Chance Encounters Ii
8 Pages Posted: 2 Jun 2017
Movie-industry analyst David Fitzhugh must estimate the value of the sequel rights associated with Chance Encounters (CE), a soon-to-be-produced movie. The producers of CE intend to use the cash from the sale of the sequel rights to help fund production of the original movie. With the purchase of the sequel rights to CE, the client intends to produce a sequel to CE--should the original movie prove successful.
Rev. Jun. 15, 2012
Chance Encounters II
In April 2003, David Fitzhugh, a respected movie-industry analyst, was hired to evaluate an unusual business idea—the purchasing of the sequel rights associated with a soon-to-be-produced movie. About six months earlier, Warmer Brothers Studios had approached Fitzhugh's client with a proposal. For $ 3 million, Warmer Brothers offered to sell the rights to produce a sequel to Chance Encounters, Warmer Brothers' newest movie. A string of poorly performing movies had left Warmer Brothers badly in need of cash to finance this latest project. Warmer would use the $ 3 million sequel-rights fee to help defray the estimated $ 25 million cost of making Chance Encounters. In return, Fitzhugh's client would receive exclusive rights to produce a sequel to Chance Encounters. Fitzhugh's challenge was to evaluate this proposal and report his findings to the client, a very successful independent-movie producer.
The Basics of the Movie Business
Movies went through three stages to reach the public: production, distribution, and exhibition. Production was the actual making of the movie. The total cost for this stage was called negative cost: the cost to produce the master negative of the movie. Typically, the largest components of negative cost were salaries of the actors and director, set design and construction, and transportation. On average, production of a movie took about a year, at a negative cost of around $ 30 million.
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Keywords: negative cost, hurdle rate, influence diagram, decision making, decision analysis, options thinking, options pricing, model, models, simulation, modeling, probability, forecasting
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