Hollywood opposes betting markets on film revenue

by on April 8, 2010 at 7:38 am in Economics, Film | Permalink

While the industry’s opposing comments were not yet final on Wednesday afternoon, Mr. Pisano and others said they were expected to cite a host of potential problems. Those include the risk of market manipulation in the rumor-fueled film world, conflicts of interest among studio employees and myriad contractors who might bet with or against their own films, the possibility that box-office performance would be hurt by short-sellers, difficulty in getting or holding screens for films if trading activity indicated weakness and the need for costly internal monitoring to block insider trades.

Among the potential abuses, the studios contend, is that a speculator might leak an early version of a film to the Internet and then profit from its subsequent poor performance at the box office.

The full story is here.  I suspect that once you cut past the rhetoric the most important factor on that list is: "difficulty in getting or holding screens for films if trading activity indicated weakness…"

The recorded music industry has collapsed for a number of reasons, but one is that pre-purchase web listening helps consumers avoid songs and albums they don't really want to buy.  There are fewer mistaken music purchases today than in say 1986 but of course that also means fewer music purchases.  That's good for consumer welfare, even if it's not always good for the music corporations and artists.  If the same trend came to the movie sector, many current business models would prove unsustainable.  As it currently stands, previews often try to trick audiences rather than enlighten them; sampling a pre-purchase MP3 file in contrast can only enlighten you.

Counterintuitively, introduction of the betting markets could make movies worse in quality (relative to my tastes at least), by inducing producers to focus on making "the sure thing," especially if betting on the movie starts very early.  (Keep in mind that the fixed costs of using theaters may require a minimum level of market interest above some threshold.)  I don't so much mind bad movies because I simply walk out of them, so I prefer a higher variance in quality than may be socially optimal.

So much of our cultural industries have been built on consumer mistakes and those days are coming to an end, rapidly.

1 Kid Dynamite April 8, 2010 at 8:26 am

“the possibility that box-office performance would be hurt by short-sellers”

lol. NOTHING surprises me anymore…

2 BucketofFried April 8, 2010 at 8:49 am

@anon

I think you bring up a good point, but you are only telling half the story. Yes, consumers should be willing to pay more for a song they’ve verified as good. As we both know, the online mp3 market leader (iTunes) does not change the price of a song based on quality or quantity demanded (generally speaking). What is the net effect? Many more people flock to the quality songs to buy, blog, and rate it. In effect, record companies have outsourced the marketing to the consumer. Similar to consumers not having to purchase dud tracks/albums, record companies no longer have waste money on marketing dud albums/artists.

3 Erik Brynjolfsson April 8, 2010 at 9:28 am

There are fewer mistaken music purchases today than in say 1986 but of course that also means fewer music purchases.

As anon above suggests, just about any reasonable equilibrium model will have fewer purchases if the matching process is noisy and more if the matching process is better.

4 Noah Yetter April 8, 2010 at 9:33 am

As anon above suggests, just about any reasonable equilibrium model will have fewer purchases if the matching process is noisy and more if the matching process is better.

How “reasonable” can such models be if they fail to describe reality?

5 Eric April 8, 2010 at 9:40 am

This is a really interesting effect of the awesome explosion of information availability of the last 15 years. Everybody pays less. See also Craigslist, whose $100 million revenue doesn’t come anywhere near the revenue newspapers have lost because of it.

6 jimibulgin April 8, 2010 at 10:30 am

POWinCA:

I have taste and intelligence, and am very snobbish about movies, but IMHO, Avatar was a kick-ass flick!

7 Chris April 8, 2010 at 10:45 am

So much of our cultural industries have been built on consumer mistakes and those days are coming to an end, rapidly.

That is MY interesting sentence of the day! Thanks for making me think!

8 Slocum April 8, 2010 at 1:43 pm

“As it currently stands, previews often try to trick audiences rather than enlighten them.”

Maybe, but if so, it’s a pretty ineffective tactic in light of how much information is readily available now (as compared to 1986). Then you’d have had access to word-of-mouth plus reviews in whatever newspapers you subscribed to. Now you have rottentomatoes, imdb, and a whole host of professional and amateur reviews that can be googled up in a few seconds. So there’s really no reason now to go to a movie without knowing what to expect unless you just can’t be bothered to check first.

9 anonymous April 8, 2010 at 3:12 pm

Given Hollywood’s flawless track record of bitterly opposing things that end up making them a lot of money (the invention of the VCR, for instance), one can but hope for everyone’s sake that their last-minute attempt to kill this market will fail.

10 Steve Sailer April 8, 2010 at 4:16 pm

The Hollywood Stock Exchange has functioned fairly well as a prediction market for movies the last decade, just having people compete for fake money rather than real money. I explained why it was a terrible idea to now make it a real money futures market here:

http://www.takimag.com/sniperstower/Sailer

11 Steve Sailer April 8, 2010 at 5:40 pm

The existing Hollywood Stock Exchange for hobbyists betting pretend money on box office revenues explicitly encourages insider trading. That’s why it’s a pretty good predictive tool, which I’ve often referenced over the last decade to decide which movies will be popular enough to be worth reviewing.

But when it comes to betting real money, outsiders would be nuts to bet against insiders. Conversely, the movie industry would be nuts to let the federal government impose the anti-insider trading regimen imposed on corporate America. Sending Hollywood people to jail for gossiping about how well a movie will do is nuts, but that is what it would take to level the playing fields between insiders and outsiders.

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13 David April 9, 2010 at 5:48 pm

“As it currently stands, previews often try to trick audiences rather than enlighten them”

I’m not sure I agree. Though I certainly see the occasional preview that gives me little real impression about the movie it’s previewing, in my experience those often turn out to be movies that were difficult to neatly pigeonhole. There are definitely prevailing movie preview tropes, but I rarely feel tricked by movie previews.

14 Tony- WCU April 13, 2010 at 9:38 am

This is interesting, betting on movies? I guess we can find anything to gamble our money away on these days. I am not sure how betting markets would influence the movie industry. I would like to focus my comment on the section of your post where you address the music industry. I believe the ability to preview music has had a positive impact on the music industry. Itunes for example allows you to have a preview of the song you wish to purchase and you are able to purchase single songs from albums. This results in higher utility for the consumer per song, which in turn entices he consumer to find more songs they like. I don’t think that being able to preview the song hurts the music industry; it only hurts the artists who have bad songs.

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