Futures that predict box office receipts for film releases are an appealing idea. Harness the collective brains of the market to predict whether a film will do well, and you have a useful hedging tool.
But the more you think about this notion, the more troubling it becomes.
Go back to the basics for a minute. Insurance is for risks that are unequivocally bad for everyone – like fires and shipwrecks. The insurer gets paid for putting its capital at risk to protect others – but it does not win big if these disasters happen.
Futures are for risks that are good for some and bad for others – essentially, price risks. Each party trades potential upside for certainty, and either can make a killing if it bets right.
Both insurance and futures were originally conceived to deal with risks outside human control – death, lightning, bad harvests.
Of course, futures are used to manage many risks of human-generated supply and demand. But so many people are involved that no one person or group should – if the market is regulated properly – be able to substantially alter the balance of supply and demand.
Anyone who did manage to specifically change the market price would be guilty of market manipulation, an offence – just as it would be a crime to cause an insured disaster such as a fire.
The limits of hedging
There is another whole category of risks – what could be called business risks, or product risks. These are risks where an identifiable group of people does have, quite legitimately, immense influence over the outcome.
Pretty well any business venture falls into this category. And these risks cannot normally be hedged or laid off to any third party.
Ford, for example, cannot take out an insurance policy to guarantee the level of its profits next year. The reasons are obvious. If any insurer or counterparty could predict how well Ford would do, enough to risk its own capital, it would know more than Ford’s own management. And if Ford’s profits were guaranteed, why would it have any incentive to try and maximise them?
Moreover, the appropriate vehicles already exist for those who want to invest in the risk of Ford’s success – buying its debt or equity.
No natural counterparties
Movies are business risks. Everyone involved in making, marketing and distributing a film is supposed to be trying their utmost to make it succeed. These individuals and companies therefore have huge influence on the outcome.
In the underlying markets covered by existing futures markets, any outcome is good for some parties and bad for others. But while the failure of a film is bad for the makers and distributors, who is it good for?
It is hard to see any group with a legitimate reason to wish for that outcome – except rival film makers. And would they want to insure their competitors’ mistakes?
The fact that films are business risks means it is very hard to see how a fair futures market could exist, and even harder to see a justification for it.
The promoters of box office futures are presumably encouraged by the existence of equity derivatives. It is permissible to invest in a company and buy a put on its stock in case things go wrong.
But these are public companies and the shareholders are at more than arm’s length from management, with basically no influence on how the firm is run. Using inside knowledge is punishable by law.
With films, anyone involved in making or investing in a particular movie would have a knowledge advantage. Why should they be allowed to lay off risks to less well informed punters in the street?
The movie exchanges’ vehement arguments that they would be able to prevent anyone manipulating the box office takings figures are entirely beside the point. The film makers would have influence on the film’s performance quite legitimately, by producing the film. It is this that makes them unfit participants in a futures market.
Would it not be the height of moral hazard to allow a film’s makers or investors to hedge their business risk? Once hedged, they could relax and let the movie be mediocre. Someone else would pick up the tab.
Yet if those involved in making or backing a film were banned from the market, movie futures would perform no risk management function – except perhaps for cinema owners.
The futures might be a legitimate form of speculation for unconnected third parties – like betting on sports matches. But at least with a football game, only the players are on the field, and they are highly motivated to win.
With a movie production, thousands of people are involved over a period of several years, all wielding a little influence on the outcome and gleaning a little knowledge. It would be good to know how you prevent all of them from betting – or giving tips.
Perhaps Media Derivatives Exchange and Cantor Futures Exchange should found a new financial centre for movie futures – in Las Vegas.