Hollywood Games People Play

Will Ben Affleck come back? Which movies will hit it big? The Hollywood Stock Exchange helps companies make educated guesses

In Night at the Museum, Ben Stiller plays a bumbling security guard who accidentally unleashes an ancient curse that brings to life all the statues and preserved animals in the American Museum of Natural History, wreaking havoc on New York City. The movie, slated for Thanksgiving release, is projected to bring in $215 million for 20th Century Fox, the highest box office receipts for any film released during the critical holiday season.

At least that's what people who use the Hollywood Stock Exchange expect. The Hollywood Stock Exchange is an online game where players make box office predictions for thousands of upcoming pictures. It works much like a stock market, except that traders use $2 million in play money to make bets on which films and stars will bring in the most money.

What most players don't realize, however, is that movie studios such as MGM and Lions Gate Entertainment (LGF) use information gleaned from this market to help make advertising and promotion decisions. 20th Century Fox declined to discuss the service, as did some other studios.


  Hollywood may be ahead of a trend this time. Companies in other industries are just starting to use similar markets, called prediction markets, to let workers place bets on future events such as sales and product launch dates. The exchange even offers a service to help companies outside the entertainment industry set up their own prediction markets. Pharmaceutical and technology storage businesses are currently using the service.

In the film industry, it can take years between when a film begins development and when it is released in theaters. But films can also hit the Hollywood Stock Exchange two years before they are released. For example, long before Pirates of the Caribbean started playing in theaters, the Hollywood Stock Exchange knew it would have broad appeal.

"We knew it was going to be the blockbuster of the summer," says Alex Costakis, managing director of the exchange, which is a subsidiary of Cantor Fitzgerald. The exchange predicted that Pirates of the Caribbean: Dead Man's Chest would make somewhere between $110.7 million and $138.6 million for Disney (DIS) on opening weekend. It raked in $135.6 million. Currently, 21,641 people hold this stock in their portfolios.


  Anyone can sign up for the Hollywood Stock Exchange as long as they're willing to reveal basic demographic information. Players then choose how they want to spend their $2 million Hollywood dollars. They can buy stocks in individual films such as Indiana Jones 4, the much anticipated sequel to the series and the most widely held movie stock on Aug. 3. Or they can buy StarBonds, which is stock in individual actors and directors.

The price of a StarBond reflects how much money an actor or director's films have made at the box office. "Johnny Depp is more widely held than anybody else," says Costakis (see BusinessWeek.com, 7/9/06, "Hollywood's Hottest Investments").

Traders who prefer to spread risk among a number of films can buy into a Movie Fund, which is a group of securities managed by a fund manager. One fund doing particularly well is the Comeback Fund, which invests in StarBonds of actors who are getting their careers back on track—sometimes after a serious illness, an arrest, or a visit to a rehab center. Actors in this fund include Ben Affleck, Melanie Griffith, and Robert Downey, Jr.


  There are also Hollywood Derivatives, which are short-term investment opportunities based on a specific event, such as the opening weekend of a particular movie or the Oscars.

Each year the Hollywood Stock Exchange forecasts the winners of the top eight categories of the Academy Awards. Over the last three years its accuracy rate has been 92%. "It definitely beats polling," says Costakis.

One difference between the Hollywood Stock Exchange and the conventional stock market is that insiders are encouraged to play. In fact, most prediction markets welcome insiders because knowledgeable people help make accurate forecasts. There's also an element of self-selection in prediction markets such as the Hollywood Stock Exchange. People who don't do well usually lose money and then lose interest in the market.


  But it's important to have less informed people coming into the market to give experts an incentive to keep betting. "The best way to get experts to participate is to get them to think they're going to make money," says Justin Wolfers, a professor at the Wharton School at the University of Pennsylvania, who has studied prediction markets.

Some traders in the Hollywood Stock Exchange have made over $1 billion in play money. Since it was founded 10 years ago, about 1.6 million people have registered to play. Currently there are 623,000 players in the database, and the exchange processes about 42,000 trades per day. The exchange was founded by two men, one who worked in financial services and the other an economist, who both loved movies.

The original idea behind the exchange was to give the movie-going public some measure of control over what was being done in Hollywood. The Hollywood Stock Exchange was sold to Cantor Fitzgerald in 2001.


  The Hollywood Stock Exchange gives traders just enough information to be able to play the market. But it collects a great deal more data and uses sophisticated models to project the demographic makeup of a movie audience. It can tell if a certain film will appeal to men in the 18 to 34 age group or whether it will play well with women over 35.

The Hollywood Stock Exchange then sells this research to entertainment companies. This service is another method, after conventional focus groups and screenings, that film companies can use to prepare advertising and promotion campaigns.

If the Hollywood exchange is correct, Ben Stiller and 20th Century Fox will both have a jolly holiday season.

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