An Open Letter to Hollywood:
The goal of this letter is to explain in plain English the benefits to everyone in Hollywood from the proposed box-office futures exchange (the “Exchange”), and in particular to get various trade organizations to withdraw their shortsighted objection to it.
Let me first mention that I know a bit about this topic. I have helped raise billions of dollars of financing for the film industry over the last 29 years, including wave after wave of financing that has crashed on Hollywood’s shores only to recede back into the distance.
Right now, we are in a serious trough, with the last wave of financing from New Yorkequity and hedge funds long gone. We need to have a sustainable approach to raising vast amounts of financing, and the Exchange will do just that. I advocated this approach for exactly this reason in an article titled “Raising Film Financing by Betting the Box” that was published in the Entertainment Law Reporter in 2003, and I recently testified in favor of the Exchange before the House and the CFTC, so if nothing else, I have been consistent on the issue.
So let me state clearly the benefit of the Exchange for everyone in Hollywood: It will bring billions of dollars to the table, and it will be sustainable.
This new source of financing will benefit everyone, including studios, independents, talent and crew, so it stuns me that the very parties that would benefit the most from it are objecting to it. The reason that the Exchange will achieve this result is obvious: The Exchange creates a publicly traded, transparent market that allows investors to know the value of their investment by just opening the paper.
The vast amounts of capital available to publicly traded companies dwarfs the capital available to private companies. This approach eliminates the perceived
opaqueness (rightly or wrongly) of Hollywood accounting and leaves a spotlight on the glamour and thrill of “owning a piece” of a film. No audits. No litigation.
Film companies will benefit by using the Exchange to hedge film risk, since hedging on the Exchange has the identical economic effect as raising third-party equity for a film. Instead of raising billions of dollars with complex slate financing transactions, film companies could reach the same result efficiently (with no transaction costs) on the Exchange. Hedging risk permits more investment in any particular film, which benefits everyone, including the crew and talent.
If film companies need the actual cash to make the film, they need only take the concept of the Exchange one step further (as is my hope and expectation) and raise cash directly from investors in exchange for a return that is tied to a percentage of the box office results of their films, as a proxy for all other revenue streams. As with the Exchange, there would be a flood of capital available if investors could know the value of their investment by opening the paper, rather than waiting for months only to receive arcane accounting statements that they don’t understand.
Given the obvious benefits, what is all the sturm and drang about?
The truth is that there is a single neurotic fear that is driving many people to distraction against the Exchange, and it is this: If by chance a film is tracking badly on the Exchange, theaters won’t book it, and the public won’t go to it. That, in a nutshell, is what all the fuss is about. The rejoinders to this neurosis seem so self-evident that they would almost seem not to need mention, but clearly they do, so here goes:
1. I don’t think that a single person will decide whether or not to go to a movie based on how it is tracking on the Exchange. Indeed, for almost 15 years there has already been an on-line Exchange, but with play money (the Hollywood Stock Exchange at hsx.com), and I don’t know a single person that made a decision of whether or not to go to a film based on how it was tracking there. Theaters will likewise know that how a film is tracking on the Exchange will not impact actual attendance, so it won’t change their booking decisions.
2. There is already a steady drumbeat of pre-release buzz on a film – indeed a roar – from numerous sources, including Aintitcool.com, rottontomatoes.com and all the tabloids. The additional information from the Exchange will be a drop in the bucket compared to what is already out there.
3. And finally, even if you accept the hypothesis that the Exchange will impact attendance or theater bookings, then on average the results of the Exchange should increase attendance and theater bookings, as the films tracking well will more than make up for films that aren’t.
The rest of the alleged objections are frivolous and makeweight, but let’s take them all on, one at a time:
1. The Exchange is gambling! Yes, indeed, all film investment is gambling, whether or not on the Exchange. Investors have been gambling in Hollywood for years, including over $10 billion of slate financings in the last 10 years. The Exchange just allows them to do it in a transparent and publicly traded manner, as opposed to the current system, which is far worse.
2. It could be manipulated! The only possible real manipulation would be if a studio went short on the Exchange and then intentionally tanked its own film (as in “The Producers”). But this will not happen in practice, since it is highly unlikely that the studio will make more profits on the Exchange than it loses on the film and in future good will (and its stock price).
3. There could be insider trading! Excuse me, but there is no legal prohibition on insider trading on a commodities exchange. Farmers who know that locusts are afflicting their fields may short corn, and oil executives are free to trade oil futures if they know of a new oil find. The whole purpose of a commodities exchange is to bring “inside information” to the market through price movements. In any event, the truth in Hollywood is that “No one knows anything,” and that certainly goes for the prognostication of box-office results. Witness the recent “Karate
Kid,” which doubled the wildest expectations.
4. The studios won’t use it! One argument made is that the studios cannot use the Exchange to hedge due to contractual and practical constraints on disparaging their own films, and hedging would be viewed as disparagement. This identical argument could be made with respect to every form of hedging, which the studios have done for umpteen years with various other strategies, including co-productions, split-rights transactions, and slate financing, all of which are done solely to reduce risk, and all of which involve the film company “betting against its own film.” So history has proved this argument wrong. Even putting aside the fact that counterparties on the Exchange are not publicly disclosed, no one has ever been concerned that the studios have hedged film risk other ways for at least the 29 years I have been in practice, and it is certainly no secret when a studio enters into a co-production (“Titanic”) or slate financing (Melrose, Legendary, Gun Hill, etc.).
5. The studios will be subject to some kind of unspecified additional regulation that they aren’t subject to now! If they decide to trade on the Exchange, there are some simple restrictions they must comply with, but the restrictions don’t apply at all to a studio that doesn’t use the Exchange.
6. Competing studios could short their competitors’ films on the Exchange! So what? That sure won’t affect attendance or theater bookings, as discussed above.
7. People might do illegal things to tank the film! One of the objections raised was that someone would short a film and then attempt to pirate the film in advance and put it on the Internet to reduce box-office results. This is about as likely as it is that Dr. Evil will set off smoke bombs in theaters to drive down attendance.
So please, for all our sake, forward this letter to anyone you know at one of the studios or at the MPAA, IFTA, NATO, DGA, or IATSE, and it will hopefully roll up the chain until someone dealing with this issue reads it.
Time is running out, and it would be a tragic shame if these organizations were to shoot all of us in the foot by opposing a financing plan that could raise billions of badly needed dollars for this industry. I ask these organizations to please publicly withdraw their objection to the Exchange, at least to try it as an experiment. If the world collapses, you can always go back to Congress to revoke it.