A Senate committee dealt a big blow to the plans of two trading firms looking to create a box-office futures exchange that would allow the movie industry as well as investors to wager on movie ticket sales. … Federal regulators only in the last week had given the first stage of approval to the exchanges. …
I was one of three programmers at HSX.com when Max was there, from 1997-2001. We learned a lot during that time, and I'm not surprised that it's taken this long to get such markets approved, and that such approval has resulted in forces pushing to make them illegal.
At that time, a "real money" market was just a dream, the primary goal of which was to allow independent filmmakers to raise money for promising projects. That market never got much interest, for two reasons mentioned in this post and in the comments and one not yet mentioned:
1- Unlike pork bellies or light sweet crude, the quality of the resulting movie product is not directly related to the "quality" of the participants. Even if the movie the stock was associated with had a contract with Writer A, Director B, and Big-Draw Stars C, D, and E, and Marketing Firm F -- you still could produce a bomb. Studios manage this risk by taking total hiring control, reading the script, watching dailies, and the like. You can do that with a small number of investors; you can't easily distribute all that for shareholders. Sure, shareholders could buy and sell based on their judgement of what information is distributed, but to have an open market all this information (i.e., the proto-movie itself) must be given away. We built a product called VirtualProducer.com that explored these options, and produced "Shadow of the Vampire" under that aegis. From that experience, it does not work. However, clearly something *could* work; Microsoft faces similar quality-of-product debates, and it's public.
2- Big studios currently control the entire market. Small independents find it difficult to enter the market because they don't have the cash buffer to help absorb risk. Anything that reduces risk or spreads it out therefore acts to destabilize the hold the big studios have on the market. They will therefore act aggressively to ensure that full risk is borne by the filmmakers, because they are the only filmmakers than can easily do so. This may lower the overall quality of movies and therefore reduce the size of the market, but it increases the big studios hold on their share.
3- Individuals within the big studios see their only method of getting promoted is to take full responsibility for huge successes and to fully deflect responsibility for failures. The system that is in place is well designed through the evolution of millions of such decisions to give the individual decision makers exactly the means to do this. New markets such as these may make sense for the companies, but for the individuals they represent a risk that no one will take because it breaks the mold and so they MUST take full responsibility for a failure, while the market distributes responsibility for success. Just like Greenspan's oversight, companies do not act in their best interest simply because the individual PEOPLE running the companies are acting in their own best interest. And they do not want the markets touching their movies.
So, those are the lessons I learned. I was just the programmer. Max was the markets guy. I think that in the end this sort of thing will get enough momentum (overseas, etc.) that it won't matter much what people are concerned about. I do hope that such markets can be created. I think they may help make more interesting movies.
A little? Accounting is more flexible than you seem to think...this can be a lot more than a little. And it is only the unpredictable part that matters.
Already is. Intrade is an offshore exchange trading box office instruments similar to what is being proposed by the Cantor Exchange and the Trend Exchange. The opportunity for so-called "real money manipulation" already exists. In addition, off-shore sports books carry bets on box office receipts.
I have to say Robin, you don't really address Guy's point. Prediction markets can only work if the underlying observable is difficult to corrupt. There are plenty of laws that ensure this is the case for financial markets, they'll be much harder to enforce in the movie market. Guy's point about inflating the budget of a movie is pretty good.
Advocating a thicker market, and then saying the market will work well because it isn't think enough seems a little disingenuous.
Of course there are states of the world in which what you say might be true, but you're hardly making a case that this is such a world.
The real problem is that a movie futures market would make manipulation hard and expensive. The system right now is far easier for studios to manipulate so its unlikely they will allow this to come to light in the US.
I mean, this is always what happens when an industry is against something and there are no other powerful or organized groups invested in the outcome! The political calculations are really obvious: a congressperson can either piss off a powerful industry that fills their campaign coffers. This is always going to happen when you have part of a government empowered to regulate the economy, have that part chosen democratically, and don't restrict industry's power to influence elections.
Or even better, give influential people in the movie shares in the box office receipts in place of wages. To prefer a bomb they would they would have to short sell it on these markets more than would be possible.
If rivals can manipulate a market more cheaply than, say, increasing their advertising or promotion budget for a film, they will do whatever is cheaper or more effective.
So, the issue really should be: how do you limit or prevent manipulation.
The answer could be something as simple as permitting only those who say the film to predict the outcomes. Say, you get a ticket receipt from attending the film, and that becomes the pin or id number entitling you to bet. Only viewers who saw the film could bet/
Industries tend to fear transparent contracts because they give them less latitude and threaten their pricing power. Look at iron ore, steel, and onions. (And, seriously? This was another "and onions" technically?)
We're not just talking about manipulating opinion here though. The studios have more direct influence over the outcomes. It's not compelling to argue that, on average, it doesn't make sense for studios to go long a title and then increase the number of screens. Trading restrictions and vigorous policing would lessen the opportunities for abuse, but from the CFTC's perspective, there may always be an unforeseen hole in the dike, and that's unacceptable headline risk, especially since preventing manipulation and consumer protection are central to their purpose.
Now, maybe a market traded by theater owners and off-limits to studios, or one based on industry-wide receipts would be more acceptable to the CFTC. Who will spend political capital to pry the amendment out though?
Read the material, but CFTC and SEC "experiments" would be contrary evidence.
How about rules instead?
Thanks for the detailed and thoughtful comments.
I was one of three programmers at HSX.com when Max was there, from 1997-2001. We learned a lot during that time, and I'm not surprised that it's taken this long to get such markets approved, and that such approval has resulted in forces pushing to make them illegal.
At that time, a "real money" market was just a dream, the primary goal of which was to allow independent filmmakers to raise money for promising projects. That market never got much interest, for two reasons mentioned in this post and in the comments and one not yet mentioned:
1- Unlike pork bellies or light sweet crude, the quality of the resulting movie product is not directly related to the "quality" of the participants. Even if the movie the stock was associated with had a contract with Writer A, Director B, and Big-Draw Stars C, D, and E, and Marketing Firm F -- you still could produce a bomb. Studios manage this risk by taking total hiring control, reading the script, watching dailies, and the like. You can do that with a small number of investors; you can't easily distribute all that for shareholders. Sure, shareholders could buy and sell based on their judgement of what information is distributed, but to have an open market all this information (i.e., the proto-movie itself) must be given away. We built a product called VirtualProducer.com that explored these options, and produced "Shadow of the Vampire" under that aegis. From that experience, it does not work. However, clearly something *could* work; Microsoft faces similar quality-of-product debates, and it's public.
2- Big studios currently control the entire market. Small independents find it difficult to enter the market because they don't have the cash buffer to help absorb risk. Anything that reduces risk or spreads it out therefore acts to destabilize the hold the big studios have on the market. They will therefore act aggressively to ensure that full risk is borne by the filmmakers, because they are the only filmmakers than can easily do so. This may lower the overall quality of movies and therefore reduce the size of the market, but it increases the big studios hold on their share.
3- Individuals within the big studios see their only method of getting promoted is to take full responsibility for huge successes and to fully deflect responsibility for failures. The system that is in place is well designed through the evolution of millions of such decisions to give the individual decision makers exactly the means to do this. New markets such as these may make sense for the companies, but for the individuals they represent a risk that no one will take because it breaks the mold and so they MUST take full responsibility for a failure, while the market distributes responsibility for success. Just like Greenspan's oversight, companies do not act in their best interest simply because the individual PEOPLE running the companies are acting in their own best interest. And they do not want the markets touching their movies.
So, those are the lessons I learned. I was just the programmer. Max was the markets guy. I think that in the end this sort of thing will get enough momentum (overseas, etc.) that it won't matter much what people are concerned about. I do hope that such markets can be created. I think they may help make more interesting movies.
A little? Accounting is more flexible than you seem to think...this can be a lot more than a little. And it is only the unpredictable part that matters.
It does. And that's yet another reason why trading by insiders is heavily regulated.
Already is. Intrade is an offshore exchange trading box office instruments similar to what is being proposed by the Cantor Exchange and the Trend Exchange. The opportunity for so-called "real money manipulation" already exists. In addition, off-shore sports books carry bets on box office receipts.
Kinch, consider stock markets. You could similarly argue that allowing short sales means the firm managers could profit from destroying their company.
I have to say Robin, you don't really address Guy's point. Prediction markets can only work if the underlying observable is difficult to corrupt. There are plenty of laws that ensure this is the case for financial markets, they'll be much harder to enforce in the movie market. Guy's point about inflating the budget of a movie is pretty good.
Advocating a thicker market, and then saying the market will work well because it isn't think enough seems a little disingenuous.
Of course there are states of the world in which what you say might be true, but you're hardly making a case that this is such a world.
The real problem is that a movie futures market would make manipulation hard and expensive. The system right now is far easier for studios to manipulate so its unlikely they will allow this to come to light in the US.
I mean, this is always what happens when an industry is against something and there are no other powerful or organized groups invested in the outcome! The political calculations are really obvious: a congressperson can either piss off a powerful industry that fills their campaign coffers. This is always going to happen when you have part of a government empowered to regulate the economy, have that part chosen democratically, and don't restrict industry's power to influence elections.
I have a whole post on manipulation.
Or even better, give influential people in the movie shares in the box office receipts in place of wages. To prefer a bomb they would they would have to short sell it on these markets more than would be possible.
Just make it a part of their job contract not to trade on the movie with big fines or jail if they do.
Jason, yes a regulator who can only look bad, never good, wants to allow the min possible.Bill I have a whole lit on manipulation; follow the link.
If rivals can manipulate a market more cheaply than, say, increasing their advertising or promotion budget for a film, they will do whatever is cheaper or more effective.
So, the issue really should be: how do you limit or prevent manipulation.
The answer could be something as simple as permitting only those who say the film to predict the outcomes. Say, you get a ticket receipt from attending the film, and that becomes the pin or id number entitling you to bet. Only viewers who saw the film could bet/
Industries tend to fear transparent contracts because they give them less latitude and threaten their pricing power. Look at iron ore, steel, and onions. (And, seriously? This was another "and onions" technically?)
We're not just talking about manipulating opinion here though. The studios have more direct influence over the outcomes. It's not compelling to argue that, on average, it doesn't make sense for studios to go long a title and then increase the number of screens. Trading restrictions and vigorous policing would lessen the opportunities for abuse, but from the CFTC's perspective, there may always be an unforeseen hole in the dike, and that's unacceptable headline risk, especially since preventing manipulation and consumer protection are central to their purpose.
Now, maybe a market traded by theater owners and off-limits to studios, or one based on industry-wide receipts would be more acceptable to the CFTC. Who will spend political capital to pry the amendment out though?
Do no harm is the bane of libertarians.