Friday, March 12, 2010

Thoughts on the New Movies "Futures Exchange"

There is this new "futures exchange" coming which will enable seemingly anyone to bet on the box office receipts of new movie releases. The article was in today's NYT's Media section. The exchange will be based on the existing successful "Hollywood Stock Exchange" (HSX) but with real money. Both are managed by Cantor Fitzgerald and the new project seems to be generating a lot of publicity in today's world of "crowd sourcing" and "crowd wisdom." Is it really such a great idea?

Let's follow the money and look at the participants:
(1) Studios/insiders have a substantially better view of how a movie would do by the time it is released than does the general public. How? They prescreen heavily, make adjustments, sign distribution deals, determine the marketing budget, follow the buzz, and so on. Personally, would you trade against them? Per the article, the studios are allowed to trade "within limits" whatever this means. The fact that they have not been able to "lay off box office risk" with insurance companies (risk pros) ought to tell you something about how great of a deal this is: the informational asymmetry is staggering. Not only that, but also, unlike a wheat producer selling weather risk, the studios CAN affect the outcomes. If this is not moral hazard, I do not know what is. If the studio buys enough "protection" on movie X, guess what, they will cut the marketing budget and # of screens!

(2) Cantor operates the exchange, and is probably interested only in ramping up the hype to attract the largest number of "investors". Cantor certainly does not care if anyone makes money, they just want volume. The President speaks of a "wide audience": quantity of participants is inversely proportional to their quality. I do wonder if there is a level of responsibility here that is ignored: stock brokers have to ascertain that the clients' risk profile matches the investments. How would Cantor do that? Would they accept credit cards? PayPal? Bets from people under 18? Is the whole thing structured as a "futures" exchange in order to avoid gambling regulations? This kind of bets are likely to be seen on European bookie lists, and I personally see no difference between "investing" in a certain outcome for a movie vs. "betting" on next year's SuperBowl champion. Is a win there taxed as a short-term capital gain? Are the losses deductible? And so on.

(3) The public: this is the tuna. The public has no informational advantage over the studios. Look at regular stock investing/trading. Even with huge amounts of publicly available information, audited financials, historical track records, and so on regarding potential stock investments, study after study show that the average active market participant underperforms the market. Compare that to investing in a completely unknown endeavor (a new movie): what are the chances that the average participant will be successful? I am sure that there will be widely publicized "success stories": these will be exceptions. The only market participants that will consistently make money are (1) the studios and (2) the exchange owner.

Think of it this way: the exchange owner charges rent. The studios have a deck of cards that they can look at in advance and place bets accordingly. The public can place bets without seeing the cards. Who do you think will win here?

I am all for markets for ideas, like InTrade, where one can instantly observe the crowd wisdom, even when it is very wrong (like the Great Hillary/Rudy Race of 2008). But it seems to me that on this exchange, the odds are stacked very much against the individual participant.
I will leave you with a quote from Howard Marks, found in his October 2006 memo: "Since I moved to Los Angeles in 1980, my friends in “The Industry” have been unanimous in one piece of advice: never invest in movies. Yet The Wall Street Journal of April 29 carried a story headlined, “Defying the Odds, Hedge Funds Bet Billions on Movies.”
For decades, movie studios have gladly accepted millions of dollars from a group
of investors collectively dismissed as “dumb money”: deep-pocketed dentists, oil
tycoons and other wealthy individuals eager for a piece of the glamorous but
high-risk game of film production. But the biggest influx of money in Hollywood
these days is coming from sharks, not suckers: hedge funds, private equity funds
and investment banks.

Take the example of “Poseidon,” which was co-financed by hedge fund-backed Virtual
Studios. It has brought in gross revenues of $180 million worldwide since May against its
production budget of $160 million, meaning that after the deduction of at least half the
revenues for distribution charges, advertising costs and exhibitors’ fees, it’s still a big loser."
(PLUG: the author of Barbarian Capital blog is available for the right consumer- or inflation-focused analyst opportunity within the US)


Jim said...

Mr. Barbarian,
How does one reach you?

Barbarian Capital said...

Jim-- please leave an email address in a comment. It will not be published and I will email you. I do not want to leave email addresses on the blog. Alternatively, you can direct-message me on twitter.