Arundel-Partners--The-Sequel-Project

HarvardBusinessSchool9-292-140June12,1992WilliamA.Teichner,CharlesM.WilliamsFellow,preparedthiscaseunderthesupervisionofProfessorTimothyA.Luehrmanasthebasisforclassdiscussionratherthantoillustrateeithereffectiveorineffectivehandlingofanadministrativesituation.Copyright©1992bythePresidentandFellowsofHarvardCollege.Toordercopiesorrequestpermissiontoreproducematerials,call1-800-545-7685,writeHarvardBusinessSchoolPublishing,Boston,MA02163,orgoto—electronic,mechanical,photocopying,recording,orotherwise—withoutthepermissionofHarvardBusinessSchool.1ArundelPartners:TheSequelProjectInApril1992Mr.DavidA.Davis,amovieindustryanalystatPaulKaganAssociates,Inc.inLosAngeles,wasaskedtolookatandcommentonanunusualbusinessidea.Theideawastocreateaninvestmentgroup,ArundelPartners,whichwouldpurchasethesequelrightsassociatedwithfilmsproducedbyoneormoremajorU.S.moviestudios.Asowneroftherights,Arundelwouldwaittoseeifamoviewassuccessful,andthendecidewhetherornottoproduceasecondfilmbasedonthestoryorcharactersofthefirst.Theproposalwasinnovativeinseveralrespects.First,Arundelwouldpurchasesequelrightsbeforethefirstfilmswereevenmade,letalonereleased.Second,theinvestorgroupwouldnotmakeartisticjudgmentsorattempttoselecttherightsforparticularmoviesbasedonpredictionsofapossiblesequel’ssuccess.Instead,Arundelwouldcontracttopurchaseallthesequelrightsforastudio’sentireproductionduringaspecifiedperiod(onetotwoyears),oralternatively,foraspecifiednumberofmajorfilms(15to30).Third,Arundel’sadvancecashpaymentsfortherights,atanagreed-uponpriceperfilm,wouldhelpfinanceproductionoftheinitialfilms.Theideawasintendedtocapitalizeonafewspecificcharacteristicsofthemovieindustry.Producinganddistributingmotionpictureswasariskybusinessandpredictingthesuccessofanyonefilmwasextremelydifficult,ifnotaltogetherimpossible.Moreover,studios’productiondecisionsweredrivenbybothcreativeandbusinessconsiderations,whichoftenconflicted.Thecombinationofuncertaintyandconflictsometimesstrainedthefinancialresourcesofeventhelargeststudios.Arundelcouldexpecttoavoidtheconflictbetweenartandcommerceand,atthesametime,escape(foraprice)muchoftheriskassociatedwiththeunpredictabilityofmoviegoers’tastes.TheideawasexpectedtoappealtostudiosbecauseArundelwouldoffercashwhenitwasneededmost,duringaninitialfilm’sproduction.SinceArundelwouldseektopurchasetherightstomanyfilms,thetotalpaymentsbyArundelcouldbesubstantialandwouldhelpreducethestudio’sborrowing.WhetherArundelcouldexpecttomakemoneydependedheavilyonhowmuchithadtopaytopurchaseaportfolioofsequelrights.In1992themajorstudiosdidnotusuallysellsequelrights,nordidtheyexplicitlyassignthemavaluewhendecidingtoputaprojectintoproduction.However,casualinquiriessuggestedthatstudioswouldfindtheideatemptingatapriceof$2millionormorepermovie.Atpricesbelow$1millionpermovietheyprobablywouldnotevendiscussit.PaulKaganAssociates,Inc.hadexpertiseinanalyzingthefilmbusiness,andithadassembledcertainproprietarydataonindustrycashflows.Hence,Mr.Daviswasaskedhowmuchthesequelrightswereworth.ThisdocumentisauthorizedforusebyHokyunLee,from1/18/2011to5/20/2011,inthecourse:TraditionalFIN751:CorporateFinancialPolicyandStrategy-Barkley(Spring2011),SyracuseUniversity.Anyunauthorizeduseorreproductionofthisdocumentisstrictlyprohibited.292-140ArundelPartners:TheSequelProject2TheMovieBusinessToreachthepublic,amoviewentthroughthreestages:production,distribution,andexhibition.Productioninvolvedcreatingthefilmnegative.Distributionconsistedofadvertisingthefilm,makingprints,shippingprintstotheaters,reproducingthefilmontovideocassettes,andlicensingittopayandnon-paytelevisionandotheroutlets.Finally,exhibitiontraditionallyconsistedofprojectingfilmsintheaters,butincreasinglyincludedotherviewingmedia,suchashomevideo.In1992,themajormoviecompanies(andultimateparentcompanies,ifdifferent)involvedinU.S.productionanddistributionwereMCAUniversal(MatsushitaElectricIndustrialCo.,Ltd.);Metro-Goldwyn-MayerInc.(CreditLyonnaisBankNederlandN.V.);OrionPicturesCorp.;ParamountPicturesCorp.(ParamountCommunications,Inc.);SonyPicturesEntertainment,Inc.(SonyCorp.);1TheWaltDisneyCompany;2TwentiethCenturyFoxFilmCorp.(TheNewsCorporation,Ltd.);andWarnerBrothers,Inc.(TimeWarner,Inc.).Thesecompanies,orstudios,wereallengagedinbothproductionanddistribution,andinsomecasesexhibitionaswell.Severaloftheparentcompaniesortheirsubsidiariesownedmovietheaterchains,payTVchannels,and/orTVstations.In1991themajorstudiosandsmallerdistributorsreleased150and274films,respectively,intheUnitedStates.Whilethemajorstudiosdistributedjust35%ofallfilmsreleasedintheUnitedStates,theyaccountedfor93%ofallrevenuesreceivedfromU.S.movietheaters.Theserevenueswereknownasfilmrentalsbecausethedistributoressentiallyrentedprintsofthefilmtotheatersforaspecifiedperiodoftime.ThetopU.S.rentalfilmof1991,Tri-Star’sTerminator2,representedapproximately5%oftotalU.S.industryrentals.Thetopfivefilmsaccountedfor16%oftotalrentalsan