How are the principals of Arundel Partners planning to make money by buying rights to sequels? Essentially, a sequel right is similar to a call option. If a movie turn out to be a hit and the sequel could be profitable, Arundel would exercise the sequel right by producing the film itself or selling the right to another investors. If the sequel might cause a loss, Arundel could simply give up the right. The sequel right gives Arundel the opportunity to break-even costs of production with a successful sequel whilst limiting losses on the downside by not pursue sequel production of unsuccessful or unpromising movies. Therefore, given fair sequel rights value, Arundel Partners believe the sequel rights could be profitable.
Do you expect any major film studios to be interested in the sort of arrangement described in the case?
The movie industry is risky and the financial performance of movies is hard to predict; therefore, even the large studios could sometimes face financial problems. By selling sequel rights to Arundel Partners, studios could get large amounts of money beforehand, which would alleviate the studios’ financial needs; that is, given fair sequel rights value, studios would be interested in this arrangement. As mentioned above, filming is a risky and highly unpredictable business. With a diversified sequel right portfolio, Arundel could escape from the conflict and risk associated with the uncertainty of audiences’ tastes. Besides, as the movie production begins, the studio would form an opinion about the movie, including the success of the movie and the possibility of sequel production. This would put Arundel, as an outsider, at a disadvantage point when bargaining with studios. Thus, Arundel would purchase sequel rights without any artistic judgment, usually before the original movie is even produced.
Why do the partners want to buy a portfolio of rights in advance rather than negotiating film-by-film to buy them? It is of critical...
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