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 ...