Arundel Partners: The Sequel Project

Arundel Partners: The Sequel Project

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FIN6425

Team 2

Greg Bradley

Matt Dyal

CJ Pater

Matt Goodavish

Kelly Chufo

Is Buying Movie Rights a Profitable Business?

Making money in the movie industry is an unpredictable task. Film acceptability is extremely difficult to quantify—is there a compelling story?  Are the actors “good”?  How will the cast and crew work together?  Will marketing efforts increase awareness and desire? Arundel’s earning will be largely dependent on their ability to choose a good script and crew.  

Arundel’s available data shows that movies released by major studios account for 93% of all revenues received from US, and 150 of the top 10 films released accounted for 26% of the total US film rental revenue.  A substantial part of profit for any major studio is obtained from these popular movies. Arundel can choose to produce a movie with the highest projected return, aiming to achieve the highest NPV if they agree on a set (fair and neutral) price for the movie and subsequent sequels before the original is made, risking information asymmetry if they wait.  Arundel must make a decision based on their investors rather than post-production artistic judgment.  If the original movie is a success, Arundel can exercise their right to make the sequel or sell the rights to the highest bidder.  If the original is not successful, Arundel can accept the loss as a write off to their investment schedule.  Estimating the PV of those rights is critical—too little and the studio won’t be interested, too much and Arundel loses money.  Unfortunately for Arundel, yearly returns in this industry can vary from 1224% profit to -91% loss!

Recommended Sequel Rights Structure

The option to produce a sequel will benefit both parties.  Although the movie studio may have to relinquish its right to produce a sequel on a popular movie, it will be able to increase its first movie profits by using the payment for the option.  The structure we recommend is as follows.  We will purchase the rights to produce a sequel on a movie prior to any movie being produced.  We will do this on a per movie basis.  Once the contract has been purchased, we will have one year to decide if we will produce a sequel, during which time we have exclusive rights to this decision.  If we choose not to exercise this right, the studio may allow anyone to produce a sequel.  If we do choose to exercise this right, we will be expected to produce the sequel no earlier than three years from the initial movie production.  This will lower the risk of the studio losing profits while both the initial movie and sequel are being shown to the public.  We expect that one year after production, we will see an inflow of cash representing future net inflows.  Since we will want all available information before deciding our action, we will not exercise the option until the one year mark.  This will simulate a European style call option.^[a]  To limit the amount of capital we must raise to offer this option to studios, we will limit the option maturity to 12 months, in turn limiting the option price.  The structure/timeline of the option can be found in appendix 1.