The eleventh-hour pushback by the movie industry and Congress appears to have worked.
Two firms, one from New York and the other in Chicago, have been pushing in recent months for approval of a futures exchange that will allow investors to speculate on Hollywood box office profits and losses as they do about the future prices of orange juice and pork bellies.
But the ruling – which was due Friday afternoon according to David Gary of the Commodities Futures Trading Commission (CFTC) – will be held another week. The request by Chicago-based Veriana Networks, deals with an exchange that would be open only to institutional investors. Another, by New York-based Cantor Fitzgerald, would be open to anyone.
Movie industry vigorously objects
National debate has heated up in recent weeks because the Motion Picture Association of America (MPAA) objected vociferously to the idea and began to enlist others – including the Directors Guild of America, the Independent Film and Television Alliance and the National Association of Theater Owners – to urge the CFTC to deny requests for the exchanges.
California’s US Senators, Barbara Boxer and Dianne Feinstein, also urged caution by the commission, as did US Representatives Lamar Smith of Texas, Robert Goodlatte of Virginia and Henry Waxman of California.
The “contract market is not warranted where, as here, its sole purpose is to provide a trading platform for instruments that do not constitute legitimate futures or option contracts,” said the letter sent by the MPAA coalition. “But [they] are in essence wagers that are susceptible to manipulation. Rather than providing a real and useful means for hedging risk or price discovery, these instruments will be harmful and burdensome to the motion picture.”
The letter charged that establishing online box office wagering marketplaces will be “detrimental to the industry they ostensibly are created to serve.”
The Chicago-based firm, Veriana, carries on its website this rebuttal, written by the Futures Industry Association (FIA):
“The MPAA has asserted that futures trading is a form of ‘legalized gambling’ that has no commercial interest or value to the public. Nothing could be further than the truth. Futures markets have proven to be vitally important mechanisms for risk management, as evidenced by the phenomenal growth in the use of futures contracts by a wide range of commercial and industrial enterprises, both here and abroad.”
FIA also counters MPAA claims that these new contracts could lead to “rampant speculation and financial irresponsibility…. It is clear that the MPAA is not familiar with the futures markets or the regulatory framework within which they operate.”
Industry observers similarly line up on both sides of the issue.
“I agree wholeheartedly with the MPAA and the movie industry who hold that this is pretty much a thin veil for basic gambling,” says Chris Lanier, president of Motion Picture Intelligencer, a box office prediction firm. “If you want to lose all your money that badly, why not just go to Las Vegas?” And Douglas Gomery, a retired professor of the economics of cinema at Maryland University, has called the idea “gambling, pure and simple.”
New investors, more capital
“In particular, the trading of these contracts gives useful information to all market participants about the demand, profitability, and growth potential of various types of movies, including the film studios,” Pagano says. “The exchanges can aid in the movie industry because film investors will now have a way to hedge their investments which, in the end, can attract new investors and generate more capital from existing investors.”
He surmises other reasons for the vehement industry resistance.
“It could be that the film studios are concerned that they will lose their monopoly position on information about various movies because the futures exchange will publish information which all market participants can then observe and analyze,” says Pagano. “This is the type of information that is currently held privately by the film studios and thus they could be fearful of losing their informational edge to non-Hollywood players.”
As debate continues to heat up prior to the CFTC’s decision, Pagano says one concern of the film studios that is correct pertains to market manipulation.
“It is crucial that the exchange operator … create a set of trading rules and monitoring systems to ensure the market is a level playing field for all participants,” he says. ”Because if it is perceived to be a rigged market, then retail investors and possibly other market participants can be taken advantage of and this could also be disruptive to the film studios’ operations.”