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Guest Post: Wall Street’s Revenge on Hollywood

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By Gonzalo Lira, a novelist and filmmaker (and economist) currently living in Chile

Traditionally, the way that the Wall Street-Hollywood relationship works is, Wall Street arrives in Hollywood with much pomp and circumstance, carrying boatloads of cash to invest in movies. Hollywood—delighted with this new money—steers Wall Street towards some “premiere” and “prestige” projects. Wall Street—like a wide-eyed rube—invests in these seemingly prestigious, supposedly top-tier project—and promptly loses all that fresh cash on these box office duds.

Wall Street screams and curses and moans and belly-aches, and finally gets back on the red-eye for JFK, broke and defeated. Hollywood, of course, stays behind in California, working on her tan as she waits for that sweet Arab money to come to town. Or maybe some shy German with a clever tax incentive will save the day. Or maybe some exotic Latin American cell-phone money will show up. Who knows who it will be—Hollywood doesn’t care. All Hollywood knows is, some new sucker will come to town, thinking he’s King of the World—another sucker just begging to be fleeced.

Only two outsiders—Joe Kennedy and Howard Hughes—ever managed to make money in Hollywood. Every other outsider—including Wall Street—has lost money in Hollywood—because all those outsider were playing Hollywood’s game.

The name of Hollywood’s game? Scripts.

Hollywood insiders never have—and never will—offer outsiders the strong scripts, the sure winners. The strong scripts and winning projects, the studios keep for themselves—obviously. Instead, the studios and other insiders always sell outsiders—including Wall Street—on the dodgy projects: The projects that some movie star or other dreams of making, but which every studio realizes will be a nightmare to produce. The projects that will win awards, but die at the box office. Think “The Hurt Locker”—a bunch of gold statuettes, but not much green. Think “Hudson Hawk”—Bruce Willis happy, but the bankrollers broke.

That’s Hollywood’s game. That’s how Hollywood has hustled—and will continue to hustle—outsiders.

Including Wall Street.

But finally—after decades of getting fleeced—Wall Street got smart: Instead of playing Hollywood’s game, now they’re trying to get Hollywood to play Wall Street’s game. You could even call it, “Wall Street’s Revenge”.

Wall Street is trying to set up a movie futures exchange.

The idea is simple: Just like with any other commodity, futures contracts would be bought and sold on yet-to-be-exhibited movies. The bets would be on the box-office receipts of these movies.

The rationale is, a futures market would hedge against losses on movie projects.

Of course, synthetic derivatives would be allowed—which immediately gives lie to the rationale of “hedging the market risk”, and reveals the movie futures exchange for what it is: A way for Wall Street to bet a lot of money on Hollywood movies. Enough that—just like with the mortgage industry—the Wall Street bets will seriously destabilize the underlying market the bets are being made on.

Destabilize, and likely end up destroying.

Right now, the Commodity Futures Trading Commission has given Media Derivatives the right to set up a market in movie futures contracts. They’ll call this market The Trend Exchange (catchy, ain’t it?).

But here’s the real catch: Right now, the CFTC has approved for the creation of the market, but has yet to approve the actual contracts. So futures trading on movies exists for now, only no one is allowed to actually buy or sell a contract.

When first proposed, Hollywood dismissed the idea—but now that the CFTC approved the creation of the market, Hollywood is having a complete cow.

And with good reason: A futures market on film box office performance would make Hollywood play Wall Street’s game. And Hollywood knows it will lose. Individual studios might win—but the industry as a whole will lose. And unlike other industries, Hollywood is remarkably close-knit, in the face of industry-wide issues and threats. Hollywood won’t roll over on this issue.

Before anything, there are three things that any non-Hollywood type ought to know.

The first is, movies aren’t commodities. They might seem interchangeable, but they most certainly are not.

An ear of corn is no different from another ear of corn, a bushel of wheat no different from any other bushel of wheat. A baseline quality requirement to corn, wheat, oil, gold or any other commodity insures that a pound of copper in Chile is the same as a pound of copper in London.

But, say, a pair of romantic comedies? You have masterpieces like “When Harry Met Sally . . .” or “Pretty Woman”, all the way to disasters like, “French Kiss” and “The Mexican”. Notice how the first of these two pairs starred Meg Ryan at her peak, the second two Julia Roberts, also at her peak. They were similar in length, rating, demographic target, everything: But one pair was awesome, and the other two sucked canal water.

And this was reflected at the box office. The qualitative difference between one movie and another plays a huge—not to say determining—factor in its success. Just because two films are rom-coms targetting similar demographics and with similar (or identical) stars, doesn’t mean they’ll perform similarly. Or even remotely similarly. Sequels—which are repetions of the first picture, with the same cast and crew and even story—often are nowhere near as good as the first installment, and nowhere near as successful (though not always—sometimes shitty sequels do better than the original).

The second thing a non-Hollywood type ought to realize is, regardless of the La-La Land navel-gazing and self-importance, Hollywood is an exceedingly small business.

Consider total box office: Last year, 2009, the total gross receipts for all movies shown at all the movie houses and cineplexes in the United States was $10.64 billion.

Boeing Aircraft sold $60 billion worth of airplanes, just last year. Just Boeing. In fact, according to the Forbes Global 2000, there are 750 individual companies that sell more than all of Hollywood’s domestic box office. And remember: The theaters take roughly half of the gross box office—so the film distributors (the studios) only saw about $6 billion of that $10.64 billion pie.

Of course, foreign box office is a factor—so are the other distribution windows, such as DVD, Blu-Ray, pay-per-view, premium cable, basic cable, television. Detailed figures for the income from these windows is difficult to get with any certainty, for various reasons that are irrelevant to this discussion. But an estimate of about $50 billion is reasonable.

$50 billion worldwide gross income, from the entire Hollywood movie-making business. UPS and Caterpillar had sales greater than that. Walgreens alone had sales 20% greater than all of Hollywood—and Walgreens has no stores outside the U.S.

I’ve deliberately refrained from mentioning commodities, because then, the size of the movie business becomes ridiculous. Suffice to say that gold—among the smallest of the commodity markets—has an annual production of about 80 million ounces, about $90 billion. And gold is gold—movies are dodgy.

It’s such a small business that an average movie that grosses $70 million theatrically is a big success—that’s how small-bore Hollywood really is.

Finally, the third thing a non-Hollywood type has to understand in order to understand the movie business is, a film is nothing without P&A—prints and advertisement. That is, the marketing and distribution budget to make a film a success.

If the average negative-cost of a movie is $50 million (“negative cost” being the cost of producing the picture, with all salaries and production fees included, but before spending a nickel on P&A), then the average P&A commitment is around $25 to $35 million.

But this money isn’t used mechanically. It’s not a matter of simply sticking $30 million into a slot and bam!—you have a movie marketed and distributed.

Distribution and marketing are tricky—especially the latter, obviously. Marketing talent and imagination can make a puny $5 million marketing budget go a long way, while stupidity can make a $50 million marketing budget disappear without garnering any meaningful box office results.

So these three factors—movies aren’t interchangeable like commodities, movies are a small business with small bore numbers, movies’ success depend on the near-perfect execution of the marketing and distribution campaign—add up to a simple reality:

Any futures market in movies will be gamed. Easily gamed.

Distributors will torpedo the marketing of a potentially successful film, if they figure that betting against a picture in the futures market will actually make them more money. Officially, they’ll spend the P&A money—but they’ll spend it ineffectually, so that the film might fail. This is very easily accomplished—it often happens even when the marketers at the studios are desperately trying to make of a movie a success.

On the other side, in order to make a film a “success”, so as to clean up on a futures market, a studio or other interested party will simply hire out an entire theater. If these futures are synthetic (as the futures will likely be, or else why bother with such a small industry), then spending $30 million to make a strong opening weekend seems a small price to pay, if you stand to earn $300 million on your futures contract.

Many proponents of a film futures market claim that it’s a way for producers and studios to lay off the risk of films—but this is simply bullshit, as anyone with a passing acquaintance with film production and film financing can tell you.

Hollywood actually already has a very efficient and effective system for laying off risk: It’s called rights sales. A producer will sell a project in a specific territory, or a specific distribution window, to a local distributor.

That’s what New Line did with “The Lord of the Rings” trilogy—you thought they actually went ahead and blew $300 million on a trilogy about hairy midgets, without laying off their risk? Even before they shot a single foot of film, New Line sold the theatrical rights to various territories—they thereby reduced their potential profits in those territories, but covered a big chunk of the production budget. Disney did the same with “The Sixth Sense” before its release—to their regret later on, of course.

In fact, rights sales—which studios and producers use to lay off risk—is the entire reason of the Cannes Film Festival, MIPCOM, and other industry gatherings. The Palm d’Or and all those black tie events are just the cherry on the sundae—the business of Cannes and the other get-togethers is to pre-sell projects, so as to simultaneously lay off risk, and find financing for a project.

So the argument that Hollywood doesn’t have a way of reducing or off-setting or actually eliminating risk altogether is nonsense. Futures are not necessary, as there are mechanisms in place that serve the purpose.

The only reason for the existence of a Hollywood futures market is for non-participants—ie., outsiders—ie., Wall Streeters—to bet on films. And that’s just a casino mentality that serves no rationale, except participants’ greed. A casino mentality run amok.

Given the mix of ego, insecurity, sex and ambition that fuels the business, Hollywood already has a casino-like mentality on its good days—injecting steroids in the form of futures into the mix won’t help anyone, and will in all likelihood hurt the industry. And let’s not forget, Hollywood is one of the few American industries which still has a net surplus with the rest of the world.

Bets on Hollywood box office performances are a fun parlor game—I’ve played it myself, for trivial sums or rounds of drinks. However, actually making futures contracts a reality—and presumably betting real money on them—will wreck a very small, very fragile industry, to no useful purpose.

But hey, Wall Street seems hell-bent on driving the entire economy off the cliff. So why not add Hollywood?

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38 comments

  1. DownSouth

    ► “Detailed figures for the income from these windows is difficult to get with any certainty, for various reasons that are irrelevant to this discussion. But an estimate of about $50 billion is reasonable.”

    That ought to be good for at least $2 or $3 trillion in derivatives contracts, that is as long as we continue to allow Wall Street to buy fire insurance on other people’s houses.

  2. jake chase

    It is extremely unlikely that equivalent intelligence has ever been expended on the analysis of a more trivial subject. You are asking us to believe that movie scripts written to appeal to 12 year old girls are qualitatively different? There have not been five movies worth the time of an intelligent adult since 1968.

    1. Gonzalo Lira

      Five movies since ’68 that most intelligenct adults would consider worthwhile: “The Godfather” “The Godfather Part II” “the Conversation” “Apocalypse Now” “Peggy Sue Got Married”—and that’s just from Coppola. Forget about Woody Allen (“Annie Hall”, “Manhattan”, “Crimes and Misdemeanors”, “Another Woman”, “Match Point”), Scorcese (“Taxi Driver”, “GoodFellas”, “Life Lessons”, “Casino”, “Mean Streets”), and let’s not forget Stanley Kubrick (“2001: A Space Odyssey”, “A Clockwork Orange”, “Barry Lyndon”, “Full Metal Jacket”, “The Shining”, “Eyes Wide Shut”—oops, sorry, that’s six for Kubrick)—all after 1968.

      As to movies for 12 year-old girls that were masterpieces in film, try “The Black Stallion”, “Coraline”, “Toy Story”, “Little Women”, “Beauty and the Beast”—also all after 1968.

      So jake chase, with some confidence I can say, you’re an idiot.

      1. colinc

        WTF? Are not documentaries also “movies.” I generously submit a partial list…

        “Why We Fight”
        “Iraq for Sale: The War Profiteers”
        “White Light, Black Rain”
        both “Zeitgeist” movies
        “The Corporation”
        “A Flock of Dodos: The Evolution-Intelligent Design Circus”

        …and while not actually a “movie,” per se, the BBC-series “Century of Self.”

        However, I’ll concede that none of these could actually qualify as “entertainment” and probably(?) did not “originate” in la-la-land. With regard to that quality…

        “The Matrix”
        “12 Monkeys”

        …and a couple others I can’t seem to coerce my synapses into recalling. Perhaps I’ll add them later if/when I remember.

      2. Carrick

        I have to take exception to Eyes Wide Shut. Photographed really well, but was utterly dumb. Kubrick only made it under ransom.

        And calling Toy Story, Little Women, and Beauty & the Beast masterpieces is.. ridiculous.

        I think one of the reasons recent good films don’t linger in our memory as well these days, is because we have so many recent bad films replaying on cable and home playback devices. Notice that soon after the number of broadcast channels expanded, and cable movie channels and :aserdisc/VCR appeared, the ability of mediocre recent films to disappear from our consciousness declined.

        There’s always been an abundance of awful film, and a few gems. Those gems don’t continue to shine as bright on a few precious broadcast slots now.. they have to share space with their lingering dull contemporaries.

      3. patb

        Aliens, Close Encounters, The Usual Suspects,
        Children of Men, V is for Vendetta, Pan’s Labyrinth,
        Wedding Crashers, Donnie Darko, Slumdog, Shaun of the Dead,
        Lord of the RIngs 1,2,3, Dark Knight,

        Goodfellas, Pulp Fiction, The Matrix,Fargo, Glengarry Glen Ross, trainspotting, reservoir dogs, The Crying Game, Leaving Las Vegas, eyes wide shut, apollo13, Clerks, American Beauty

        Blade Runner, Blue Velvet, Brazil, Princess Bride,
        who framed roger rabbit, sex lies and videotape, when harry met sally, Gandhi, The Road Warrior. The Blues Brothers

        Taxi Driver, Clockwork Orange, Network life of brian,
        the man who would be king, deliverance,Dawn of the Dead.

    2. NotTimothyGeithner

      Have you seen a lot of old movies? A lot of them really aren’t that good. Sure there is “Plan 9 from Outer Space,” but there sure is a lot of overrated crap out there from the pre-1968 period.

      I’ve never seen “Plan 9 from Outer Space,” but if “Gone with the Wind” is considered great, Plan 9 must be completely unwatchable.

  3. bob

    Re: the “small potatoes” size of Hollywood. Fascinating that such a small sector has such outsized influence on public policy issues, particularly copyright. Negative economic impact due to prevention of innovation in other fields (software and IT come to mind) could well outweigh the entire movie industry.

    In a different vein, will the movie futures exchange cover the north-of-Hollywood porn industry? Not many theatrical releases there, but I’m guessing there are winners and losers to form the basis of bets, or rather, investments.

    1. Gonzalo Lira

      Actually, as a business, porn has better returns than mainstream features—but I don’t think there’s enough profit for me to work in that particular industry, sorry. I’ll whore it up metaphorically on Wilshire, rather than actually in the Valley.

  4. attempter

    Although corporate Hollywood is one victim for whom I wouldn’t shed any tears, still the big picture here presents the same image as always: this absurd and obscene state of affairs where mere back-alley betting is legalized and enshrined as part of the economy.

    The solution is the same as in every other case of speculation: ban it, outlaw casino “finance”, restore the bucket laws or something stronger, return this garbage to the back alley dives where it belongs, and let the Wall Street scum place their bets and try to enforce their “contracts” there.

  5. Steve

    “And gold is gold — movies are dodgy.”

    I HOPE this is a true statement!
    Unfortunately these days, they are probably both dodgy.

    1. Gonzalo Lira

      I think you’re right, painful as it is for me to say it. The whole financial world seems as if it took a giant tab of acid, then was let loose to go wreack some havoc.

  6. scraping_by

    “Any futures market in movies will be gamed. Easily gamed.”

    Many performances of “Springtime for Hitler.” Yes.

    Philosophical question: Why is it so much of modern life seems like satirical sketch comedy?

    1. Gonzalo Lira

      Good question.

      A sign I once read: “Life is a test. It is only a test. If it were the real thing, you would have received instructions, telling you where to go and what to do.”

      Maybe it’s not a test, per se—maybe it’s a dress rehearsal to an improvised farce.

      1. colinc

        Interesting quote but at least somewhat erroneous. Life is more of an ill-conceived, poorly prepared and uncontrolled experiment. There are 3 options…

        1) Your life can be YOUR experiment.
        2) It can be an experiment by/for someone else.
        3) Some “blending” of 1 & 2.

        Regardless, they all reach the same terminus, the only “absolute certainty” in all the universe.

      2. Michael Fiorillo

        “…maybe it’s (life) a dress rehearsal to an improvised farce.”

        Very nicely put, but then the Evil Clown gets you at the end.

  7. abelenkpe

    @ Jake: Clearly you should never involve yourself with trading hollywood futures as hollywood never makes movies for 12 year old girls. They make movies for 14-21 year old boys, which explains their vacuous and violent nature.

    Hollywood is already disproportionately influenced by marketing. This would ruin the business. Hopefully it will not gain any traction.

    You know, I read these financial sites often and the comments sections are always filled with bored aged gasbags whining about how we don’t make anything in this country. We do. We make movies. It employs thousands of people at good wages and our products are in demand all across the globe. But you would be happy if this would disappear too? Nice.

  8. Valissa

    What a delightful and fascinating post this is… both educational and enjoyable, what more can one ask of an author? I had no idea that Hollywood’s profits were so small, comparatively speaking.

    This article speaks to what I see as a growing trend. It seems that the Wall Street has been seeking to create ever more avenues of profit by suckering more and more industries into buying into their market betting casino financial models. Financial innovation OR simply conning the marks!

  9. mey

    Great article, I’d never even thought of this subject before. Thank you for the intro, especially for the laymen.

  10. Eff

    I work in this casino industry.

    It is a mixture of psychopaths, wannabees, and HELLS angkles.

    Gaming it a little more than it already is, would constitute a normal development for the aforementioned.

    What am I doing in this bunch? I’m a crafts man, which after all, are needed for any actual production.

    Final point, the industry I’m in has promoted the destruction of social ideals in America. All that’s left is this seedy, ugly rat-scum dysfunctional, disintegrating “society.”

    I’m not sure where the hits are going to come from this year.

    I thought the “Hurt Locker” was an apt metaphor for America: dysfunctional, effed-up, doesn’t know how it got there, doesn’t know how to leave. Cry me a river.

    One pathetic American movie, amongst too many losers.

  11. Eff

    (cont…)

    BTW, there is a really incisive reflection of the times to be enjoyed at Jesse’s. I really enjoyed.

  12. KFritz

    Re: Boeing. The only other player of comparable size in that industry is Airbus. I think a better comparison industry is video gaming which, as I understand it, surpassed cinema’s gross sometime in the last decade. Plus Boeing’s gross is worldwide, yes? What’s Hollywood’s worldwide gross?

    What % of Hollywood’s gross comes from video and other downstream revenue? How much of the gross comes from cable and broadcast tv? Also, as I understand it, the highest production values on a second by second basis are devoted to advertising. The (downsizing) music industry can also be considered a component of Hollywood. Seems to me that if all this is included in Hollywood, it’s far bigger than $10 billion. Given all this, has anyone ever kept track of Hollywood/entertainment as a % of GDP?

    Interested to hear your thoughts on “Ordinary People,” “Patton,” and “The Shootist.” I consider the first a masterpiece, the second a near miss, the third a flawed gem.

    1. Gonzalo Lira

      Studios and distributors are very cagey about revenues from DVD, cable and TV, for a variety of reasons.

      First of all, they don’t want to advertise the good (or bad) deal they got with, say, a cable provider, or a retail outlet. Nor do the local distributors want to provide exact figures to their competitors or to the other studios.

      Second, the studios want to keep the ancillary market incomes vague, so as to screw the talent out of back-end points (these being the percentage of profits earned after all expenses have been covered, what Eddie Murphy famously called “monkey points”, as only a monkey would be dumb enough to ask for them). So-called “Hollywood accounting”, which paints such a dire portrait of movie performance that some movies—notably “Forrest Gump”—have never turned a profit, is used by studios and distributors at all levels to screw talent out of money. If no one really knows how much videos, cable, TV earn, then no one can really complain. New Line tried screwing Peter Jackson out of some sweet home video money for LOTR—and if it hadn’t been that they wanted to make nice with Jackson so as to go ahead with “The Hobbit”, Jackson never would have seen the money that was rightfully his.

      A third reason to keep the ancillary market numbers vague is, they want maximum flexibility when dealing with various distributors. Distribution deals are negotiated on a case-by-case basis. So with one project, a studio might be all warm and fuzzy with a particular player in a particular distribution window, because the studio is counting on good feeling to get a better deal on some future project that they think will score more cash. Incidentally, this is why studios have such power over all the distribution windows—they are constantly bringing new product onto the market, so they always have a carrot and/or stick to wave around, the carrot/stick being the hot new movie everyone is anticipating.

      These are some of the reasons no one really knows the exact figures for the ancillary distribution markets for Hollywood movies.

      1. KFritz

        Much thanks for the information. Are there any books that cover Hollywood as well as ‘Econned’ covers the Meltdown and runup?

        1. Joe-Z

          Try “The Big Picture: Money and Power in Hollywood” by Edward J Epstein. A very eye-opening book which reiterates in much greater detail the author’s arguments.

          One caveat: it was written 6 years ago, so I don’t know if current events have overtaken it.

          1. Flava-Fabulous-Fab

            Epstein has a new book/updated version published as “The Hollywood Economist: The Hidden Financial Reality Behind the Movies”.

  13. EmilianoZ

    Come on, “French kiss” was a great movie! Kevin Kline does the most hilarious caricature of a Frenchman I’ve ever seen. I love that movie. On the other hand “Pretty woman” is so corny. I’ve never been able to sit through the whole thing. I’d rather read all the PR documents ever issued by Goldman Sachs than watch that movie again.

  14. Edupreneur

    Seems like a big first step toward ensuring that media congloms don’t green-light productions that bash Wall Street.

    From 1997 book Story, by Robert McKee:

    “In 388 B.C. Plato urged the city fathers of Athens to exile all poets and storytellers. They are a threat to society, he argued. Writers deal with ideas, but not in the open, rational manner of philosophers. Instead, they conceal their ideas inside the seductive emotions of art. Yet felt ideas, as Plato pointed out, are ideas nonetheless. Every effective story sends a charged idea out to us, in effect compelling the idea into us, so that we must believe. In fact, the persuasive power of a story is so great that we may believe its meaning even if we find it morally repellent. Storytellers, Plato insisted, are dangerous people.”

  15. MindTheGAAP

    Gonzalo,

    Thank you very much for posting this. I found it fascinating and informative. My experience watching Hollywood movies apparently led me to mistakenly believe that nobody in the film business could write; now that you have proven me wrong, I very much hope to see you post again in the future.

    That being said, I’m not sure I agree with the logic to your post. Even if Wall Street can “manipulate” the opening release numbers, I fail to see how this would actually wreck the movie industry. So what if opening sales are ten times higher, or only one-tenth as high, as they would have been without futures?

    While the last twenty years suggests that I am wrong in believing that society–surely–has something better to do than obsess over celebrities and box office openings, I fail to see how this would hurt anybody in the long run. Enlighten me, please?

    1. Gonzalo Lira

      Thank you for your kind comments!

      As to the potential damage to the industry—initially, there would be a lot of money for production, as derivatives would encourage more filmmaking.

      But only in the short term.

      In the long term, though, there would be fewer pictures, until there were finally none—like the new housing market. As movies started blowing up, film financiers would increasingly find themselves on the wrong end of the filmmaking process—they would realize that the REAL money is in trading the derivatives. So they would exit production, and enter derivatives trading.

      By the way, before this long term crash happened, in the short term, there’d be more production—but they would be INEFFICIENT productions, as producers would realize that bloating a budget (just like housing price inflation) encourages derivative manufacturing and trading. So US production costs would soar even higher than they are now.

      That is, until the crash—then you’d get what you have in US construction: A lot of idle workers who got used to huge paychecks due to market inefficiencies, huge paychecks which are unsustainable.

      Bottom line, derivatives are insurance policies on other people’s houses (there is a terrific posting about this at Jesse’s Cafe, the full analogy drawn out quite lucidly—check it out). Once everyone realizes that there’s more money to be made burning someone else’s house down, everyone becomes an arsonist—and nobody wants to be the sucker who builds a new home.

      1. Russell Cameron Thomas

        Gonzalo:

        As an economist, could you please expand on your analysis: “In the long term, though, there would be fewer pictures, until there were finally none—like the new housing market. … they would realize that the REAL money is in trading the derivatives. So they would exit production, and enter derivatives trading.”

        I’m puzzled by your broad assertion that “derivatives are insurance policies on other people’s houses”. While this may be true for some derivatives (Credit Default Swaps, CDS), it’s not true for most derivatives (e.g. call options on equity, most futures contracts, and so on).

        You imply that the Movies Futures markets have the same economic effects and risks as the derivatives associated with the housing market (securitization, collateralized debt obligations, and associated CDSs), which I would say is false because the contract structures are so different.

        You say that “in the short term, there’d be more production—but they would be INEFFICIENT productions, as producers would realize that bloating a budget (just like housing price inflation) encourages derivative manufacturing and trading”. This is a false conclusion. The only derivative being “manufactured” is the futures contract. There is no securitization of movie revenue streams into bonds, no collateralized debt obligations based on those securitizations, no default swaps on those CDOs, and no put or call options, either. As an economist, I’m sure you know that futures contract trading volume is a function of the *volatility* of prices, not their absolute value. Therefore “bloating budgets” on films will not generate more futures contract volume, nor will it inflate the value of those contracts, because the value is based on box office revenue, not costs.

        You say that “the REAL money is in trading the derivatives”. I believe this is factually false, even if some get-rich-quick-artists want people to believe it’s true. Futures markets are zero-sum — for every dollar of profit there is a dollar of loss. Brokers, market makers, and arbitragers make money through commissions but not (normally) through trading. In a fair futures market, only superior forecasting or trading skills will earn consistent profits.

        I *do* agree that there may be severe or fatal flaws related to gaming the box office revenue numbers. If insiders have more to lose by gaming the numbers than to gain, and if gaming the revenue is easily caught and also legally punishable (breach of contract?), then it could be manageable.

  16. marky market

    Theater operators would be able to use this as an effective hedge, would they not? They don’t have anything like rights sales currently.

  17. RPB

    “Only two outsiders—Joe Kennedy and Howard Hughes—ever managed to make money in Hollywood. Every other outsider—including Wall Street—has lost money in Hollywood—because all those outsider were playing Hollywood’s game.”

    WRONG

    Charles Roven, the man that prompted the “Roven Clause” is crushing the competition. He came from WS and he is the money behind the new Batman series.

    1. Gonzalo Lira

      Dear Sammy Glick Wannabe,

      Chuck Roven has been producing studio pictures since 1983, AND he’s married to Dawn Steel, former studio head. If that’s an “outsider”, then I hesitate to ask what’s an insider. (Also, FYI, he’s not the “money behind Batman”—Warner’s is. Hollywood is all about OPM.)

      About this so-called “Clause” named after Roven—I did a google search: The only reference to such a clause is your own comment post.

  18. hibikir

    Comparing revenues by themselves is not an apples to apples comparison. The business are so different that comparing UPS and Universal is madness. If anything, one has to compare Hollywood to software companies: The costs are all upfront, and reproduction is extremely cheap. Many movies have ROIs that would make retailers green with envy. Even many of the flops end up even after all is said and done.

    The big problem with movie investing is that movie accounting makes Goldman look like a bunch of nuns. How many major players have had to sue the studios due to accounting fraud? Peter Jackson was told that the LOTR trilogy made no money!

  19. Duke Con Dao

    Gonzalo Lira wrote:
    Chuck Roven has been producing studio pictures since 1983, AND he’s married to Dawn Steel, former studio head.”
    is that what we call juice from beyond the grave since Dawn’s been dead since 1997…

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