The future of movie futures

Took the kids to Toy Story 3 on Sunday, and that has set me on a meandering course through actuarial science that ended at the financial regulation bill thrashing about in Congress.

See, I really liked the movie. I lucked into the 2-D version, thus saving $12 to put toward weekend beer money. And I even got a little teary at the end. (You will, too.)  So I dug up this article on box office receipts. The movie took in about $110 million opening weekend. Then I read this nugget:

In the past, Pixar pictures ultimately have grossed, on average, slightly more than four times their opening-weekend take in the U.S. and Canada. If the same holds true for “Toy Story 3,” it will end up at about $450 million.

To this wheezy, old actuary, that sounds just like loss development. You are following a cohort (Pixar movies) and using past performance to predict future revenues. Here, we’re projecting an ultimate based upon the opening weekend (which I decided then and there to abbreviate OW). By my reckoning Pixar movies have an OW-to-ultimate factor of 4.13.

So if one were so inclined, one could collect weekly box office grosses and project ultimate revenues, updating weekly (or even daily). One could create a suite of development factors by animated films vs. summer action movies vs. romantic comedies. And sometimes you’d have to adjust your projections for quirks like Toy Story 3 debuted at midnight (most animated features don’t) or Transformers 2 debuted on a Wednesday, not a Friday.

And the data just about falls on you, there’s so much of it. Here’s boxoffice.com’s weekly cumulative gross for Avatar:

Still making about $12,000 per day

I’ve assumed the movie will gross $750 million in the end. It’s a couple hundred thousand under that today, and money continues to trickle in.

Anyhow, it all looked so …….. so …….. actuarial. Avatar, for example, has a 1-week-to-ultimate factor of about 5.50, which is probably quite high. But you could model all of this and predict box office receipts.

You could also do predictive modeling, based on most-viewed trailers, number of Facebook friends, or the ratio of positive to negative remarks on the web.

So you’re probably thinking: Yes, but who cares?

Futures traders. Recently, the CFTC approved trading in box office futures, starting with Matt Dillon’s next, Takers, opening in August. Boxoffice.com projects Takers to hit $22 million, after a $10 million opening weekend, a development factor of 2.2. Proponents of the idea include companies like LG, which would like to hedge against movies with which it has tie-ins, and movie sites like FilmGo.net, which like the additional news to cover. Also on board is economist Robert Shiller (Irrational Exuberance), who sees an opportunity to “democratize finance.”

The Motion Pictures Association of America (MPAA – the guys who hand out decency ratings), reflecting the thinking of the major studios, is opposed, saying rival studios could bid down a contract and create a self-fulfilling negative buzz.

Both California senators oppose, but argue the converse. They say that no one really has an interest in a movie doing poorly – unlike, say, wheat – where the farmer wants a high price but the baker wants a low price. That, the senators say, make the box office future a regular old insurance policy or, worse, gambling.

The CFTC rounds up commentary on the issue here.

Personally, it’s not a game I’d play. Studios are famously opaque and have burned insurers lots of times over the decades on film guarantee contracts. The guarantees are pretty simple. If a bloc of films debuting on a certain weekend falls below a certain gross, the insurance contract makes up the difference.

The most benign rumor I’ve heard centered on a studio backing a superexpensive movie with no sequel potential. (The hero dies.) It bought heavy film guarantees for the film’s debut weekend, then tried to pull the movie out of said contracts after the movie was test screened. The studio figured it didn’t need insurance after all for that film, which was called Titanic.

So I’ve always held the opinion that the studios can game anyone anytime anywhere and a futures exchange would be just one more avenue for their avarice. But it would be fun business to price.

But I may not get my chance. Though CFTC OK’d box office futures, the Senate voted to prohibit them as part of the financial regulatory overhaul (“Wall Street reform”). The House bill doesn’t have such a provision, and the matter will be decided in conference committee.

So for now, hold your bets.

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