Modern Cinema Exchange

Operational Plan

September 12, 2017

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Table of Contents1 Introduction.......................................................................................................................... 3

2 Background.......................................................................................................................... 5

3 Past Attempts....................................................................................................................... 6

4 Summary.............................................................................................................................. 7

5 Overview.............................................................................................................................. 8

5.1 Production Financing.................................................................................................................. 8

5.2 Media Distribution....................................................................................................................... 9

5.3 The Integration of Production Financing and Distribution...........................................................9

5.4 A “Futures” Exchange vs. an Industry Alliance.........................................................................10

5.5 The Symbiotic Vision................................................................................................................11

5.6 Publicly Traded Companies (Securities)...................................................................................12

5.7 Risk Management Options in the Media Business...................................................................13

5.8 The Capriciousness of the Media Industry...............................................................................15

5.9 Media Hedging.........................................................................................................................15

5.10 Standardization and Liquidity....................................................................................................16

5.11 Alternative Approaches............................................................................................................16

5.12 Dangers of a Media Czar..........................................................................................................17

5.13 Functions within a Disinterested “Futures” Framework.............................................................18

5.14 Freedom of Information within a “Futures” Exchange...............................................................19

5.15 Insider Trading and Information “Leaks”...................................................................................20

5.16 The Modern Cinema Exchange................................................................................................21

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1 Introduction

For decades, major content owners have kept their downstream distribution partners at a comfortable distance.  They believe more money can be generated from these downstream partners if they are detached from the financing / production processes.

Although this strategy has resulted in windfall profits over the years, times are changing and risks to both production facilities and distribution platforms (cable, satellite, internet, IPTV, mobile etc.) are greater now than ever.  The underlying proposition described in this document provides detailed specifications regarding how production facilities and platforms can combine their efforts in such a way as to derive benefits from both sides of the distribution supply chain and reduce risks along the way.

When considering how production facilities and platforms can combine their functions (to their mutual benefit), this document introduces a “Futures Exchange” as the specific point of integration.  Although a securities exchange can also offer a “rallying point”, securities do not perform in ways that mirror the media distribution process.  (Media arrives in bursts.  Futures exchanges operate in bursts.)  Other than exchanges, alternative mechanisms can be industry-wide alliances, however people involved within the industry are often barred from communicating with one another and in many cases, do not enjoy each other’s company.  There must be a “disinterested rallying point” for the two sides of the supply chain to come together.  A “Futures” Exchange is the correct rallying point as will be further described below.

Please see the three graphs (below) labeled A, B and C:

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Graph A shows a typical security (or stock) being traded on a stock exchange. The company represented by the stock continues to grow in value over time, however has experienced at least one correction in its recent history.

Graph B shows a “Futures” contract that reaches a peak quickly, settles into a pattern that reflects its notional value, and then comes to an abrupt end as the contract term concludes (and settlement occurs).

Graph C shows a typical media title that enjoys early success (as it is new and attracts those looking for fresh content), however declines quickly as other media titles are introduced into the market. Such a media title will most likely enjoy years if not decades of earnings within a “library” designation (sometimes referred to as “Long Tail”). This is different from a “Futures” contract, as a “Futures” contract will cease entirely where the media titles enjoys what could be a very long shelf life. Still, the bursts in activity are similar with the long-term value determined within a relatively short period of time.

When Graph C is compared to Graph A, it’s easy to see they are different. The security (or stock) represented by A trends up or down incrementally over time, as compared to the media title as represented by B which tends to rise quickly and then concludes over a period of months. The A and C trending patterns are therefore, not compatible.

When Graph C is compared to Graph B, it’s also easy to see that they are not exact, but they are similar. Although a media title is considered a security by its nature, it doesn’t act like a typical stock. It acts like a “Future” and can be packaged as a “Derivative Future”. This is the point of this document, and why this

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“Futures” trading model provides the basis for an integrated financing, distribution and promotional network that is compatible with real-world media economics.

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2 Background

As mentioned above, this document describes how a “Futures” exchange is the correct point for the integration for a Next-Generation media financing, distribution and promotional network. If you were to ask the astute question, is a media asset a “Future” or a “Security”, the answer is, it’s a “Security” that acts like a “Future”. If it’s one thing that acts like the other, then I would suggest both options are available for the purposes of creating a novel rallying point for providing:

o New Sources of Production Financing

o Lower Costs of Media licensing

o Larger Promotional Campaigns

o Valuable Risk Reduction Tools and Resources for both sides

Once we have settled on the “Futures” Exchange (as it operates in bursts that mirror bursts found in media distribution), all that is left is to create the systems, technologies and interfaces that are required to operate such a symbiotic network.

In the past, the author of this document wrote four different documents that performed the following functions:

1. US Patent 8,037,506-B2 Allows content media to be broken into segments (or contracts), and allow these contracts to be openly traded on an exchange (similar to a commodities-style exchange). These processes allow new sources of capital financing for media projects as traders and speculators can involve themselves in buying and selling fractional interest in these media assets. Therefore, new and significant amounts of investment capital are made available to the media production industry.

2. US 2014/0172661-A1 A system for financing of film and media productions of individual movies or slates of movies which provides returns on investments for subscribing members who may be television and media broadcasters.

3. Provisional Application Filing Number: 61737086 Allows for the creation of a media co-financing alliance that allows like-minded distributors around the world to collectively invest in the motion picture assets they distribute, helping them to offset the high costs of content acquisition by factoring in “backend” profits when they are realized.

4. PCT/US16/59240 Allows global mobile carriers to distribute early-release media titles by way of Multicast “Pre-Positioning” whenever possible in order to reduce distribution costs while keeping the resolutions and quality-of-service as high as possible (over often-congested international mobile networks).

This document provides additional building blocks (with its own novel methods, means and tools) for accomplishing its stated goals (as described herein) for such a media “Futures” Exchange.

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3 Past Attempts

In the 2007 to 2010 timeframe, two companies in the United States spent a great deal of time, money and resources launching on-line exchanges that would effectively “game” box office results for Hollywood movies. One such company was referred to under two names, “Media Derivatives” and “The Trend Exchange”. The other company was launched by Cantor-Fitzgerald’s with the name “The Hollywood Exchange”. Since such box office “gaming” models brought no direct benefit to the motion picture industry, and only exposed risks by way of insider manipulation, these proposed “Derivative Box Office” models were officially banned in the United States by the federal government (with the Motion Picture Association leading the way).

Note: See the many links to Senator Dodd’s efforts to outlaw box-office derivative “gaming” readily available by way of Internet searches (in the 2010 timeframe).

Neither of these two trading platforms provided access to production capital and neither model integrated with downstream distribution partners. The means and methods presented in this disclosure are therefore not only different but vastly superior to these other box office derived “gaming” models as they provide numerous constructive benefits to the industry none the least is a new source of production financing.

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4 Summary

A commodities-style exchange is established to take a percentage of the equity in a given media asset, break the (derivative) equity component of the media asset into numerous discrete contracts (such as commodities-style contracts), and then list these contracts to potential buyers, sellers and speculators by way of means, methods and tools found in the domain of “Futures” trading.

Within this process of listing “Futures”-style contracts, downstream distributors are allowed to buy contracts, and if they buy a pre-determined number of contracts and hold these contracts until settlement, they will receive four benefits as follows:

1. Distribution Rights within their discrete territories (Exclusive or Non-Exclusive depending on the number of contracts purchased)

2. “Backend” equity within these media assets as defined within the contracts (allowing proportional revenues to be distributed to these same distributors)

3. Valuable Ad “Avails” as provided by distribution partners (cable, satellite, internet, IPTV, mobile etc.)

4. Valuable Risk Management means, methods and tools

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5 Overview

To understand why such a model is being proposed, it’s important to understand both the financing processes and the distribution processes independently. Then, the points of integration between the two processes can be described showing the mutual benefits and potential for risk reduction as follows:

5.1 Production Financing

Let’s start with the Production Financing processes.

Large and prestigious banks are almost always included in the financing of large-scale media projects. Even if personnel at major studios claim to effectively “self-finance” their own media productions, a deeper dive tells us otherwise. Large banks are almost always involved in one capacity or another, and when they are not involved, it’s a recognizable sign that things are not going well for that studio.

Major banking institutions are well known for co-financing longer-term “slates”, providing gap-financing, mezzanine financing, lines of credit and other facilities that are almost always depended upon before production processes can commence. The scenario of a bank providing all or the majority of “risk capital” for a single movie (as a private investor may consider) is non-existent, however. Banks play an important role within the media production business, however their exposure to risk is kept to a minimum and in virtually all cases, large amounts of production capital must be raised elsewhere.

Note: Banking institutions could be hedge funds, private equity firms, high net-worth individuals and other entities that are established to provide working capital to major industry sectors.

In some cases, foreign distributors are involved in co-financing arrangements, however such financing is typically less than that which is required to produce a title. Therefore banks (of one kind or another) are still needed to fill the gap at a minimum.

If the question is asked, why do banks involve themselves in the media financing business, the answer is, to make a profit by way of their exposure to risk (even though such exposure is often limited). Although a given movie may lose money, a slate of movies (produced by a reputable production entity) will most likely yield a profit between a low of 8% to a high of 25% given the aggregate performance of the titles within the slate. When very large amounts of money are invested in large-scale slates, 8% is worth-while for them, and the potential for larger returns are ever-present.

Virtually all of these banks employ personnel who have deep knowledge and understanding of the media production business and are able to establish their own risk management strategies, and in some cases, hedging procedures as they seek to gain approval from their investors. For the purposes of this document, we’ll call such personnel “Industry Analysts”.

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By way of the astute maneuvering by these Industry Analysts, and due to the restrictive nature of media financing contracts, it’s these banks that are often the only groups to get their money back or enjoy a profit (after top-line production costs have been paid).

The important point to note being: cash departs from the distribution supply chain and is consumed by banks which may or may not decide to invest again. If these banks make the decision to cease all future media investments, then the media business as a whole is left weaker, as valuable working capital has disappeared - unnecessarily.

5.2 Media Distribution

Now let’s look at the Media Distribution side of the equation:

On the other side of the supply chain, early-release media content is prohibitively expensive for most Platform Operators (cable, satellite, internet, IPTV, mobile, etc). It is well-known that revenues generated from media content are almost always less than the license fees that are required by the content owners (especially Hollywood content). This is why the larger platforms operate by way of monthly subscription fees and consider media acquisitions as simply the cost of doing business (or the loss-leader).

Example: A license to Wonder Woman in a given territory may be $250,000 (USD). The actual receipts for such a given movie (Home Theater, Electronic Sell-Through, Home Video, TV, Library Services and otherwise) may yield $200,000(USD). The monetary loss (without consideration for the value such a title brings to a network) is therefore $50,000. This is why subscriptions are important. Platform Operators understand big-budget titles lose money, but they bring prestige to a distribution network so as to justify a subscription fee of one kind or another.

In many territories, piracy prevails, and Wonder Woman is made available to individual consumers for no more than $1 (USD), if not made available for free. This is the point that can sometimes break the back of international media distributors. They not only need to pay exorbinant license fees for high-profile media content (often beyond their receipts), but they must compete with unauthorized services that avoid paying license fees altogether.

Note: It is well known that global gtelevision operators use media content as a “loss leader” to sell highly profitable broadband services.

5.3 The Integration of Production Financing and Distribution

In the future, new business models must be developed that will retain all-important cash reserves within the supply chain, and provide more benefits to both sides. The media “Futures” model as presented in this document provides significant benefits to both sides as follows:

Producers receive valuable financing from well-established media distributors who will not exit the supply chain (in aggregate) as could happen with a high-profile bank.

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Distributors receive profits that would otherwise be directed to banks so they can use this windfall to buy-down the cost of future content acquisitions

Production companies become healthier organizations in aggregate as there is more money made available for high-value media productions.

Distributors become healthier organizations as the overall costs associated with content acquisition have been lowered (due to new “backend” profits that effectively off-set exorbinant license fees)

Larger promotional campaigns can now be launched by way of the negotiation for global Ad “Avails” that will be described in detail below.

Risk management mechanisms and facilities are also made available allowing both ends of the supply chain to better manage general to highly granular risk scenarios. These risk management mechanisms are expressed in the more sophisticated strategies including, but not limited to short positions, straddles, strangles, swing trades, calendar trades, etc.

Note: “Backend” revenues are often scoffed at by many within the industry. At the same time, banks continue to contribute capital for media productions. The solution to the problems associated with “Mystery Backend” is the placement of the investor from within the waterfall. If platform operators are acting collectively as a bank, they can be paid collectively as a bank from within a preferred disbursement tier. More about “Backend” positives and negatives can be found outside of this document.

5.4 A “Futures” Exchange vs. an Industry Alliance

An industry insider may look at the “Futures” model and consider it to be unnecessary as an alliance of content owners and distribution partners may solve all of the issues presented in this document without the need for a “Futures” exchange. The problem then revolves around the creation of an “interested” alliance vs. the creation of a “disinterested” “Futures” exchange.

Any alliance created within the global media industry today will have its influential partners and it’s not-so-influential partners. Such a model will quickly break down as the smaller groups will become fatigued by the bigger groups that continuously manipulate conditions to gain an unfair advantage.

There are some technical problems as well. It is well-known that certain groups are prohibited from speaking or meeting with each other unless under the umbrella of a recognized industry organization (such as the Motion Picture Association). The reason for the prohibitions are centered around concerns about “price-fixing” and the potential for fostering an “anti-competitive” climate. This is why it’s common to find certain people exiting a room when new people enter certain Hollywood venues.

Another problem is the general acrimony found among these groups. The industry in general is relatively small and seemingly incestuous. A given executive from one media company will most likely have worked for (and created enemies) at other media companies. All of these issues mentioned above conspire to relegate an Alliance to a model that is simply unworkable in practice.

In contrast, a “Futures” exchange is a superior model as it is always disinterested, yet offers a highly granular apparatus to its constituents. It operates as a cloud-based network that allows for the most

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unsophisticated trades to the most ultra-sophisticated trades, all without the need for any group to meet amongst themselves or make any decisions (collective or otherwise). All functions and processes can be performed as needed by way of placing trades (and simultaneously entering into license agreements) without the need to form an industry alliance.

Note: License agreements could involve public or private auctions including public or private negotiations.

5.5 The Symbiotic Vision

The fundamental idea is to simultaneously provide production financing while, at the same time, allow platform operators to enjoy the perennial 8% to 25% profits that are currently enjoyed by banks. This means these platform operators will need to purchase equity ownership in media assets even though they are typically too small to make such proposals on their own (with few exceptions).

See Figure 5.1 (below). The left-hand side of the figure demonstrates how banking organizations provide production financing and receive profits for their participation. In many cases, these are the only profits enjoyed (after paying the project’s top-line costs).

The right-hand side of the figure shows how these same profits can be re-directed to Platform Operators so as to lower their overall cost of content acquisition.

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In Figure 5.2 (below), the graph on top demonstrates the perennially high cost of acquiring popular media licenses. The graph on the bottom shows a steadily declining line (in BLUE) that estimates the cash needs for future content license purchases, as eventual profits (from “backend” equity positions in numerous media titles) off-set these very high content license fees.

5.6 Publicly Traded Companies (Securities)

In the past, publicly traded companies have emerged that allowed investors to buy and sell shares of stock in a given slate of movies (example: Silver Screen Partners I and Silver Screen Partners II). The best of these companies returned only small amounts of money to shareholders, with most of them recognizing losses (as it requires a sizeable number of movies over time to ensure a profit). These publicly traded companies were simply too small to build the libraries they needed to reduce the risk of fickle audiences.

The major Hollywood studios themselves are publicly traded companies, and an investor can buy shares in any of these companies, however may find it difficult to gain access to the performance of a given movie (or even a slate of movies). The financial statements produced by these studios combine financial performance among entire business units, providing virtually no granularity (regarding discrete media titles) whatsoever. In addition, the share price of these large publicly traded companies typically

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experiences modest increases year over year (Disney, Fox, Sony, Comcast, Warner Bros, etc.) with the exception of periodic market corrections.

Conversely, a “Futures” exchange facilitates the buying and selling of contracts for a discrete media title with no other business influences whatsoever. The level of granularity for that discrete title cannot be higher.

Note: A slate of media titles can also be bundled within such a framework to further allow for creative and highly valuable trades.

5.7 Risk Management Options in the Media Business

In virtually all business sectors, risk management mechanisms and tools exist. For example, an oil producer can short crude oil indexes. Farmers can short the crops they grow on a commodities exchange. Software companies can buy shares of its competitor’s stock, etc.

When considering the media financing, production and distribution processes, there are very few tools available for hedging or otherwise managing risks associated with production financing. For the most part, completion bonds provide some assurance that projects will be finished, but by whom? The insurance company? The insurance company will now see to it that the movie is finished? What can we now expect from that movie? Insurance policies serve a useful purpose, but on their own they do not provide the necessary apparatus needed to truly manage financing and production risks.

Let’s consider a real-world example as follows:

We have a given producer who has invested a great deal of time and money in a project that has been on-going for years. He is enthusiastic that the project will now see the light of day, however worries about competitive projects that may arrive on (or around) the same release date. He wants to hedge, but does not know how. He thinks of investing money in the competitive project (as it then won’t matter which project prevails), but his funds are limited, plus this would make industry headlines: “Producer hedges against his own project”!) Such a producer’s options are limited and in addition, any such attempts will be considered disloyal to a project that he and many others have nurtured for years if not decades. In the end, the two projects are pitted against each other, and one will most likely outperform the other. In some cases, catastrophic losses mean the end of what could have been a long and prolific career for such a producer.

If such a producer had a Media “Futures” Exchange available, then tools and mechanisms would then be available to mitigate risks which would ultimately allow for more creative energy to be focused on new projects to fill an ever-expanding global media pipeline. Such a producer would place his carefully crafted trading strategies (to either limit the downside risk to his own project, or increase his upside exposure to his competitor’s project), or place other more sophisticated trades that would limit unwanted down-side exposure.

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As an added measure of security, the producer does not even need to perform these trading functions himself as he can have his attorney (or an alternative advisory service) place the necessary trades on his behalf. This way he can be assured that no information leaks will associate his name with attempts to manage his risk.

Note: Of course such information could be made available under court order, but in the unlikely case this happens, such a court order would happen years or even decades after the face, insuring no such negative news would harm the project’s opening.

The Figure 5.3 below shows two different graphs. The graph on top illustrates the possible scenarios that a media producer (or content owner) may face given the upcoming release of a discrete media title. The graph on the bottom illustrates the significantly smaller range of outcomes, as a good deal of the “upside” was traded for the removal of “downside” exposure. Such a producer (or content owner) can now concentrate on other matters (other than frightening doom and gloom scenarios).

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In Figure 5.3 (below), the top section shows the possible financial outcomes for a given media project. Everything from a huge financial success to a huge loss are represented in this figure. The bottom section of Figure 5.3 (below) shows the downside potential has been capped by trading some of the upside potential. Such an outcome (within these boundaries) would be considered acceptable by the producer.

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5.8 The Capriciousness of the Media Industry

Every year industry experts are surprised by the success or failure of media projects that are widely released. Big-budget sequels fail and small independent films make fortunes. In years past, movie distribution companies (such a Relativity Media and others) had access to software algorithms (sometimes referred to as Monte Carlo algorithms) that were touted to predict the success or failure of a given movie. By way of these supposed software innovations, substancial amounts of money were invested in Relativity and others, however time revealed two things as follows:

1. The algorithm was no better than the prediction of dart-throwing monkeys2. Monte Carlo (movie prediction) algorithm are ubiquitous and are in no way owned and controlled

by a small number of Hollywood insiders

It is well known that Relativity Media was unsuccessful in its bid to become a major Hollywood studio on its own. It lost its bid because it only confirmed what many people already knew. Nobody can predict how a given movie will perform in the box office no matter what criteria are used. Economists would say, it’s simply un-knowable.

Some people believe factors completely removed from the movie business contribute more to success or failure scenarios than anything else. For example, the weather. Or good news for the region on a given weekend (favorable elections, positive economic news). In the end, big movie investments often fail and small independent movies elbow-out larger movies as the entire market is capricious by its nature.

5.9 Media Hedging

As mentioned above, virtually all economic sectors have hedging mechanisms and tools that its constituents can use to manage risks (or simply limit their downside exposure). This is not the case in the media financing / production and distribution business. The fundamental mechanisms when they do exist cannot be accessed by most people within the industry, and the problems are exacerbated by an industry that is prone to media hype. Hedges could be discovered by a rapacious press which could lead to self-fulfilling prophesies not found in other business sectors.

All of these issues conspire to challenge today’s conventional wisdom and suggest an alternative and more flexible approach be made available. A “Futures” exchange not only provides such an alternative, but offers additional benefits that might escape initial consideration (such as the aggregation of huge numbers of Ad “Avails” to insure robust promotional campaigns for future media releases).

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5.10 Standardization and Liquidity

One of the hallmarks of “Futures” trading is standardization. Gold is gold. Euros are Euros. Crude oil is crude oil. Conversely, Wonder Woman is not Fast and Furious. The Big Bang Theory is not Modern Family and Candy Crush is not Call of Duty. Media assets do not provide the standardization of materials that characterize “Futures” trading, and this fact is recognized by the Modern Cinema Exchange team members. This issue is important and will certainly be raised by the media industry not to mention the larger “Futures” trading community.

Instead of arguing that “backend” media derivatives are “backend” media derivatives, it’s better to characterize the trading model as the trading of small-lot, fungible, on-exchange content licenses with standardized contract specifications.

Definition: Fungible – Able to replace or be replaced by another item; mutually interchangeable.

The important thing to note is the apparatus found in “Futures” exchanges can be used to facilitate fungible on-exchange transactions. This may be a better way to characterize the trading model, however the term “Futures” exchange will be used throughout this document for brevity (at a minimum).

Regarding liquidity, there are tens of thousands of platform operators around the world and thousands of media producers (of all kinds). In fact, there are most likely tens of thousands of platform operators and thousands of media producers in China alone. The actual number could be as large as one hundred thousand world-wide. It is expected that market liquidity and volatility will be at least adequate to achieve the necessary trading volumes required to sustain such a model, not to mention providing all-important “price discovery” functions needed to determine value benchmarks.

5.11 Alternative Approaches

No matter who is consulted in the media production and distribution industry, all agree the framework is old, inefficient, expensive and desperately in need of innovation. Thoughts of moving various functions on-line (which would disintermediate middlemen) causes two major concerns as follows:

1. Threats of rebels being placed on a “blacklist” that could reduce or eliminate avenues of distribution

2. The emergence of a media czar (individual, company or alliance of companies)

The first concern is unreasonable as distribution supply lines are highly fractured and the emergence of such a threat would only invite new and potentially more attractive opportunities.

The second concern is valid and should be avoided at all costs. As presented above, a “Futures” exchange is completely neutral and cannot act as a czar by its very nature.

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Other alternative approaches are listed below:

Knowledgeable insiders may consider this model to be unnecessary as they would assume that all of the features and benefits can be achieved without employing a “Futures” exchange.  For example, a platform operator could negotiate a backend equity component within the structure of one or more future licensing deals.  In addition, a producer could likewise negotiate ad “avails” from such a platform operator (that could potentially lower promotional costs).  A deeper dive suggests this is simply impractical.  The efforts associated with re-opening often complex financing contracts is simply too arduous to accommodate all but the world’s largest platform operators (who pay the highest licensing fees), and the largest of platform operators often have equity ownership initiatives by way of their own production facilities.  For a given platform operator, the legal costs associated with modifying existing financing contracts could easily exceed $100,000 (USD).  If such costs are borne by the platform operator, then any benefit could be erased by the legal fees alone (not to mention the operator’s time and expenses).  If such costs are borne by the content owners, then only one or two platform operators could be accommodated without changing the media title’s fundamental economics.

Another approach is to create complicated bond structures (ETFs, UITs and others) that allow for both the granting of distribution rights to platform operators and the delivery of ad “Avails” (or other valuable resources) from content owners.

The problems with such structures are:

1. A given bond can only be purchased through one designated source and these bond sources compete against each other. Example: Broker A would be promoting one bond above Broker B’s bond, and both would have significant limitations. Therefore, the brokerage services and brokers themselves do not offer a standardized apparatus that platform operators can use to efficiently purchase media license rights plus equity in exchange for cash and ad “Avails”.

2. Although bonds are sold from time to time, they are not actively traded. As a result, these instruments do not foster the liquidity needed to allow cash to readily flow through the system.

5.12 Dangers of a Media Czar

When analysts peer into the future to look for ways to place all transactions on-line (and save as much as 40% in systemic inefficiencies while increasing their global reach by the same number), the stage becomes unwittingly set for a sort of media czar (as mentioned above). Such empowerment would create a vacuum that would ultimately serve the czar’s own purposes first, the purposes of its close constituents second, and then everyone else at the end. Mid-sized to small operators would be under enormous pressure to acquiesce.

Although the combined Hollywood Studios are not viewed as a single czar, they are threatening as they wield a huge amount of influence around the world. Netflix also wields an enormous amount of influence (at the time of this writing). Such groups will continue to exert pressure on mid-sized and smaller

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operators who fight for their place in the eco-system (and play important roles in the distribution of local content and competing points of view). To allow any group an opportunity to rise to the station of what might ultimately become an industry-wide “czar” is beyond the scope of this document, but in-line with alternative plans certain industry analysts have, although unwittingly.

5.13 Functions within a Disinterested “Futures” Framework

When industry analysts consider all of these items listed above, it’s easy to see how a “Futures” exchange can act as a disinterested apparatus for all participants and perform the functions that are needed to “get the job done”. The bigger question should then be, how best to bring all participants to its trading platform. Such a trading platform would then be responsible to integrate the extremities of the supply chain, and in doing so, provide for large-scope deal structures (as offered by the content owners), allowing all global platform operators to participate at any level they choose (with examples such as):

o License Only (No Equity) with Ad Avails

o License Only (No Equity) without Ad Avails

o License - Equity with Ad Avails

o License - Equity without Ad Avails

o No License - Equity with Ad Avails

o No License - Equity without Ad Avails

The use of a “Futures” exchange, therefore anticipates virtually all deal structures and allows platform operators to participate in any way they choose by way of an on-line portal offered at virtually no additional cost (to platform operators or content owners). The strengthening of the business models on both sides can then be set in motion with a single tool (the “Futures” exchange).

Note 1: Some large operators (such as Comcast) have purchased major studios for similar reasons, and are creating symbiosis at a macro level rather than a micro level.

Note 2: If a large operator wants to engage in such symbiosis at a micro level, then statistical models and regression theories suggest that a large number of movies would need to be licensed to allow for the benefits described in this document to accrue. The efforts required to cross-cultivate a large number of movies is prohibitive, however, and beyond the scope of all but the largest of platform operators, and even they would be challenged by the overwhelming costs and efforts required to fight against entrenched ways of doing business.

Note 3: Very little has been said about the merits of “hedging” (or allowing producers to “short” themselves). Such a mechanism is far beyond the scope of any alternative approach known at the time of this writing.

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The Figure 5.4 (below) provides another view for risk mitigation processes initiated by both sides of the supply chain:

5.14 Freedom of Information within a “Futures” Exchange

Within the Modern Cinema Exchange as disclosed in this document, all traders have access to all available information regarding media titles by way of web sites, newsletters, mobile apps, promotional videos and other forms of communications. Information for each discrete media title offered on the exchange will include the following:

Producer Director Talent Original Story (story outline and author) Screenwriter Genre Distribution Plan Promotion and Marketing Plan Comparable Media Titles (“Comps”) Screenplay (when requested – within a secure environment) Any other information that is known to producers and content owners (or anyone else)

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5.15 Insider Trading and Information “Leaks”

When the major studios first learned of the two companies engaged in “gaming” the box office for Hollywood movies as mentioned above, they were most concerned about the potential for insider trading. Although insiders would be barred from trading during the production and post-production processes, the worry is these same insiders would notify friends and family members if serious problems arose, and would likewise notify friends and family members if production processes were going better than expected. The theory being these unauthorized reports would then allow traders to gain an unfair advantage as they would have information that could directly affect the financial returns of the production.

The fallacy of this theory is as follows:

Nobody using criteria that becomes known during the various production processes (pre-production, production, post-production) can determine the success or failure of a movie until the movie arrives in the box office, and ticket sales are tallied. Virtually no insider information regarding performances or other production-related issues have proven to be reliable sources of box office guidance. A person acting on the advice of such an insider may do better to, once again, have monkeys throw darts.

Note: Of course catastrophic events would be covered by way of insurance policies as required the investors and the exchange.

As for traditional commodities, insiders exist (as is demonstrated by the movie “Trading Places”), and these insiders can alter the value of certain contracts, however box office success is un-knowable and any tips from insiders would most likely not contribute anything more than common and frequent Hollywood-style gossip.

Note 1: During the old days of Hollywood, a studio executive allowed a duck to waddle into his office from a nearby pond. One day the duck pecked at a script that was among other scripts being considered for the next “Green Light”. Since all of the scripts were equally good, the executive decided to “Green Light” a script that had attracted the interest of the duck (for that reason). The movie was a hit, and the studio executive followed the same procedure (with the same duck) for a period of time, enjoying remarkable success along the way. Today, the best predictor of a given movie’s potential success is still that same duck. (Pictures of the duck are prominently displayed on Paramount Studio’s lot in Hollywood.)

Note 2: Regarding the two companies that planned to “game” box office results for Hollywood movies, there was also a concern (by the MPAA and major studios) that small investors would lose their homes betting on Hollywood Movies. They didn’t want the press to suggest a Disney (or similar) movie was the cause of a family living on the streets. Since the leverage could be very small, and the contract size may be priced as low as $100, it is unlikely anyone would lose their home with such small dollar or leverage amounts. Furthermore, if traders decided to act as platform operators, and placed orders for large numbers of contracts, they would be disqualified early-on for not having adequate content security (meaning content encryption). In addition, limits can be placed on trading volumes for retail traders, however such limits are not envisioned at this time.

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5.16 The Modern Cinema Exchange

Virtually all media distribution today is achieved by way of sophisticated digital network architectures (newer as well as older). However, the media financing and territorial licensing processes are virtually all performed off-line (by attending trade shows, conducting face-to-face meetings and following-up with phone calls, emails, texts and in some cases faxes).

It’s now time for the financing, licensing and promotional processes to be offered on-line to all global participants. But then the question arises, how? Who’s in charge? Will such a person (or company) be fair to all constituents?

Such an exchange model as described in this document provides complete and transparent fairness to all constituents by its very nature as a “Futures” Exchange. This model offers almost complete on-line access with the exception of “Output Deals” and Territorial Exclusivities that may need face-to-face dialog in order to verify all content terms, conditions and expectations (although such face-to-face communication can also take place on-line).

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