While we've been following the Cantor Exchange's long struggle to bring betting on the box office to the masses, Hollywood had a heart attack last Friday when the other exchange designed for betting on the box office—the MDEX, created by Veriana and intended for professional and institutional investors—came one step closer to reality after receiving its approval from the Commodities and Futures Trading Commission. Cantor awaits its approval today, but the question for cine-geeks/degenerate gamblers everywhere is, "So can I bet on box-office grosses yet?" The answer: no. The exchange itself, as a marketplace where people can buy and sell contracts guessing at box-office performances, is approved, but the contracts themselves have yet to be. Further, a ragtag Rebel Alliance composed of major studios, Hollywood guilds, and national theater owners is doing everything they can to blow up what they see as a potential Derivatives Death Star designed to decimate Planet Hollywood.
This scrappy little resistance led by that hero of underdogs everywhere, the M.P.A.A., is employing everything in its power—mostly angry letters from Galactic U.S. Senators Orrin Hatch and Patrick Leahy, and even possible legislation from the U.S. Congress—to outlaw betting on the box office. Also on their side appear to be some members of the Commodities and Futures Trading Commission who actually approved the MDEX. Apparently, Veriana (and presumably Cantor) did all their homework, followed the rules, and satisfied all the technical requirements to be designated as a marketplace, so there was very little the Commissioners could do but approve the exchanges. The question, however, is whether they will also approve the actual contracts (box-offices futures) to be traded on those exchanges. In fact, one Commissioner of the C.F.T.C., Bart Chilton, even sent out a hold-your-horses memo in which he said that although the C.F.T.C. had little legal basis to deny the MDEX market status, he was yet to be convinced that "'movie futures' can overcome some fundamental design flaws."
The underlying concern is whether the proposed exchanges, and the contracts they'd trade, are Hollywood's saviors or the industry's death knell. Put in wonky money terms: is all the betting to be had on these exchanges pure speculation, or a way to provide liquidity to Hollywood's notoriously illiquid market? The argument that Veriana C.E.O. Robert Swagger put forth in a conference call to confused entertainment reporters everywhere was that the exchange will in fact create liquidity because investors will feel free to pump more money into a movie's production when they have a way to "hedge" their risk.
If the above is true, then it would seem that the movie studios opposing the exchange might be doing so because it presents a threat to their monopolistic control of the film distribution market. Swagger, however, claimed that resistance to new market exchanges typically gives way to broad acceptance in an industry when its key players understand how to use them to their own advantage. Although the idea is far-fetched at the moment, Swagger seemed to imagine a world where studios might eventually get on board and use the exchange themselves. (Though how and why a studio would do so without running into massive conflicts of interests remains unclear, especially to the M.P.A.A. and the others opposing the exchanges.)
However, those in Hollywood opposing it—like the M.P.A.A. and its B.F.F. senators—argue that the exchanges show a faulty understanding of film financing and distribution, and that, as such, they are little more than glorified gambling dens. Senator Blanch Lincoln (D-Ark) has submitted a measure before the Senate Agriculture Committee to bar futures trading on box-office receipts. (The Agriculture Committee oversees "futures markets" like the MDEX because, historically, futures exchanges were created to hedge risk on and figure out the prices of tangible agricultural products like wheat or pork bellies.) Her rationale is that, after derivatives nearly destroyed America, creating new derivatives on movie grosses could destroy Hollywood.
(Though in fairness, those nasty derivatives destroyed America precisely because they were traded in secret between banks themselves, and not on an open, public exchange, which is what the MDEX is proposing.)
Veriana C.E.O. Robert Swagger says that even if futures contracts on box-office receipts were banned, the MDEX is designed to allow futures contracts on all sorts of as-yet-undreamed media-related prognostication, be it TV-ratings, American Idol winners, or how low this year's Oscar ratings will go.
Will this brave new world actually happen? That would depend on the actual structure of the movies futures contracts themselves. The burden appears to be on Cantor and Veriana to design something that doesn't appear to be just another excuse not to drive to Vegas—if they can. Right now, Hollywood is doing a great job of aligning Washington against the exchange. After all, when's the last time you heard of Orrin Hatch (R) and Patrick Leahy (D) agreeing on anything?
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