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The Context
April 1992: David Davis must take a look at a unusual business idea
Statistics
Major studios distributed 35% of all films accounting for 93% of revenues coming
from exhibitions.
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Cost structure
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.
Exhibition costs:
Net Profits
= all revenues (proceeds remitted to distributors + )
negative cost distribution costs exhibition costs
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The median release data for a sequel was 3 years after the first films release,
and most were released with 1 to 5 years.
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.
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
Distribution
and Exhibition
Production
Production
Distribution
and Exhibition
Time
(years)
1
First movie
3
Delay
PV(Neg Cost)
Hypothetical
Sequel
The Data we
have in the
case
PV(Rev)
Hypothetical
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Data
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
1. Choose those that would be produced, estimate how much net money that would
make and give a price per sequel then
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Study Questions
1. 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?
2. 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)
3. 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?
4. 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?
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Solutions
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d1
Se qT
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rT
Ke
0.5 T
d 2 d1 T t
P Ke rT N d 2 Se qT N d1
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Solutions
250
200
150
Upper bound
Stock price
100
50
Lower bound
Intrinsic value Max(0,S-K)
0
0
10
20
30
40
50
60
70
80
Action
90
100
Option
110
120
130
140
150
160
170
180
190
200
Valeur intrinsque
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