Wall Street is attempting to create a new exchange that would allow investors to trade future contracts based on how well upcoming films do at the box office. While this might excite movie buffs who hope to finally monetize their overabundance of film knowledge, Hollywood is not amused. In fact, the Motion Picture Association of America is trying to prevent the creation of the new exchange. It has some legitimate reasons for doing so, but the film industry could benefit significantly from the new futures market.
The New York Times explains several of Hollywood's complaints. Some are sensible, others are not.
Conflicts of Interest
The movie industry worries that studio employees could be tempted by the possibility of making money through this new futures market. If so, then that could affect their work. Think about a sports player or coach betting on a game. If a football quarterback bets against his team, then he could a purposely mess up so that he profits. The same could happen with a movie if its fate could be bet on.
Insider Trading Concerns
This also leads to a broader concern: insider trading. This potential problem was also brought up here. Anyone who knows nonpublic information about an upcoming film has an advantage on betting for or against it. One problematic example, in particular, is movie screenings. These early viewers have seen the product ahead of time and can capitalize on their experience. Will movie studios really be expected to submit lists of those who have viewed the film to the SEC to control insider trading? Anyone obtaining an illegal bootleg could also benefit. The last thing Hollywood wants is more incentive for hackers to acquire movies before release.
But not all Hollywood's worries are so serious. One reported fear is that people could manipulate the market by creating rumors about a film. If there's anything that the entertainment industry already has plenty of, it's rumors. There are entire magazines devoted to celebrity gossip. More rumors might be annoying, but if a film is legitimately good, then rumors shouldn't ultimately have much effect on its box office receipts.
Movie studios are also apparently falling victim to the fallacy that short sellers can wreck a movie's profits. Let's think about different futures -- those for corn. Imagine that investors overwhelmingly believe that something is going to hurt the corn market and prices will plummet. They short corn futures. How does that affect how well the corn grows? It doesn't. Does it affect how many people ultimately by the corn? Nope. The same goes for movies. If a film is good, then short sellers will have precisely zero impact on its box office receipts. Moviegoers aren't going to start checking the futures market before they go to the theater -- they're going to rely on previews, advertising, reviews and word-of-mouth, as always.
One Huge Advantage
It's a little surprising that the movie industry is fighting this exchange, because it could ultimately benefit them in a very big way: it will encourage investment in films. If someone is worried about the risk inherent in funding a new motion picture, that person can now hedge the investment through a futures exchange. The ability to hedge allows for a smoother, less risky and more predictable revenue stream -- something the movie business currently lacks. This serves as the legitimate business purpose for trading film futures, according to Cantor Fitzgerald and Veriana Networks, the firms trying to create the new market.