Analysis: In today's arid film-funding climate, a little legalized gambling might not be such a bad thing
(ALSO READ: "What You Need to Know About Movie Futures Trading.")
The way things are going, Hollywood might just get its wish. Trading on predicted box-office performance might not happen.
But given the state of film finance over the last 18 months, the question should probably be asked:
Is a little “legalized gambling” — as the MPAA calls it — really such a bad thing?
Though two proposals for movie futures trading have passed muster with the Commodity Futures Trading Commission, an all-out ban has been tacked onto the Senate's sweeping financial reform legislation.
If it passes — and unless financiers Media Derivatives and Cantor Fitzgerald come up with an alternate plan — the film industry could be missing out on a valuable tool that would ease the risk assocated with making movies.
That, in turn, could free up the vise grip on movie funding.
“Futures markets have been used to mitigate risk in various segments of the economy for years,” Robert Swagger, CEO of Chicago-based Media Derivatives, told TheWrap. “And there are a long list of hedge funds, private equity firms and banks which have removed themselves from the film-financing sector because they have no way to offset the risk."
“Our exchange is designed to meet the very strong capital needs of the film industry right now,” added Richard Jaycobs, president of Cantor Exchange.
Led by the Motion Picture Association of America, the opposition lobby has succeeded in characterizing these exchanges as mere betting on movie box-office performance.
But the fundamental purpose of any futures exchange, the backers say, is to reduce risk, not create more of it.
In fact, futures markets date back to ancient Greece, and have, in modern times, regulated prices for everything from heating oil to bread, offering market participants tools to hedge their positions and mitigate the unknown.
Too invested in a flop, or say, bummer potato crop? Set your bid low. Not invested enough for a sure-fire hit or bumper onion yield? Set your bid high.
“I now have some idea of what my heating bill will be next year,” Jaycobs told TheWrap, noting that the now-accepted practice of futures trading on oil was a controversial subject back in the 1980s.
“Every film is a gamble, so we should get away from calling (movie futures trading) ‘gambling.'” said Schuyler Moore, a professor who also helps investors buy into movies, testifying on behalf of Cantor Fitzgerald during last week’s House subcommittee hearing on the movie-futures issue.
“I guarantee there will be an enormous flood of financing for the studios,” he said. “This is an efficient way to off-shoot risk. There is always fear of something new. All it does is create an efficient transparent market that is absolutely needed. Studios will come to appreciate it.”
Perhaps more than anything else, the opposition has successfully tied innovative new markets based on movie futures to the kinds of risky derivatives trading that created the Chernobyl on Wall Street 18 months ago.
But that's apples and oranges, the financiers say.
Jaycobs noted that the exotic financial products, such as credit default swaps, which are currently under intense examination, were tied to risky residential lending, and had nothing to do with commodities futures.
Meanwhile, Hollywood also has successfully convinced Congress — 10 more members of the House came out in opposition Wednesday — that movies are not a product like wheat or oil, and should not be subjected to futures trading.
“We’re only one step away from being the Mob anyway,” one studio executive told TheWrap last week. “Movies are perishable — they’re not the kind of product Wall Street should bet on.”
Of course, as clearly evidenced by the drop in DreamWorks Animation stock the day after 3D film “How to Train Your Dragon” got off to a disappointing start last month, movies are traded on Wall Street already.
Box office performance also has a pretty important effect on larger publicly traded media companies like Time Warner, News Corp. and the Walt Disney Company.
Perhaps more compelling than any other argument for Hollywood to at least listen to the movie-futures pitch, the film funding sector is in bad shape.
Wall Street funding for independent film financing has gone from about $2 billion in 2005-2007 to almost nil today, according to Deutsche Bank. Over that same period, indie film financing arms have been whittled from 38 to approximately 11.The foreign pre-sale market isn’t much more fruitful.
Jaycobs believes the tide of opposition can be turned by creating a better understanding of how futures markets work and what they’re intended to do.
But with Congress set to vote on broad-ranging legislation that would curb derivative products in the next few weeks, he concedes Cantor has its work cut out.
“This is not a period in our country in which financial innovation is being rewarded,” he said.
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