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CASES Arundel Partners: The Sequel ProjectIntroduction and QuestionsProf. Hugues Pirotte SOLVAY BUSINESS SCHOOL UNIVERSIT LIBRE DE BRUXELLES
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The ContextApril 1992: David Davis must take a look at a unusual business ideaArundel Partners would purchase sequel rights from major studiosBefore the first film was madePurchase all sequel rights and not choose based on own judgment, or at least a random selection of themPay upfront in cash on a fixed price per-movie basis, for the whole lot.Interesting to studios becauseProvides cash when it is most needed, i.e. at the production stageHelp in reducing studios borrowing (privately-financed industry in US Europe)A price of $2 mio or more per movie would be temptingSteps in movie productionProductionDistributionExhibitionStatisticsMajor studios distributed 35% of all films accounting for 93% of revenues coming from exhibitions.Arundel Partners: The Sequel Project
H.Pirotte
The Context (2)Cost structureThe total production cost is called the negative cost, includingPre-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, etcPost-production costs: editing, laying down sound and music, titles and credits.Distribution costs: deducted from revenues collected by the distributor form theaters and ancillary marketsDistribution expenses: advertising, etcDistribution fees: % charged by distributors on revenues perceivedExhibition costs:On average, in 1991, 50% was remitted by the theaters to the distributorsNet Profits= all revenues (proceeds remitted to distributors + ) negative cost distribution costs exhibition costsArundel Partners: The Sequel Project
H.Pirotte
About the sequelThe 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 movieRevenues: 70% of original movieArundel Partners proposalCritical 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.Arundel Partners: The Sequel Project
H.Pirotte
Time scaleArundel Partners: The Sequel ProjectTime (years)012345ProductionDistribution and ExhibitionProductionDistribution and ExhibitionFirst movieSequelDelayPV(Rev) HypotheticalPV(Neg Cost) HypotheticalThe Data we have in the case
H.Pirotte
DataData is provided in the external spreadsheet on the website.This data includesHypothetical sequel costs and revenues based on first films estimated data, under some assumptionsProjections assuming the sequel would be produced and would be typicalNot 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 rightsChoose those that would be produced, estimate how much net money that would make and give a price per sequel thenCan be stress-tested by scenario analysis.Apply a simple option pricing model
Arundel Partners: The Sequel Project
H.Pirotte
Study QuestionsWhy 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?Arundel Partners: The Sequel Project
H.Pirotte
Arundel Partners: The Sequel Project
H.Pirotte
Arundel Partners: The Sequel Project
H.Pirotte
Arundel Partners: The Sequel Project
H.Pirotte
Arundel Partners: The Sequel Project
H.Pirotte
Arundel Partners: The Sequel Project
H.Pirotte
Arundel Partners: The Sequel Project
H.Pirotte
Arundel Partners: The Sequel Project
H.Pirotte
Arundel Partners: The Sequel Project
H.Pirotte
Arundel Partners: The Sequel Project
H.Pirotte
Arundel Partners: The Sequel Project
H.Pirotte
Arundel Partners: The Sequel Project
H.Pirotte
Arundel Partners: The Sequel Project
H.Pirotte
Arundel Partners: The Sequel Project
H.Pirotte
