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Back to the Futures

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An article in the New York Times yesterday revealed that the MPAA (Motion Picture Association of America) is up in arms at the prospect that the Commodity Futures Trading Commission might approve the creation of a futures market that would deal in movie box office receipts.

I say, let 'em try!

Futures markets have traditionally been reserved for raw goods. In futures trading sugar is a commodity that is traded through futures contracts, but not salt water taffy. Sugar is the raw ingredient, candy is the resultant product after manufacture. Same with oil. Crude oil futures are traded, not gasoline. Why is that? Mainly because there is an inherent standardization to a raw commodity, but also a question mark as to how much that commodity will bring once it's brought to market. It's that question mark that becomes the gain or loss for the futures trader. Once the raw commodity becomes its final product, price fluctuation is severely limited so there's not much to bet on.

Perhaps this is what fooled the Einsteins at Cantor Fitzgerald and Veriana Networks (the two groups proposing the exchanges) to think that trading box office futures could work. The complete unpredictability of a film's performance. But it's an entirely different manner of unpredictability, and I wonder if they understand that.

To further disconnect this idea from true futures trading: while it's true that the value of futures contracts fluctuates according to many factors depending on the commodity, there's a best/worse case scenario that can be estimated as a basis, barring unforeseen events like a natural disaster, unexpected blight, economic crisis, etc. In any given contract period the trader calculates the risk involved going in and may gamble that a certain crop's yield will do well or poorly based on what's known about that commodity, interest rates, weather patterns, even political climate for less stable countries. The "gamble" is a calculated one.

Being a gambler and investor and having worked in entertainment finance for over 15 years, the last thing I would ever advise anyone to bet on or invest in is film box office grosses. Why? Oh, I don't know, let's ask renowned screenwriter/playwright/author William Goldman:

"Nobody knows anything."

You said it, Bill.

Mr. Goldman's statement, which has been quoted ad nauseum (including by me with great frequency) and attributed to all manner of people about pretty much anything that's unpredictable in life, was in fact a statement about show business, Hollywood in particular, and the unlimited surprises (both good and bad) awaiting any individual or company venturing into the entertainment industry. Yes the rewards can be great, but they're so sporadic and impossible to predict that even big movie studios often lose their nerve in the face of an expensive, potential flop.

Entertainment finance people spend untold hours and sleepless nights trying to figure out the monetary potential of any given film and the closest anyone in this business ever comes is to approximate a best-guess based on a virtual house-of-cards of assumptions. When something hits a mark we set or, thank the heavens, exceeds it, you never hear the words, "I told you so." No, the wise man or woman who made that prediction is too busy worrying that the other 10-15 films in that year's slate will miss the target. Like good ol' Charlie Brown, one minute you're the hero, the next you're the goat.

Here's the thing, people with a lot of money and/or people with access to a lot of money almost never have the slightest understanding of how the movie business works, especially from a finance point of view. But they almost always find out.

The hard way.

But go for it, boys, and don't worry. As long as you hit that wire with the connecting hook at precisely 88mph the instant the lightning strikes the tower... everything will be fine.