Wall St. Sets Its Greedy Eyes on Shaking the Silver out of Hollywood

Here's how it would work. Hollywood studios, actors, directors, investment banks, hedge funds, and anyone else would be able to buy and sell contracts based on the value of all ticket sales in the first four weeks of a movie's release. According to Cantor Fitzgerald's plans, the contracts would each be worth one-millionth of a given movie's gross sales during that four-week period. Let’s say you thought Avatar would pull in $500 million during its first four weeks. So, you buy 100 futures contracts at $490, figuring that when Avatar made $500 million you’d be up $1,000. Unfortunately, as it turned out, Avatar "only" made some $430 million domestically in the first month after its release—meaning that you’d lose a cool six grand.

One problem, skeptics say, is that Hollywood insiders could have a huge advantage in such a market. People in the movie business often have far greater access to crucial information about a film’s box office prospects than ordinary investors do—such as how big the marketing budget will be or how bad the performances are. "If the industry is selling, odds are that it is a bad idea to buy," says Dean Baker, codirector of the Center for Economic and Policy Research.

Another problem, says Stout, the law professor, is that such a market creates "all sorts of perverse incentives to manipulate the success of movies." Let’s say you were responsible for Gigli, and you realized during filming that it was shaping up to be one of the worst movies ever made. Instead of writing off the $54 million you’d shelled out to make the film, you could simply buy up a stack of futures contracts priced on the assumption that the movie would tank. Then, to nudge that failure along, you could slash the marketing budget, or decide to add 30 more dreadful minutes to the final cut. Played correctly, a studio could inflict a movie like Gigli on the world and still turn a profit. If box office futures trading happens, being a Hollywood insider would take on a whole new meaning.

Proponents of the concept argue that the plan would simply allow moviemakers to offset their risks. Media Derivatives, Inc., another company that has applied for government approval for a box office futures market, said in a submission to regulators that it wants to enable "risk transfer…from the producers, studios, theaters, and financiers/film funds to a community of speculators willing to assume these risks in return for being paid risk premiums."