracking data on, say, Speed Racer or Meet Dave. Oh, and if I'm going to lay money down on Avatar, I'd better see something off that $2 billion foreign gross. It's only reasonable. Which means, of course, it could never happen in Hollywood.
ยท A Place to Bet Real Money on Movies [NYT]