Arundel Partners: the Sequel Project

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Arundel Partners: The Sequel Project Case Study Executive Summary In April 1992, an innovative idea was proposed that would capitalize on characteristics of the film industry. The proposal came from the fact that producing and distributing motion pictures is a risky business and predicting the success of any film was difficult. The proposed venture was to create an investment group, Arundel Partners, which would purchase the sequel rights associated with films produced by one or many American film studios. Arundel Partners pays to obtain the sequel rights, even before the original movie is in production. Based on profitability of the original film, only a few films will become sequels. The idea is appealing to studios, since Arundel would offer cash during the initial film’s production, and studios know profitability is usually lower on sequels. Arundel’s estimated profitability depends on how much it had to pay to purchase the portfolio of sequel rights. Purchasing sequel rights before the release of the first film is very risky, and potentially profitable for Arundel due to the investment being structured as an option. I. Profitable prospects of buying movie sequel rights Arundel Partners came up with the innovative idea of purchasing the sequel rights for the entire production of films produced by one or more major U.S. movie studios before the first film is even under production. Then the company could take advantage of the special characteristics of the movie industry. For example, Arundel Partners could track the box office performance of the first movie after it was released for a few weeks in theaters and could then predict if the sequel would be profitable or risky--depending on how much moviegoers liked the original. In other words, Arundel Partners structured their investment as a call option; the purchase of the sequel rights allows the

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