Lack Of Transparency Limits Film Investments

NY Magazine has run a clear analysis on why the attempt to establish Film Future markets failed.  Our business is so far from transparent, it is laughable to outsiders.  The article articulates how we have no clear & unbiased info on how well films perform and all reporting is done by the studios themselves.  To run a commodities market, the public would need something more transparent (like other countries have) and without it court cases would abound.

Such chaos would almost inevitably lead to a call for mandated government-agency oversight of Hollywood accounting, and that, to studio thinking, would be Armageddon—albeit an Armageddon that would be celebrated by everyone who has ever been promised a net-profits check that didn’t arrive. In the space of just a couple of days this month, a jury demanded Disney pay $270 million in damages for wrongfully withholding profits on Who Wants to Be a Millionaire, another found that actor Don Johnson was owed $23 million by the producers of Nash Bridges, and Nikki Finke’s Deadline website posted a leaked balance sheet in which Warner Bros. appeared to demonstrate that the movie Harry Potter and the Order of the Phoenix, which grossed $938 million worldwide, is somehow $167 million in the red. Given that statistic, perhaps stockholders should inquire whether any studio movies ever realize a net profit, and if not, why the people who run those studios are still employed.

If we are ever going to have a sustainable investor base for our industry, we need to bring the reporting and accounting practices up to the standards of other industries.  It's time that we develop a list of best practices of what needs to be done to reach this goal.  I will add it to my To Do List in the meantime.

The Possible Benefits Of Film Futures Exchanges, And...

By now you've probably heard that the US Congress has approved two different film future exchanges, (i.e. commodity exchanges).  Variety, among others, have been covering the story in what we have to recognize as an inflammatory way (then again, why should they not be like the rest of the media). The  press has uniformly been very biased in the way the story is told, always positioning the exchages as "a gamble" and a haven for speculation.  Sure, I suspect that these exchanges will prove to be a very disruptive influence, but that does not mean they are shouldn't be allowed.  And yes,  I am all in favor of far greater government supervision of our financial industries, but again that does not mean new mechanisms shouldn't be given a chance.  There is a great deal more to the story of these exchanges that needs be put on the table, as they offer us many benefits beyond what the press would have us understand is a simply another opportunity to gamble.

I am grossly disappointed in the lack of action from film industry leaders to do anything to help to establish a sustainable investor class for the entertainment industry. Not once, and nowhere, have any articles or anyone spoken up, as to any alternative vehicle to the film futures exchanges that could offer investors a mechanism for managing risks.  Let's not get into the fact the Hollywood's approach to equity investors is treat them just like another in a long line of suckers.  The Industry's historic attitude to equity investors in the film biz is so dismal, it makes something unknown and unproven like film futures start to look very appealing in contrast, at least to me that is.

There is no discussion within our industry, even in the Truly Free circles, as to what could support, build, and sustain investors.  Without serious discussion of this subject, and reasoned action around it, the days of an independent film INDUSTRY are numbered.  Investors are a key stakeholder in both the business and art of film, and their needs must be addressed.  I plan to consider more fully in future posts some things that would help maintain an investor class, but that is for later blogging -- I want to consider these exchanges.

One thing though that always comes up in discussing investors' needs is managing their risk, which is one of the main selling points of film futures.

I hoped that Indiewire or some other non-MPAA mouthpiece might cover the story from a truly indie angle, but alas, it has not been so.  We are forced to read in between the lines to get some semblance of what these exchanges may offer the indie community and our investors. Variety pointed out:

(Lionsgates') Burns said in his letter that Cantor's exchange "would allow a diverse group of motion picture industry participants, including studios, film distributors, theater owners, investors and other financial intermediaries within the motion picture industry to manage their risk and exposure to new film releases."

Further...

(Cantor's) Jaycobs said the goal of Cantor Exchange is to assist the motion picture industry by expanding the breadth and depth of financing sources. "Enlarging the potential sources of film financing will lower the cost of making a film, help create American jobs, and contribute to stabilizing large and small numbers of the industry alike as they face the challenge of raising financing in the high-risk endeavor of filmmaking," he said.

In the LA Times Sunday, they point out however that film futures is not like other commodities as the interests of buyers and sellers are not aligned.

There's also a fundamental difference between a futures contract on, say, gasoline prices and one on a movie. Paul Glasserman, an expert on derivatives at Columbia Business School, notes that both buyers and sellers of gasoline futures have legitimate risk-management motives. A buyer (such as a trucking fleet) might worry about prices rising, while a seller (such as an oil company) might want to keep them from dropping sharply. But there's no such symmetry in movie futures, in which investors trying to hedge their bets on a film will have to rely on speculators to shoulder the risk.

In Variety, interim MPAA head, Pisano said the MPAA's position is that the proposed exchanges are not in the public interest and are not useful to hedge risk. "Although it may appear in theory that establishing a short position in a futures contract could be a 'hedge' against poor box office performance, in the reality of the marketplace, selling a motion picture 'short' after production would invite catastrophic collateral consequences, both for the particular film's success and future relationships with financiers, directors, actors, exhibitors and others."

What do I know, but I don't agree.  I think these exchanges do offer investors an opportunity to manage their risk -- and they should have that choice.  I think these exchanges enhance the opportunity to demonstrate audience demand and expectation.  I think these exchanges offer a new marketing platform to an industry desperately in need of such opportunities.  I think these exchanges offer another cog in what is a difficult endeavor to help audiences discover new work.  Most of all, from an independent perspective, these exchanges are entirely elective.

But truly, we need other perspectives.  Why has the discussion been so one sided?  If we can't come up with mechanisms to help introduce new tools for investment, we are going to watch our diverse and ambitious culture seriously diminish.

Luckily for all of us someone's tried to explain it for the community: Jeremy Juuso over at the AKA Indie Film Blog.  In looking into who will be eligible for even being listed he points out:

From public statements and press reports, it appears unlikely that films will be listed for futures trading unless they have plans to open at well over 650 domestic theaters. Also, based on the CX movie futures listing standards, it appears unlikely that a film will be listed if the film’s release date is scheduled for more than one year, or less than one month, from the date of consideration.

Under these guidelines only a few of my films will have ever qualified for this listing, and with it so goes the possibility of it supporting much indie film investment.  Further, as I can only imagine that theatrical release patterns of specialized content will be changing greatly in the days to come, the chances of even more films from being excluded from listing.  So where does this leave us?

Juuso's post is quite extensive and informative.  I was very glad to have read it and recommend you do so too. He makes a particularly good point about who will most likely use the film future exchanges, along with the citing the difference between "speculation" and "gambling".   I look forward to more of his posts.  I've read and commented on Juuso's posts in the past, and like where he's now heading.

Update 4/29: It's nice to see that TheWrap.com is starting to cover the other side of the story.