fighting the copyright cartel - living in Paris - Max Keiser and the Hollywood Stock Exchange story

[maxkeiser]

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Hollywood Ending

A decade ago, a Wall Street trader and an L.A. dealmaker united to remake the movie industry in the image of the markets. They had capital, ambition, securities-industry savvy and an American public captivated by money and celebrity. So whatever became of the Hollywood Stock Exchange?

by Robert LaFranco

In late March 2000, Max Keiser and Michael Burns were tucked away in the VIP lounge of Hollywood's House of Blues, gleefully presiding over one of the town's hottest Oscar parties. The duo surveyed the scene: a throng of industry insiders, journalists, style-savvy party crashers, even Ron Jeremy, all descending on a buffet table brimming with enough gourmet fare to feed a small former Soviet republic. Spinning tunes was Moby — among the world's best-known DJs at the time — while Earth, Wind & Fire prepared for their headline set. Outside, a crowd of wannabes loitered anxiously around the velvet ropes, angling for a way to get in.

It was a heady time for Keiser and Burns, two former finance whiz kids who five years earlier had teamed up to start the Hollywood Stock Exchange. Their dot-com-era high flyer was going to change the movie business by revolutionizing the way movies were paid for — giving independent filmmakers a way to raise money online from the public and other investors. The way they saw it, soon anybody with a credit card and a computer could become the next Robert Evans.

Already, Keiser was a regular on Entertainment Tonight and The Howard Stern Show. Two months earlier, the HSX had proven the surprise hit of the Sundance Film Festival — publicity-wise, anyway — as Keiser and Burns's rented cafe drew hefty crowds who came for free cappuccino and a chance to check their e-mail. But the best buzz had come a few weeks later, when the HSX unveiled an enormous, colorful ticker in the heart of West Hollywood, offering live updates of "star stock" and "movie bond" prices scrolling along the side of a 7,000-square-foot piece of prime real estate like a newfangled companion to the Hollywood sign.

"We were going to change the way Hollywood worked," says Keiser today. "It was an industry ready for change."

But like many rising stars in Tinseltown, Keiser and Burns — and the exchange they created — would eventually flicker and dim. Not long after Oscar night 2000, the already buckling stock market cratered with sickening ferocity and sank into a three-year tailspin. For HSX, it was the moment in the movie when the ship hits the iceberg.

Today the founders and original investors in the Hollywood Stock Exchange are scattered around the globe with little to show for their efforts but a curious line item on their résumés. It's likely small solace to them that hedge funds and Hollywood are now converging like at no time in history — at least proving that their notion of an impending sea change in the way movies are financed was somewhat prescient. And it's probably salt in their wounds to know that in June, Dallas Mavericks owners Mark Cuban and Todd Wagner launched their own Hollywood financing firm — in their case, for buying out and bundling profit-sharing deals. For their part, Keiser and Burns remain the hapless protagonists of that rarest of Hollywood productions: a decade-long epic without a happy ending. And for every trader who has ever longed to close his positions, take his profits and stumble from the trading floor in pursuit of his dreams, theirs might be a reminder that not all markets are meant to be made.

It wasn't supposed to be this way. In 1995, Max Keiser, a 35-year-old former stockbroker and one of Shearson Lehman's biggest options producers, had come to Hollywood to work on a movie project that his old buddy Alec Baldwin had gotten placed at Miramax. Michael Burns, an investment banker with Prudential Securities in Los Angeles, was a 37-year-old with strong ties to the movie industry. Burns and Keiser met while working together at Shearson Lehman in the '80s, but in 1990 went their separate ways, Keiser to Paris to live off his Wall Street gains. One day, while sitting in a Hollywood cafe called Barney's Beanery, Burns and Keiser alighted upon the idea for an exchange in entertainment futures. Perhaps it was the high-octane espresso talking, but the way they saw it, their notion was revolutionary. The inspiration had come to them while thumbing through an industry trade publication, where they had seen a printed weekend box-office tally.

"It looked just like the listings for the S&P 500," Keiser says. "I suddenly looked at the movie industry like Michael Milken viewed the bond market. The original business plan of HSX was an exchange for predictive products that would lead to re-monetizing the industry and breaking up the Hollywood cartel. Using this platform we would allow many, many, many more people to have access to funds."

Based on his knowledge of the NYSE, Keiser began mapping out an exchange. He mimicked the double-action trading environment of a real exchange, setting up the whole thing in a virtual environment. He established a currency and treasury function, a virtual banking system, a virtual interest-rate function and other virtual back-end trading functions that he would eventually patent as the Virtual Specialist. Then he and Burns set about seeking approval to operate as an exchange that could democratize the insular movie business.

There was, however, just one little problem. The lack of transparency in Hollywood studio accounting practices made actual deliverables an impossible strategy to execute. Meanwhile, their business plan was hamstrung by Blue Sky laws and their inability to secure the CFTC's blessing. So Burns came up with a new idea: If they pitched the product as a game and developed the whole thing as a virtual economy, they would avoid the regulations — and still have a robust trading environment that could someday be used as a real-money movie-business exchange. Burns invested $400,000 and sent Keiser to the developers at Cambridge Technology Ventures, who finessed and expanded it, turning it into a robust fantasy market. The result was a completely self-sufficient platform for the creation of valuable predictive data but, sadly for users, completely useless wealth.

Then again, considering that this was the mid-'90s, that seemed as good an idea as any.
Hollywood Ending, pg 2

"When we saw that Blue Sky rules made it difficult to accomplish the trading aspect of it, we should've spent more time talking up the community aspect or even building it up as a MySpace-esque environment," Burns says. Instead, what the company began leaning toward was a consumer portal that would be not just an advertising vehicle but a source of data as well. Movie studios, it should be noted, conduct an enormous amount of market research before dropping $50 million on a movie, and the kind of data HSX was collecting was a natural fit for that purpose: Which demographic groups are buying into which movies and which stars? What is the public interest in horror films? How much buzz is there about the new Judd Apatow flick?

Prediction markets, based on the premise that mob wisdom rules, place trust in groupthink over the postulates of individual experts — and in this arena, HSX would prove to be a resounding success. Since 1998, HSX traders have chosen the top eight Academy Award category winners with 85 percent accuracy. Just this past February, a few days before it opened in theaters around the county, the HSX stock price of Eddie Murphy's Norbit was climbing through the 70s, while Hannibal Rising was hovering in the 30s. Using a simple formula known to the industry (divide the HSX price by 2.5 and multiply by 1 million), it has been consistently proved possible to predict a film's opening-weekend box office with a fair degree of precision. (A 2006 Harvard Business School study found HSX to be a relatively accurate online prediction market, finding its opening-weekend forecasts to be on target 77 percent of the time.) According to HSX, then, Norbit would open well north of $24 million and Hannibal at $12 million. Indeed, Norbit — despite withering, often vicious reviews — grossed $34 million and Hannibal $13 million.

Which, for what it's worth, is a neat trick. But what, exactly, is it worth?

It's an open secret that for the past few decades, Hollywood studios have used a trio of research companies — Nielsen National Research Group, Online Testing Exchange and MarketCast — to decide everything from cast mix and storylines to marketing strategies and release dates. Thus, while the HSX was initially greeted with interest, it quickly devolved into something of an online sideshow to the research world's Big Three. The industry was logging on, but getting anyone to pay for the data was a struggle.

Complicating matters, perhaps surprisingly, was the site's high visibility. By 1999, as dot-com hysteria dominated the cultural landscape, revolutionary hubris was running rampant and HSX was, in some ways, taunting the movie industry. Keiser began appearing on Entertainment Tonight offering weekly box-office predictions based on HSX trading performance. He was a frequent pundit on cable news programs and a thorn in the side of the studios who did not much appreciate the fact that this fast-talking stockbroker was tainting the public perception of their movies by loudly declaiming their prospects before they were even released. At one point, Keiser says, studios threatened to boycott ET; Keiser was pulled off the air. Still, Web traffic to HSX was increasing rapidly, and it wasn't long before more than 70 investors — including Citigroup, NBC, Travelers Insurance, Keystone Venture Capital and, of all things, the Scandinavian Broadcast Service — had ponied up some $40 million to get a piece of HSX. And although Keiser and Burns were still enamored of the notion of building a real futures exchange, their new investors dismissed the idea outright; they were, instead, eyeing an IPO. HSX built up a staff of about 100, more than a third of them in public relations and marketing, and the company went to great lengths to generate awareness, drive traffic and boost ad dollars — the favored revenue model of the day.

"I was outvoted," Keiser grumbles today. "It was gut-wrenching. The board bailed on me and my vision."

Regardless, those were the good times. HSX moved into a former Herb Ritts Gallery office in West Hollywood that it thoroughly revamped. Andy Kaplan, a top Sony television executive, was installed as CEO. They hooked up that giant ticker. They threw lavish million-dollar parties, became fixtures at film festivals and blew still more millions on advertising. Asked what the company spent its $40 million on that could not be considered promotion, Keiser, who still holds onto his dream of someday democratizing media finance, shrugs: "Nothing I can think of."
Hollywood Ending, pg 3

By then HSX was losing about $700,000 a month. By mid-2000, it had burned through $23 million in VC funding raised the previous year. And after the market crash eliminated the IPO exit strategy, HSX investors tried a back-door exit, linking up with a publicly traded pink-sheet company called Predict-It, another struggling fantasy market. On paper, the two companies could together claim revenue of about $10 million, but that figure was window dressing at best. Not long after plans for the pending merger were filed with regulators, Keiser and Burns checked out of the deal. Subsequently, the company's 70 investors also backed out, refusing to put up more money to float the venture.

"Everyone was struggling, and we were all trying to climb onto something that would keep us afloat," says former Predict-It CEO Andrew Merkatz. He has since formed a merchant banking firm, CountryRoad Capital. "Two drowning bodies grabbing onto each other does not make for a good ending."

Then suddenly, in May 2001, with the Scandinavian Broadcast Service in control of the assets and apparently willing to write the last check, Cantor Fitzgerald stepped in to acquire the company.

"We had launched a sports-spread betting program in 2001 and had interest in diversifying what we offered, and they were cheap and not making money," says Paul Galbraith, a spokesman for the Cantor Index in London. "But in the end, we never found a market for movie spreads in the U.K. With movies, there were just a couple of people who really knew what they were doing, and they had a lot more time on their hands for the entertainment futures market than our market makers did."

Slight, presumably, intended.

To be fair, today's HSX is, if nothing else, highly liquid for a prediction market. Since its inception 12 years ago, the exchange has created 1.7 million trading accounts and developed a sizable, cultlike following among movie fans. On an average day, 20,000 traders on the HSX will swap 2.5 billion shares in more than 40,000 trades, volume that dwarfs rival markets such as the Iowa Electronics Market and HedgeStreet. Compared to In-Trade, an Irish prediction exchange that offers markets in politics, commodities and other products, HSX is the NYSE: In seven years, In-Trade has created just 65,000 accounts, 12,000 of them active.

Still, there is one key difference that separates HSX from its competitors' sites: money. Traders on the Iowa Exchange, In-Trade and HedgeStreet are all investing with actual currency. At HSX, the $9.9 billion in "Hollywood Dollars" accumulated by the current leader are about as valuable as a photocopy of a dollar bill. Meanwhile, the number of active accounts at HSX.com has dropped to 650,000, an audience too small for Nielsen Net Media to bother tracking.

Keiser (who voted his 10 million shares "no" to the sale) now insists that Cantor has not made good on the deal — which the firm made using eSpeed stock — leaving the original owners with nothing. He estimates the company has since spent close to $20 million developing the exchange software he created, but has not yet taken advantage of the asset the way everyone expected it to. A Cantor spokesman declined to comment on Keiser's allegations.

The company does finally appear to be building on its prediction-market foothold: Earlier this year, it hired Andy Wing, formerly a Nielsen executive, to run a new division, Cantor Entertainment, with HSX as its centerpiece. Might HSX finally achieve legal exchange status? Consider that it took HedgeStreet two years to win its legal-exchange designation, then another 18 months to get it off the ground. Or that in 2005, In-Trade was fined and placed under tight restrictions regarding its U.S. activities, while the Iowa Exchange, a nonprofit and largely academic outfit, has been granted a "no action" waiver from the CFTC so it can operate in the U.S. without penalty.

As for the founders? Michael Burns, it is safe to say, landed on his feet. Having spent a decade brokering broadcast deals as an investment banker for Prudential Securities' Los Angeles office, Burns had maintained strong ties with the entertainment business and was helping to build the independent studio Lions Gate Entertainment even as he was working on the HSX venture. Today, Burns is Lions Gate's CEO.

Keiser, meanwhile, is still relishing his role as a rebel. Leaving both Wall Street and Hollywood in the dust, he spends most of his time in Paris producing films for the Al-Jazeera news network and heading up his latest venture, Kinooga.com. Kinooga, as Keiser explains, is the offspring of his original idea, providing a venue for individual buyers to finance independent media projects. "We're creating a funding mechanism for independent producers to compete with the entrenched entertainment cartel," he says. "This is an unregulated piece of business that gives many, many, many more people access to funds."

As for Keiser and Burns's original dream, that online Hollywood market that would turn John Q. Public into a mouse-wielding movie mogul? Consider that based on the $1 commissions now being earned by HedgeStreet, a trading business even merely the size of HSX today would generate $30 million a year in revenue. Cantor's own spread-betting business in the U.K. is now earning $70 million in annual revenue, according to Galbraith. "Any way you slice it, the trading business far outstrips selling research," Burns says. "I'd be very surprised if a futures exchange is not the business Cantor wants to get into. It just doesn't make sense otherwise."

This final scene, it seems, has yet to be written — for both the future of online futures markets and one trader's crazy dream that simply refuses to die.

[maxkeiser]

1. maxkeiser; correction and amplification on SBS and Cantor deal...

in the article the way it was published; the journalist writes:

'Then suddenly, in May 2001, with the Scandinavian Broadcast Service in control of the assets and apparently willing to write the last check, Cantor Fitzgerald stepped in to acquire the company."

The deal between SBS and Cantor was prearranged (and in my opinion not in keeping with SEC regulations). SBS had the sale to Cantor already made when they took control of the common stock of HSX with a sum of money (2mn. dollars) that 'crammed down' or eliminated the common stock as an ownership stake with a new preferred class of stock. The company was then 'sold' to Cantor for 2 mn. in ESPD stock (the listed entity of Cantor - at a cost to Cantor being almost nothing). In other words, SBS was able to get their hands on 2 mn. of ESPD stock for nothing... As a sweat heart deal arranged on the board level (illegally in my opinion) that effectively killed the common share holders and the company. Alas, the stock deal did not pan out because Cantor moved the company to the top floor of the WTC just a few months before 9/11 when fate finally caught up with them and they lost something like 600 bankers... The actions of the board to allow this "sale" to happen is another story that really does start to get into some interesting Hollywood back waters; let's just say that the board was not acting in the best interests of the share holders...