Philosopher George Santayana once said “Those who cannot learn from history are doomed to repeat it,” and even amidst the economic turmoil resulting from Wall Street’s gambling-style financial practices, it seems this statement rings true.
Earlier this week, the Motion Picture Association of America (MPAA), along with a number of film studios, independent producers and labor unions, took to Washington to debate the approval of futures contracts held by Cantor Futures Exchange (a subunit of Cantor Fitzgerald) and Media Derivatives (MDEX). These contracts would allow traders to essentially bet for or against the expected revenue earned by a film at the box office over a specific period of time. These derivative contracts would ensure that investors betting correctly for or against a film’s success over a period of time would reap financial spoils, while the opposing side would ultimately lose money, perpetuating the casino-mentality policies that have already permeated firms like Goldman-Sachs.
The debate specifically stems from the approval of Cantor’s contract on Sylvester Stallone’s upcoming action film The Expendables and MDEX’s contract on the bank robbery film Takers, starring T.I. and Hayden Christensen. Cantor’s contract would center around the projected four week box office receipts of Stallone’s film, while MDEX’s contract would involve the futures and options of the opening weekend sales of Takers.
“We have never ever thought about hedging our risk or selling a movie short, and we never will,” said interim chief executive of the MPAA Robert Pisano. “The first time we do that, the first time we go short against one of our own movies, it will be the last time we ever work with those filmmakers, and once that becomes public in the community, it will be the last time many filmmakers will work with us…I can accept that there are circumstances when financial engineering synthetic derivatives play a role, but they certainly don’t play a role in the process of creating this uniquely American product. I think we got something close to, or indeed, a gambling contract and should not be given the cloak of authenticity by being traded as a future.”
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Cantor and MDEX representatives and consultants argued that these speculative contracts would prove a necessary hedging tool to limit the risk of investing money in a film. Currently, the film production process requires outside investors to invest in a number of movies that a studio wants to make, their success in itself a risk. Proponents of these new contracts argue that this new system will decrease some of the risk involved in investing in certain films and ultimately could bring an even greater amount of revenue to the film industry.
“Currently, the major studios operate in a financial world where their prognostications about a film’s economic potential go unchallenged,” said Cantor’s Richard Jaycobs. “Investors have no means to quantify the impact of a studio’s decisions; neither can they protect themselves from the day-to-day decisions that are being made about their investment, which inhibits investment.”
Yet Pisano is adamant that these contracts will prove a dangerous precedent for Hollywood, citing the recent mortgage fiasco as an omen of what could come as a result.
“[W]e just don’t support bringing that [speculative] ethic and ethos in financial modeling into our business,” said Pisano. “We don’t want a repeat in our industry of what happened in the mortgage industry.”
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As of today, a decision has not been rendered over these contracts.
