A futures market for movie-making? Two thumbs down

futures market for movie productionFor those of you who find derivatives too boring of an investment, a new exchange recently OK'd by the U.S. Commodity Futures Trading Commission might please you: a movie futures exchange. Yes, if this pans out you'll be able to front the money for new movie projects in return for a taste of the net, according to Wharton professor of insurance and risk management Kent Smetters.

Smetters writes that this exchange, to be sponsored by Cantor Fitzgerald, is being opposed by most big Hollywood studios and the MPAA, claiming that it will "lead to speculative bets, insider trading and false rumors." Since the industry has thrived for a century on the backs of whales and, more recently, venture capital, I don't see how this would be any different. Nonetheless, part of a financial reform bill currently working its way through Congress would ban the exchange. Spoil sports.

In a phone conversation, Smetters made a cogent argument against the quality of offerings that would appear on the exchange. He compares it to a "market for lemons," a phrase made famous by Nobel laureate George Akerlof. In the movie exchange, the buyers would have very little information on which to base a purchase, while the sellers would have a great deal of information; enough, he speculates, that only for potential turkeys would the producers reach out for market financing. Buyers wouldn't have a shot at a piece of a James Cameron megablockbuster like Avatar, but might be allowed to foot the bill for stinkers like Did You Hear About the Morgans or Old Dogs.

I asked him if this might be of use to independents who don't have the backing major studios enjoy. He thinks that the exchange might work if the projects listed were limited to independents only, to avoid the lemon problem, but suspects this could not be done legally.

Even if this exchange comes to fruition, I wonder how many investors will ever see a taste of the profits. As Edward Jay Epstein explains in his book "The Hollywood Economist," "the movie business is a fee-based business," and most of the time "there is no net." Take his example, Gone In 60 Seconds, which grossed $242 million at the box office and cost $103.3 million to make. He shows how, once everyone in the food chain of producing, distributing and showing the films had carved out their slice of the pie, there was nothing left except a net loss of $95 million. Imagine if you had invested your money here.

Nonetheless, if you're still interested in taking a fling at fame and fortune, consider the suggestions of my fellow WalletPopper Ron Dicker on how to select your film.

A movie exchange would probably draw the same people who buy one share of Harley-Davidson, and get their money's worth from hanging a certificate on the wall they can brag on. A savvy investor would give this market two thumbs down.

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