Saturday, September 11, 2010

Reprint: Wall Street’s Revenge On Hollywood

This post originally appeared in naked capitalism on April 18, 2010. At the time, debate was raging about a “futures market” for films, similar to the futures markets in other commodities. 
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?

Subsequent to this posting, the Motion Picture Association of America, the Hollywood trade and lobbying group, succeeded—rather brilliantly—in nixing a futures market for films, as part of the financial “reform” package Congress recently passed. 
The pro-Hollywood futures market lobbying team had quite a squad arguing their case in Washington. Then again, with all the major studios opposed to it, and only one mini-major—Lionsgate—in favor, the industry was able to present a united front in opposition to this scheme. 
However, my own sense is, if Wall Street had not been in the dog house politically, after all the bailouts and market crises of the last three years, it is quite possible that a futures market would have come to pass. 


  1. Max keiser was one of the major proponents in railroading said futures market. He was also one of the originators of the Hollywood Stock Exchange (HSX). He sold it to Cantor Fitzgerald who changed the intended use of the software (I believe - I don't know the particulars).

    His show - The Keiser Report, on - is pretty funny and informative. Worth checking out.

  2. keiser crushed this... you give some excellent insights on the inside versus outsider hollywood game, thanks!

    nice interview with Hampton btw... keep blogging, we'll keep posting on

  3. ran into your blogging from another blogger I like (Ran prieur); and you certainly keep me hooked.

    Very insightful articles and analyses.

  4. Hey Gonzalo,
    I know this comment isn't relevant to this message, but thought you might be interested.
    In addition to gold hitting a fresh all-time high today, other commodities are also hitting new record highs. Corn, sugar, and cotton all set new highs today. I posted charts for all three on my blog. Inflation is definitely here, contrary to what Mish wants to claim. I wonder if hyperinflation is not too far in the future.
    Thanks for the insights!

  5. Hey S Benard,

    I never post comments on my own blog—but I've seen you around at Zero Hedge, and now here. However, your profile has no way to get in touch with you, or the name of your blog.

    So e-mail me so we can chat


  6. Well, in this particular case I won't shed any tears over an industry destroyed by the Wall Street. 99% of Hollywood movies bore me to death - they're extremely predictable, corny and often full of marketing/jingoistic propaganda.

  7. First off, I don't believe you. It's not like Con Agra and Exxon really hates the futures markets. I suspect they're a heck of a lot more powerful politically than CBOT.

    Secondly, if you're right, golly, gosh darn, gee whiz, I really wish they'd build me one of them movies futures markets. Hollyweird may be a "small business" the way they do their accounting, but they wield a wildly disproportionate and almost entirely negative influence over, jaybers, the entire damn human race compared to even Con Agra, let alone Walgreens or UPS. I'd gladly destroy that industry for beer money: the allegedly miniscule addition to the balance of trade be damned. I mean, what are you defending here? Even Bankers actually provide a necessary service without poisoning the collective psyche of humanity, and boring the rest of us to death. Aaron Skorkin ain't Orson Welles, and most of the chumps who pollute southern California ought to be saying "paper or plastic" rather than whispering to my young relatives subconscious minds.

  8. Is the tower of terror at disney hollywood studios worse than the revenge of the mummy at universal studios?

  9. It’s such a small business that an average movie That is, the marketing and distribution budget to make a film a success.
    Herman Miller Aeron


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