film derivatives

Tipping the hat (again) to the folks at THREsq.com for flagging this piece in the L.A. Times yesterday about the two box office futures trading exchanges that are in the process of getting regulatory approval.  The article is really about the major studios' objections (through their trade/lobbying association, the MPAA) to the trading of box office futures in general.

The main thrust of the argument against regulatory authorization here is that it essentially creates a box office betting book: it's the credit default swap derivatives game, but with box office performance as the variable in question rather than defaults under convoluted contracts.  The public is cautious about unique financial products these days on account of their roll in the great recession....  So should these exchanges be allowed?

The basic economic purpose of the exchanges is (and this is overly simplisitic, but we're just blogging here) to allow film investors to hedge their film financing plays a bit.  If you have an investment in a film and you buy some derivative securities that will pay out if the film does poorly, the bite of your initial investment can sting a little less.  The idea really only works well (with the potential for big profits) on a large scale--which contemplates that the major market for these derivatives would be the major studios in the first place. 

There would definitely be room for indie financiers to get involved, and we'll find out how when and if the products/exchanges get approved--but for now, the MPAA is crying foul.