Frightful Financial Futures in Film

Another lackluster weekend at the box office has Hollywood in glum mood. By all accounts May was a severe disappointment for the industry, with several major summer tentpole films failing to catch fire, and underperforming initial box office projections. There have been no breakout hits so far, of the kind we saw in winter and spring, and nothing to match the hits of previous years like "Transformers," "Iron Man," and "Star Trek." There have been similarly weak starts to the summer season before, but this year feels especially dismal because expectations were running so high. Now imagine how much worse it would have been if the proposed Hollywood box office receipts futures exchange were up and running.

Inherently there's nothing wrong with trading film futures. I've heard about all the potential benefits. Futures trading may give Hollywood getting a new source of income, help hedge against risks, and give more power and influence to major studios. Wall Street trades in all sorts of exotic financial instruments and futures for a variety of commodities. Also, a popular fantasy version has existed for years – the Hollywood Stock Exchange or HSX – that allows players to buy and sell fake contracts on the performance of upcoming film projects, actors, directors, television shows, and related options. I have an account with HSX myself. It's a fun diversion, and I can understand why users would be tempted to try and translate the system to the real world.

But in the real world, box office receipts don't make for a very good commodity, and HSX with real money would essentially be legalized betting on a film's performance. The current online game bases the pricing of contracts on the first four weeks of box office returns. The proposed Media Derivatives Inc (MDEX) Trend Exchange for the "popcorn prediction market" looks pretty close to this. Up to six months in advance, they plan to sell contracts for a film's performance with price determined by grosses during the first two weeks or opening weekend of release.

Think of the potential consequences. Once tied to this kind of futures trading, a film's success or failure would be all but decided after only one weekend, which would give an advantage to front-loaded blockbusters rather than slow-and-steady performers like "How to Train Your Dragon" or prestige pictures that see attendance rise after major award wins. We would see even more emphasis on marketing campaigns to get audiences into theaters, and studios would have more incentive to produce only low-risk projects like sequels and reboots. And as the recent crop of middling summer fare has proven, this is not a strategy that audiences are embracing. If the exchange was in place today, Hollywood's recent losses would have had far further reaching financial impact.

The regulation of financial information about such trades would run into all kinds of problems. Hollywood runs on hype and gossip, and filmmakers have to oversell their films as a matter of course. Marketing campaigns often turn out to be misrepresentative, and advance buzz can evaporate overnight. Just this weekend, "Splice" was supposed to be a strong performer based on good critical reaction and a lot of interest from fanboy sites like Aint it Cool News. Out of the four films that premiered this weekend, it not only came in dead last with a box office take of $7.5 million dollars, despite a fairly pervasive marketing campaign, but audiences hated it. According to the market research firm Cinemascore, viewers gave it a rare D grade. But can you imagine the film industry sans the hype?

Also, box office receipts are notoriously easy to manipulate. There have been countless instances of studios overestimating their films' weekend grosses to drum up publicity and garner attention in the short term, only for the actual numbers to fall short. News outlets always publish the predictions ahead of the actuals for the sake of their headlines, which has allowed this sort of fudging to perpetuate. And Hollywood's accounting has always been less than transparent. Think of all the lawsuits where massive blockbusters apparently never turned a profit , thus denying rights holders or creative talent their share. Even figuring out whether a film is a hit can be a tricky business, when "Robin Hood" takes over $200 million worldwide and is pegged as a flop, while "Letters to Juliet" pulls $75 million over the same time frame and is considered a modest hit.

I don't think May would have been as nearly as bad for Hollywood if it weren't for the sky-high expectations. For years, sequels were expected to do worse than the films they followed, not better. But now despite "Iron Man 2" and "Shrek Forever After" making plenty of box office bank and guaranteeing a profit for their respective studios, both have been unable to escape the taint of disappointment because they didn't do what the financial analysts said they would – exceed or match the performance of their predecessors. If there were more money behind those predictions, I'm sure the perceived failure would be even worse. It's bad enough the stock prices for the studios keep dropping every time a picture has a bad first weekend, but at least those have a chance to recover in the long term if performance improves.

But these new movie futures? Not so much.