Arundel Partners: The Sequel Project
1. Executive Summary
“Nobody knows anything”. This famous line coined by William Goldman, a well known Hollywood screenwriter, simply but honestly sums up the movie industry. Numerous academic studies have tried to gauge the determinants of movie success but have yet failed to deliver a satisfying answer. Ravid A. (1999) for example finds that neither stars nor big budgets contribute to profitability of a movie. This case study investigates the case of buying sequel rights to original movies. These rights can be understood as a real option allowing the holder the flexibility of decision making depending on the success of the original movie. In 1992 Paul Kagan Associates Inc. appointed Mr. David A. Davis, a movie industry analyst, to investigate whether there would be economic potential to profit from buying sequel rights for movies produced by U.S. movie studios and creating an investment group, Arundel Partners (AP thereafter) that would exploit this investment strategy. The idea was that a successful original movie was more likely to be followed by a successful sequel. One could then earn a profit by exercising the right to produce the sequel or leaving it unexercised based on the expected future return of the sequel that would depend on the performance of the original movie. The business strategy incorporated several key insights regarding the movie business: movie returns are hard to predict, production and distribution of movies is risky and there exist conflicts of interest between creative and business considerations. AP believed it was possible to solve these issues by buying a portfolio of rights to movie sequels from production companies before the original movies were produced. Buying such rights upfront with an equal dollar value attached to each film was advantageous to AP but also to production companies. With a portfolio or slate of movies AP essentially spread the risk and kept the potential of having a...
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