Shorting Tinseltown

Illustration by Rodrigo Corral DesignPhoto: Everett Collection

The first time the brokerage firm Cantor Fitzgerald realized it could make money by turning armchair speculation about weekly movie grosses into an actual futures-trading market was nine years ago. The company had just bought Hollywood Stock Exchange (, an Internet game that had, in the late nineties, become a kind of rotisserie league for movie buffs who fancied themselves experts in predicting weekend hits and flops. HSX was (and is) simple

Sign up, and you’re promptly given $2 million in fake money to bet on any movie’s performance in its first four weeks in U.S. theaters. As I write, Peter Jackson’s The Hobbit: Part One is trading at $154.51 a share, which means HSX players expect it to gross $155 million in its first month—not bad for a movie that doesn’t exist. If that price rises, shareholders make “money”; if expectations for the film sink, their “cash” diminishes; meanwhile, skeptical “investors” can “short” the movie and hope it underperforms. It was Cantor Fitzgerald’s notion to remove those air quotes and have movies go where cotton and soy have gone before—into the real world of commodities trading, where fortunes expand or evaporate based largely on the collective hunch of the moment.

Four months after Cantor Fitzgerald bought HSX, 658 of its employees were killed in the World Trade Center attacks. It took until 2008 for the company to raise the idea again. And this time, the concept came unexpectedly close to being realized—so close that in April of this year, its advocates found themselves testifying in front of a congressional subcommittee on agriculture, trying to convince skeptical representatives that the fate of an Adam Sandler movie was as worthy a subject for speculative capital as your average pork belly.

It was not to be. Opposition from virtually the entire Hollywood Establishment was heated—and united. “In my 30 years in the business,” says A. Robert Pisano, interim chief of the Motion Picture Association of America, who led the anti-trading coalition, “I don’t think I’ve ever seen so many historical antagonists—labor and management, theater owners and distributors, studios and independents—join together this way.” But they did, successfully lobbying Congress to insert a provision in the financial-reform bill, signed into law on July 21, that outlaws movie-futures trading. The day after the bill passed the House, Cantor Fitzgerald started laying off HSX’s staff. Game over. Or, more precisely, “Attempt to turn game into non-game in which your irrational exuberance about Taylor Lautner could actually bankrupt you”—that’s over.

Unfortunately, the primary argument of HSX’s supporters looked like a disingenuous attempt to sell a gambling enterprise as a piece of economic stimulus, with this premise: The film business is inherently risky and always needs new capital, but potential speculators are leery because movie performance is so unpredictable. Therefore, a futures market that accurately forecasts grosses will make the biz more attractive to investors … who, presumably, wouldn’t already have blown their dough in that brand-new futures market.

But as any HSX player knows, the game’s consensus wisdom is often dramatically wrong. (Just before opening, The A-Team and The Karate Kid each traded at about $95—guesses that proved $23 million too high for the first film, $64 million too low for the second.) The creation of a speculative market, particularly one in which speculation itself could damage a movie by lending what Pisano calls a specious “aura of financial authenticity to gossip,” would be more of a wild card than a stabilizing force. And even if a futures market could miraculously transform Hollywood into less of an IED for investors, the potential for abuse looms awfully large. Any new business where the criminal possibilities occur to you before the legitimate ones is probably doomed; it doesn’t take much of a mental leap to envision an army of Wilshire Boulevard Bialystocks and Blooms overseeing scams in which one could intentionally produce a bad movie with bankable stars and noisy marketing, short it, and make a mint when it underperforms. (Although then we’d have an explanation for Knight and Day.)

It’s not surprising that an industry steeped in financial shadiness feared such an idea. Despite the casual fluency with which many moviegoers now speak about per-screen averages and week-to-week holds, the way grosses are tallied is largely shielded from scrutiny. A company called Rentrak (which bought Nielsen’s box-office business) compiles the data, and the chief watchdogs preventing a studio from misreporting its grosses are … other studios. As a self-policed system, this works quite well. But numbers can still jitter all over the place: Universal estimated that its hit Despicable Me had opened to $60 million on a Sunday; the next day’s real tally? $56 million. That’s typical—studios overshoot the mark on weekend box office all the time and correct it the next day (the movies may be the only business in America in which you can blame your own seven-figure mistakes on the weather). What’s $4 million among friendly rivals? Nothing. But what’s $4 million to angry investors who want to know why that money vanished, or whether any of the 3,476 theaters showing the movie underreported their totals? It’s an invitation to a Florida-election-size quagmire of lawsuits, accusations, and demands for transparency every single week.

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.

These are the kinds of quaint accounting eccentricities on which, one imagines, the government might want to weigh in someday. For now, that day has been deferred, which may be the only reason to mourn the loss of the loony futures scheme that would have hastened its arrival. Those balance sheets could certainly use scrutiny—but not because they’re entangled in a marketplace in which value is predicated on nothing more than the audacity of hype.

Shorting Tinseltown