CASES Arundel Partners: The Sequel Project Introduction and

1
CASES Arundel Partners The Sequel Project

• Introduction and Questions
• Prof. Hugues PirotteSOLVAY BUSINESS
  SCHOOLUNIVERSITÉ LIBRE DE BRUXELLES

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The Context
Arundel Partners The Sequel Project

• April 1992 David Davis must take a look at a
  unusual business idea
• Arundel Partners would purchase sequel rights
  from major studios
• Before the first film was made
• Purchase all sequel rights and not choose based
  on own judgment, or at least a random selection
  of them
• Pay upfront in cash on a fixed price per-movie
  basis, for the whole lot.
• Interesting to studios because
• Provides cash when it is most needed, i.e. at the
  production stage
• Help in reducing studios borrowing
  (privately-financed industry in US ? Europe)
• A price of 2 mio or more per movie would be
  tempting
• Steps in movie production
• Production
• Distribution
• Exhibition
• Statistics
• Major studios distributed 35 of all films
  accounting for 93 of revenues coming from
  exhibitions.

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The Context (2)
Arundel Partners The Sequel Project

• Cost structure
• The total production cost is called the negative
  cost, including
• Pre-production costs story acquisition, script
  development, set design, casting, film crew
  creation, costume design, location scouting,
  budget planning.
• Principal photography fixed salaries of actors,
  directors, writers and other personnel rent,
  wages for soundstages, set construction,
  lighting, transportation, costume making, special
  effects, etc
• Post-production costs editing, laying down sound
  and music, titles and credits.
• Distribution costs deducted from revenues
  collected by the distributor form theaters and
  ancillary markets
• Distribution expenses advertising, etc
• Distribution fees charged by distributors on
  revenues perceived
• Exhibition costs
• On average, in 1991, 50 was remitted by the
  theaters to the distributors
• Net Profits
• all revenues (proceeds remitted to
  distributors ) negative cost distribution
  costs exhibition costs

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About the sequel
Arundel Partners The Sequel Project

• The median release data for a sequel was 3 years
  after the first films release, and most were
  released with 1 to 5 years.
• Profit structure (averages)
• Costs 120 of original movie
• Revenues 70 of original movie
• Arundel Partners proposal
• Critical to agree on the number of movies and the
  price per movie before either Arundel or the
  studios knew which films would be produced.
• A satisfactory method of payment should be agreed
  upon (escrow account, etc) maybe some
  incentive plan for the studio still.
• For tax purposes, desirable to fix an expiration
  date for the rights like 3 years from the first
  films release.
• Arundel could grant the studios a right of first
  refusal on any rights it planned to sell.
• The contract also could provide that Arundel
  would use the original studio for distribution,
  assuming its distribution fees are competitive.

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Time scale
Arundel Partners The Sequel Project
Distribution and Exhibition
Distribution and Exhibition
Production
Production
Time (years)
0
1
2
3
4
5
First movie
Sequel
Delay
The Data we have in the case
PV(Rev)Hypothetical
PV(Neg Cost)Hypothetical
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Data
Arundel Partners The Sequel Project

• Data is provided in the external spreadsheet on
  the website.
• This data includes
• Hypothetical sequel costs and revenues based on
  first films estimated data, under some
  assumptions
• Projections assuming the sequel would be produced
  and would be typical
• Not surprisingly however, most movies
  hypothetical sequels would not be produced
  because of poor projected performance.
• The questions on the next slide are related to
  the pricing per movie of these sequel rights
• Choose those that would be produced, estimate how
  much net money that would make and give a price
  per sequel then
• Can be stress-tested by scenario analysis.
• Apply a simple option pricing model

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Study Questions
Arundel Partners The Sequel Project

• Why do the principals of Arundel Partners think
  they can make money buying movie sequel rights?
  Why do the partners want to buy a portfolio of
  rights in advance rather than negotiating
  film-by-film to buy them?
• Estimate the per-film value of a portfolio of
  sequel rights such as Arundel proposes to buy.
  (There are several ways to approach this problem)
  
• What are the primary advantages and disadvantages
  of the approach you took to valuing rights? What
  further assistance or data would you require to
  refine your estimate of the rights value?
• What problems or disagreements would you expect
  Arundel and a major studio to encounter in the
  course of a relationship like that described in
  the case? What contractual terms and provisions
  should Arundel insist on?