Saturday, April 17, 2010

Hollywood Futures Market A Good Idea?

My good friend, Tammy Hunt (talent manager and entertainment professional extraordinaire!), shot me an email yesterday asking if I thought the approval of the futures exchange for trading on film performance is a good idea. I had been following the progress of that story, but I hadn't really stopped to consider the implications.

This afternoon, I responded to Tammy, and I actually was pleased with my answer.  So, I decided to repost it here.

I would love to know what anyone else thinks on this topic. Please comment or tweet with your thoughts.  I'm curious to know how other film professionals view this.

My response to Tammy:

Tammy - 

That's a really tough question.  On the one hand, it sounds kind of fun to be able to bet on box office outcomes, and make some money if you're good at it.  But the stated rationale behind these models is to allow studios a vehicle to protect their risk.  In other words, they can bet on a certain level of performance that will give them some of their money back if the movie doesn't perform well.  That means they are betting against their success.

So, you have people who have some control over the product's performance betting that it will perform badly.  That's like letting a basketball player or referee bet on the game, right?  Obviously a bad idea.  Or maybe not.

The counter argument is that while the studio might make money from underperformance (as a result of its futures contract), it makes more money if the film performs well.  The futures bet is only a hedge that theoretically allows the company to take a larger risk on the success of the picture, which actually means it's good for the business.  If the studios can give the films a bigger push because they will get some of their money back if it doesn't work, that is actually good for the film industry.  

The larger risk is if individual executives play the futures market.  They could theoreticlaly sabotage a film, causing the studio to lose money while they cash in individually.  But that can be (and should be) monitored and punished severely.  I don't think many film executives would be stupid enough to try that, but it could certainly happen.

Going through that analysis, I believe it should be a net positive for the business.   There could be some abuse, but in reality it doesn’t severly undermine the motivation to succeed and it could be a very useful tool for the film industry.  And beyond that, I think a lot of smaller, unaffiliated investors will have a good time trying to guess which films will perform well.

Friday, April 9, 2010

Why Hollywood is Afraid of a Futures Market - The Truth

There is a lot of resistance in Hollywood to the futures market being finalized by Wall Street brokerage, Cantor Fitzgerald.  In short, CF is seeking final approval to operate an exchange that will allow investors to place bets on the future box office performance of Hollywood films.  Sounds like fun.  So why is there such aggressive resistance in Hollywood?

A quick story that will illustrate my point.  A few years ago, one of the big tech companies (it might have been Apple or Microsoft - I can't remember) started an office pool among its employees on which products would sell the most.  Interestingly, they found that the pool was a much better predictor of success than their product development process.  In other words, when a group of people are placing bets, it tends to accurately mirror the ultimate results.  The larger the group of people, the more accuracy.  And I suspect when they are betting serious dollars, it might sharpen the focus even more.

Hollywood, and specifically the marketing of motion pictures, is very much built on creating and controlling the perception of reality.  If you have a bad movie, you still might make money if you can convince enough people to see it before the word gets out that it's not very good.  In the age of instant word of mouth via social networks, it has already become difficult enough for marketers to control the message.  Now Cantor Fitzgerald wants to create a financial exchange that is likely to become an accurate predictor of the truth.  The truth -- often the enemy of people facing the task of selling a mediocre product.

Cantor Fitzgerald says that the film futures exchange will give the industry a legitimate way to hedge their investments -- a level of protection against a film performing badly.  I think the executives would rather maintain control of their own version of reality and hope they can get enough people to the theater to lessen the losses.

Actually, I see both sides.  I'd rather try to salvage success than bet on failure.  On the other hand, I'm always in favor of anything that brings more light and truth to a situation.  I'm betting Cantor Fitzgerald will ultimately prevail.

Thoughts anyone?