Potential Disagreements and Contractual Provisions
he description of the assumptions used and the inputs can be found in Exhibit 2). Using this approach, we obtained an average sequel right value of $4.6 million. Based on this result, we may conclude that if we buy the right on the sequel for $2 million we will earn approximately $2.6 million dollars. However, the real option valuation approach on a studio-by-studio basis reveals that the estimation of the value of an average sequel right might be unreliable. When estimating the value of a sequel right for each studio separately, we obtained the following results:
There is a significant difference in the value of sequel rights among the six studios (standard deviation equals to $3.66 million), therefore the value of an average sequel right calculated over all sequels might not be appropriate for decision making. If Arundel would consider investing in only some or a couple of the studios, our analysis indicates that MCA Universal, Warner Brothers and Walt Disney have the most valuable sequel rights.
Potential disagreements and contractual provisions
The problem that may arise between the two parties once the contract is signed can be considered a moral hazard issue. The studio might have incentives not to sell the sequel rights of movies that have a very high probability of success and high expected returns, and may try to find ways to withhold these from Arundel or ask for very large sums of money. Warner Brothers will definitely feel cheated in a way if they have to give up the rights to ‘Batman, which was expected to result in a successful sequel, with an expected return of 225%. In this respect, studios may also choose to delay producing movies which have a high success expectation or even change the profile of the movies in that year (low budget/quality). In order to mitigate this problem, the contract between the two parties should be designed in such a way to incentivize studios