1. CASES Arundel Partners: The Sequel Project
Introduction and Questions
Prof. Hugues Pirotte SOLVAY BUSINESS SCHOOL UNIVERSITÉ LIBRE DE BRUXELLES

2. 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 studio’s 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.
H.Pirotte

3. 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
H.Pirotte

4. About the sequel Arundel Partners: The Sequel Project
The median release data for a sequel was 3 years after the first film’s 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 film’s 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.
H.Pirotte

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

6. 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 film’s 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…
H.Pirotte

7. 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?
H.Pirotte