Wednesday, 10 October 2012

Why does the $250M cap exist?

When they are used in calculating a starbond TAG, box office grosses are capped at $250 million - no matter how high the actual box office climbs above that mark.  This is to limit the amount of profit that traders can take from a single starbond investment.

A mega-grossing movie entering the TAG, or dropping out of it, has a huge impact on the TAG and therefore the starbond's price.  This provides a huge profit opportunity for traders, and because we all know what movies have grossed above $250 million in the past and which movies are likely (or unlikely) do so in the future, those profits are is essentially risk-free.  Too many risk-free investments are not good for HSX.

HSX's business model is to sell information gleaned from the trading of moviestocks.  The more moviestock trades, the better information HSX has to sell.  The more active traders dealing in moviestocks, the better for HSX.

Starbonds exist as a fun sideline for traders.  They provide some extra profits on the side, and some traders feel good about owning a particular starbond.  However, they don't provide much value to HSX.  It is moviestock trading that drives HSX's revenues, and its sustainability.

If traders have greater risk-free opportunities traders from starbonds, they will invest more $H in starbonds.  And the more H$ they invest in starbonds, the less H$ they will have to trade moviestocks.  And if less H$ is being used to trade moviestocks, the information that HSX sells becomes less valuable.

So that's why the cap exists.

When the cap was first introduced, there were fewer mega-grossing movies.  A decade ago, only four films grossed above $250 million, and only one of those broke $400 million.  This year, we've had four films go past $250, million with three of those grossing over $400 million, and there is still the last Twilight movie and the first Hobbit movie to come.

So we are having more movies breaking the $250 million mark and more movies earning way more than that.  If the $250 million cap were removed tomorrow, we would see starbond price changes of $60, $80 and even $100 becoming quite common, and carrying little trading risk.  Traders would park more money in long-term starbonds and trade moviestocks less.

This means that the $250M cap is not going to change any time soon, and arguments like "more movies are breaking the cap", "let the free market decide" and "it's not fair that these starbonds are priced less than their true value" aren't going to change anything.

No comments:

Post a Comment