Coming Soon to Hollywood: Movie Derivatives

BY Tom LeGro  March 23, 2010 at 1:24 PM EST

Moviegoers will soon be able to decide which flick to see based not on thumbs, stars or tomatoes, but on how well films do on the investment market.

Two investment firms are working to develop a futures market for movie derivatives that will let investors wager on box office performance.

The exchanges will offer film studios a way to hedge against the risk of a bust, much how like farmers swap corn or soy bean futures in case of a bad harvest. And just like other futures markets, trading will be open to outside speculators who can strike it big betting on unlikely hits.

One of the firms, Indiana-based Veriana Networks will target professional and institutional investors as it looks to develop a market for film derivatives. The firm is expected Wednesday to win a key regulatory approval from the Commodities Futures Trading Commission that would put it on track to debut its “Trend Exchange” in time for summer blockbusters such as this June’s ‘The A-Team’ and ‘Toy Story 3.’

“There’s a lot of risks that you can cover in the production of a movie, but what you can’t cover and protect is…the emotional response by the viewers when they see it,” says the firm’s chairman and chief executive officer, Robert Swagger.

A competing market called the Cantor Exchange is being set up by New York-based brokerage house Cantor Fitzgerald LP. Cantor Exchange will be open to all investors and is expected to be up and running shortly after April 20.

Tom Cruise in 'Risky Business' Cantor already has a few years of experience managing bets on Hollywood films. In 2001, the firm purchased the Hollywood Stock Exchange, an online stock market where users can wager over films using imaginary money.

If the site’s track record is any indication, though, predicting box office success can be risky business. Hype over Matt Damon’s “Green Zone” sent shares of the Iraq war flick as high as $74.64 in the run-up to the film’s U.S. premier on March 12. After a lackluster opening weekend, though, the film’s stock plunged 51 percent to $36.24 just three days later.

In the face of mounting production and marketing costs, Hollywood studios have increasingly turned to outside financiers to help limit their losses from potential flops, says Jason E. Squire, a professor at the University of Southern California’s School of Cinematic Arts and author of “The Movie Business Book.” He says movie derivatives could prove to be an “inventive and fascinating” source of risk protection.

As for individual investors, Squire says film derivatives are “a great idea for a highly speculative investment because there has never been an organized way for a private individual to really bet on their own instincts in connection with a movie’s performance.”

It will “be high risk,” Squire says, “but it sounds like a lot of fun.”