Arundel Partners Case Analysis

Arundel Partners Case Analysis

Executive Summary:

A group of investors (Arundel group) is looking into the idea of purchasing the sequel rights associated with films produced by one or more major movie studios. Movie rights are to be purchased prior to films being made. Arundel wants to come up with a decision to either purchase all the sequel rights for a studio抯 entire production during a specified period of time or purchase a specified number of major films. Arundel's profitability is dependent upon the price it pays for a portfolio of sequel rights. Our analysis of Arundel抯 proposal includes a net present value calculation of each movie production company. In order to decide whether Arundel can make money buying movie sequel rights depends on whether the net present value of the production company抯 movies is higher than the estimated 2M per film required to purchase the rights.

Problem Identification:

How are the principals of Arundel Partners planning to make money by buying rights to sequels? They would be interested in purchasing the sequel rights for one or more studiosˇ entire production over an extended period of not less than a year. If a particular film was a hit, and Arundel thought a sequel would be profitable, it would exercise its rights by producing the sequel. Alternatively, they can sell the rights to the highest bidder. Inevitably, the performance of the original films would not justify sequels, and for them the sequel rights would simply not be exercised. For most movies it becomes quite clear after their first few weeks in theaters whether a sequel would be economical or not, based upon each film's box office performance.

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 importance to Arundel that a number of films and a price per film is agreed upon before either Arundel or the studio knew which films would generate the option of a sequel. In addition, once production started, the studio would inevitably form an opinion about the movie and the likeliness that a sequel would be possible. This would put Arundel at a disadvantage, because they would then have to negotiate the price for sequel rights on each film produced, while knowing much less than the production studio about the film.

What are primary advantages and disadvantages of the approach that was taken by us in valuing the sequel rights? Our analysis of Arundel抯 proposal includes a net present value calculation of each movie production company. Arundel feels that waiting to purchase sequel rights until after the movie goes into production will make it more difficult and costly to purchase the rights. Below are advantages and disadvantages of our approach.

ADVANTAGES:

- Simplicity

- Because all available data was used, there is a greater sample in our analysis. We assume that more data points will lead to a more accurate conclusion.

- We did not eliminate any outliers because we felt outliers are characteristic of the industry.

- The analysis is based upon historical data rather than fabricated assumptions.

- We believe that breaking out the data by studio is an advantage because it provides direction.

DISADVANTAGES:

- It is assumed that historical performance is indicative of future performance in the short term based on historical data. Our assumption is supported by Exhibit 1which shows that all production companies tend to have similar performance over time.

- Only 1 year of historical data is available

- We assume that production companies are willing to sell the sequel rights under our terms.

- Probabilities of success have been calculated, but we have not been able to apply them to the per film value. In short, it is necessary to be subjective about the risk based on the probabilities of success.

MORE INFORMATION:

- More historical data would be useful to support our assumptions.

- More data on success probabilities may help to direct the course of action

- We would also like to have information about the willingness of production companies to sell sequel rights at a pre-negotiated price.

Action Plan:

Given our analysis of the motion picture industry, we recommend that Arundel carefully select the major film studios from which they intend to purchase sequel rights. The net present value of hypothetical sequels taken from the available previous years shows not only that the industry is highly volatile, but also that certain production studios are more volatile than others in terms of their recent performance. In addition, some studios are consistently less profitable than others. (See "NPV for Each Production Company" chart in appendix) Since the success of film studios are relatively stable in the short term (see "Rental Shares of Major Film Distributors" table and graph) Because of this stability, it is possible for Arundel to