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Will Carl Icahn Go Long "Twilight"?


Who will benefit from movie futures trading.

Editor's Note: Minyanville welcomes its newest professor, Christopher Dixon. Chris has over 30 years experience in operating and investing roles in the media and entertainment industry. He's a 10-time member of the Institutional Investor All America Research Team and was also ranked as a Wall Street Journal Best on the Street for the cable industry. Please join us in welcoming Chris.

The CFTC's approval of movie futures trading raises the question of who benefits. Theoretically a perfect futures market is made up of three parties -- the principal or manufacturer who's seeking to lock in expected revenues, the purchaser who's looking to lock in a price, and the speculator who's willing to absorb the spread.

Given that movie ticket prices are well established in the market, most exhibitors know the terms of the contracts over the key four to six weeks a picture is in release and can move pictures around the multiplex to optimize returns, and studios can tweak their advertising to boost returns, the real question becomes: Will the exhibitors or studios use the markets to hedge their exposure?

Will they short the box office on a picture they think will underperform or go long on pictures that can probably outpace expectations?

Because most film industry professionals obey the William Goldman rule ("Nobody knows anything"), it's tough to see how the box-office market is much more than a place where speculators will prevail -- ensuring a boatload of volatility and little financial purpose. It's likely that Trend Exchange, the creator of the movie contract, will end up throwing a party with no one from the industry (where are you Ryan Cavanaugh?) showing up. No wonder the MPAA is cool to the proposal.

What's curious is that if one defines a futures market as the opportunity to transfer risk between interested parties at a price, then the opportunity to create a futures market in other aspects of the media industry actually makes sense.

Perhaps the best example is the market for 30-second television spots. There you actually have all the pieces needed. Sellers with a fixed amount of inventory, buyers seeking to lock in volume, and speculators who are willing to take on the risk associated with shifts in the market between the time the contract is written and when it naturally expires. In a sense, the current "upfront" and "scatter" markets are ad hoc efforts for television networks and advertisers to lock in prices for inventory to be delivered at a later date and "scatter" is no more than a cash market that determines whether or not the futures market reflects the spot pricing.

Of greater concern is the outlook for film financing. As revenues from DVD have yet to be replaced by electronic downloads or day and date premium pricing for video on demand, library values will come under pressure, driving expected returns ever lower while benefiting the majors like Disney (DIS), Time Warner (TWX), Fox (NWS), or Paramount (VIA) who have sufficient scale and lower capital costs than the emergent studios like Summit, Lions Gate (LGF), or, of course, MGM. This in turn raises the bigger question: What does Carl Icahn know, why does he want to buy a studio, and will he seek to hedge his investment with the newest derivative?

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