March 16, 2010

I certainly don”€™t know much about investing, but I can give you one solid tip: don”€™t bet in the movie box office futures market.

Wall Street firm Cantor Fitzgerald expects to get federal regulatory approval to begin trading movie pseudo-shares in April (and a start-up called Veriana Networks also hopes to get into the business). The rationalization is that movie-makers could unload some of the risk of a flop on investors, but the appeal is that it’s more fun than gambling on pork bellies.

What could be a more perfect embodiment of our post-modern economy? While the Asians manufacture everything, Americans will try to get rich by selling each other cinematic synthetic financial instruments.

Betting on box office numbers isn”€™t a new idea. For a decade, hobbyists with too much time on their hands have been competing on the Hollywood Stock Exchange (HSX) for pretend money by predicting how well new movies will perform.

“What makes Cantor Fitzgerald’s Hollywood Stock Exchange helpfully accurate is that it has always encouraged insider trading.”

How does the HSX prediction market work? Consider, for example, the remake of the 1981 film Clash of the Titans (with Liam Neeson redoing Laurence Olivier’s role as Zeus), which will be released on April 2. The consensus among HSX players is that it will be a big hit, earning $193 million in its first four weekends of domestic release. If you think Clash will do even better, you can “€œbuy”€ it for 193 dollars in play money, with any excess over that amount going into your account for more bets.

Trying to outsmart other members of the public about what the public really wants might sound overly meta to you, but HSX claims to have 200,000 players. Some bettors seek validation for their tastes, others confirmation of their acuity.

Back in 2001, Cantor Fitzgerald bought HSX, intending to turn it quickly into a real money futures exchange. Tragically, the firm’s world headquarters happened to be on floors 101-105 of One World Trade Center. On 9/11, 658 workers”€”two-thirds of its employees”€”were murdered. (That’s almost twice the 343 dead lost by the Fire Department of New York.)

I”€™m glad Cantor Fitzgerald’s dream has survived 9/11. And I”€™ve found their HSX useful over the years in figuring out whether I should bother RSVPing to invitations to screenings.

It’s not that the HSX prediction market is tremendously accurate. This year, it notoriously underestimated the popularity of Alice in Wonderland. Similarly, Avatar traded mostly at a little under $200 million through the fall of 2009, but wound up paying off at over $400 million. Most notably, Mel Gibson’s The Passion of the Christ dropped as low as $6 before taking in $296 million in its first four weeks.

Yet, HSX is still quite useful for the kind of order-of-magnitude guesstimates I need to decide whether a release will slip beneath the waves so quickly it won”€™t be worth reviewing.
For example, today I was invited to a screening of The City of Your Final Destination. It stars Sir Anthony Hopkins, was directed by James Ivory, and was written by Ruth Prawer Jhabvala. Those of us of a certain age will recall them as the surviving members of the classy Merchant-Ivory team that made The Remains of the Day in 1993. But how many people in 2010 will care about this geriatric crew’s latest?

A quick glance at the Hollywood Stock Exchange shows that punters are expecting The City of Your Final Destination to garner less than a million dollars at the domestic box office.
In contrast, last November I received an invitation to a preview of another little movie with an aging lead, Crazy Heart. Yet I quickly heard that, even though the film was still being edited, the movie industry had already made up its mind that it would serve as the occasion for finally giving Jeff Bridges his Best Actor Oscar. So, I went.

And that illustrates exactly why you wouldn”€™t want to bet real money on box office futures. What makes Cantor Fitzgerald’s Hollywood Stock Exchange helpfully accurate is that it has always encouraged insider trading. Its website currently advises “€œInsider Trading: Trade with any information you can find.”€

As well it should.

Screenwriter William Goldman famously noted, “€œNobody knows anything”€ about which movies will be hits. For instance, why did Tim Burton’s Alice in Wonderland enjoy a huge $116 million opening weekend? My theory is that the public reasoned: “€œIt’s in 3-D, it’s by a famous director, and it begins with the letter “€˜A,”€™ so it must be like Avatar!”€ Yet, even in the unlikely event that were true, it wouldn”€™t stay true for long.

On the other hand, studio executives, agents, set caterers, and their pool guys do know something about which movies probably won”€™t be hits. And they gossip about it.

Good films are hard to make, and quite a few productions are palpably not good enough to catch the public’s fancy. You wouldn”€™t want to bet real money against the people who were there.


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