DARDEN fi BUSINESS PUBLISHING ‘UNIVERSITY/VIRGINIA UVA-QA-0546 HIGH PLACES STUDIO (A) Laura Anderson, a vice president in High Places Studio’s produetion-finance department, had to make a recommendation to the studio’s president, Leo, Walsh, regarding whether the studio should go ahead with the production of an exciting new movie mystery. Walsh had the final vote on the development and production of a movie script for a-tiajor box-office release. This new movie idea, like so many others in the film industry, was risky. It could become a blockbuster hit, but it could also become a costly failure. ei Anderson could recommend that Walsh forgo production of this movie drama and use the studio’s currently available resources to produce a film from another script for Home Box Office (HBO), one of the premium cable networks. Anderson had to decide what she would recommend as the best use of the studio’s current production resources. The HBO option, a Western-themed drama, promised fairly certain profits. Conversely, a huge hit at the box office could really put High Places on the map as a major contender among the Hollywood studios. A box-office release would provide more prestige and profit for the studio if the film were a hit, but also had the potential for significant losses if the movie failed, which High Places could ill afford. Laura Anderson’s Decision Problem High Places Studio was a young studio by Hollywood standards, and needed to choose its films carefully. As in the rest of the industry, there were constant concems at High Places about money and a desire to release the next blockbuster success. Limited production resources prevented High Places from undertaking more than one film at a time, The cable option virtually guaranteed the studio profits of $3 million, after expenses. The shoot would be structured carefully to control expenses, and the proceeds from the film would be set according to a contract with HBO, so there would be little or no variability in the studio’s share of the profits _fibm.the film. decision to produce a large-scale movie for box-office release depended on several factors. The first important step was finding a good script, and Anderson was sure they had one. s * livan (MBA "99), under the supervision of Dana Clyman, Associate Professor of Business Administration. It was written asa basis for class discussion rather than to illustrate effective ot ineffective handling of an.administrative situation. Copyright © 1999 by the University of Virginia Darden School Foundation, Chackittsville, VA. All rights reserved. To order copies, send an e-mail 10 sales@dardenpublishing.com. No:Part ofthis publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted i any {@br'gr by any means—electronic, mechanical, photocopying, recording. or ‘other wise—without the permission 6f the Dirden School Foundation. Rev. 8/01.0 ee Distribuido por IESE Publishing. Si necesita ms Gopias,conticten wesep.com. Todos los derechos reservados.= UVA-QA-0546 High Places had fallen in love with the script.for Tuna on Rye immediately. Tuna on Rye was a mystery set in Brooklyn in which the protagonist,“Gil Stevens, while working behind a deli ‘counter, witnesses the abduction of a beautiful yoting woman as she waits in line for her daily sandwich. The studio already had the cast in place,-including Nick Petty for the male lead. Petty, a hot new up-and-coming actor, had scored a big hit in is*debut role as a dashing private detective, and Anderson was excited about his prospects for this film. The script was tailor-made for the summer date-movie scene, and Petty had an almost uncanfiy-ability to mix good looks, wit, and drama in his performances. With Petty on board, Anderson was confident that the studio ‘was off to a great start. Up to now, the details had been falling into place peffectly. One of the most crucial factors in a winning film was the choice of @ director. High Places had been in discussions with two directors who had read the script and. were interested in directing the movie. The first director, Max Morgan, was one of the best-known directors in Hollywood. He had directed several well-known hits in the past five years, and was known for putting together high-quality movies. Because of Morgan's power and prominence in the industry, High Places had agreed that if the studio were to go ahead with the film and Morgan ‘wanted to direct, the job was his. After extensive discussions with Morgan’s agent, Anderson discovered that the script intrigued Morgan—he even said it was right up his alley. He planned to direct if his schedule allowed. Morgan was currently in the midst of editing his latest melodrama, Catch of the Day, and was uncertain he could be done in time, Based on those conversations, Anderson concluded that, should High Places decide to go ahead with the film, there was approximately a 70% chance that Morgan would be able to direct. Anderson determined that the total cost for a Morgan film would be $60 million. ‘There was, however, a major concern about Morgan, He had a reputation for running late on productions, and tardiness could have devastating effects on the success of the film—High Places needed to have the movie ready for release during the lucrative summer season. If Morgan could not complete the film on time, Anderson estimated that High Places could only expect ‘gross revenues of $30 million, resulting in significant losses. Anderson assessed a 40% chance ‘that Morgan would miss the deadline for summer release. Of course, once the studio determined that the shoot would run late, it could still halt production and declare the money already invested an unfortunate loss. Abandoning the project could reduce the negative publicity _ associated with releasing a poorly received film, but in Anderson's experience, by the time a film ‘wis deemed dangerously late, it had already burned through 75% of ts total costs. © Ifgheifilm were ready for summer release, it could turn out to be a hit, a blockbuster, or a disappojntment. Given Morgan's historical success and Petty in the starring role, Anderson estimated'that the film had a 70% chance of being at least a ht if released on time. Blockbusters ‘were hard to epi. by, but Morgan was known for capturing an audience. Therefore, upon further reflection, Andérson divided this number into its component parts, and assessed a 20% chance of the film’s actually achieyinig blockbuster status (and, therefore, a 50% chance of its being a hit and a 30% chance ofyits:bging a disappointment). If the film were a blockbuster, Anderson estimated that it would groés approximately $180 million for the studio. A respectable summer Dstrbaldo por IESE Pablhing: Si neces nk ols, conitene: ww Sesp.om, Toso derecho reservados, CUVA-QA-0546 hit would gross $80 million and a disappointiiig film would bring in only $35 million, even for a Max Morgan summer release starring Nick Peity. In the event that Morgan could not direct the.film, Anderson had Maggie McManus lined up to direct. McManus was an able director with a few modest hits to her credit. Anderson concluded that the total cost of the film under McManus, would be $35 million. In addition, McManus kept a strict production schedule and had never'had a.film,run substantially late, so Anderson was convinced that the film would be ready for summér. at, IfMeManus were to direct, Anderson felt it was equally likely that the film could be a hit ‘6 a modest disappointment. Because McManus did not yet have the prestige of Morgan, Anderson Valued a hit as gross receipts for the studio of $45 million and a disappointment as $30 million. Ariderson believed that that there was really no chance that a McManus film could be a blockbuster: In conversations with HBO, Anderson learned that she and the studio needed to make a decision quickly about whether to approve the film for box-office release or go with the more certain HBO option. HBO was in the process of planning its upcoming season, and needed a definite answer from High Places. If High Places decided to go with HBO, the studio needed to let HBO know before it could hear back from Morgan with his final decision, Distribuido por HESE Publishing. Si necesita mus Copia, contictenos: www. ksep.com. Todos los derechos reservados.UVA-QA-0547 Laura Anderson had been in discussions with Nit it since early in her decision process. Though Nick was committed to doing the film if High Places decided to give it go, the studio still hadn't worked out the specifics of how Nick would,t industry, actors are often paid a flat salary for appearing in a film. Someti the actor believes the movie will be a hit, the payment structure can be altered t@ reflect a lower flat fee plus some percentage of the studio’s gross receipts. Based on..Nick’s stature in Hollywood, he could command a base salary of $3 million per picture, In this case, however, Nick had begun to speculate that this script could really tum into a break-away hit and he had instructed his agent to look into the possibility of negotiating some percentage of the gross. Laura had already incorporated Nick’s $3-million base salary into the original cost structure of the film under both directors. Under the base-plus-percentage structure, Laura and ‘Nick’s agent had been discussing an arrangement whereby Nick could choose his standard flat salary of $3 million or an alternative in which he would receive a base salary of $500,000 and 5 percent of the studio’s gross receipts. Laura wondered if High Places should offer Nick the choice of payment structures, and if offered, which structure Nick would accept. ‘This case was prepared by Jenelle Hammes Sullivan, MBA °99, under the supervision of Dana Clyman, Associate Professor of Business asthe basis for clas discussion. It was writen as a bass for class discussion rather than to illustrate effestivg objneffective handling of an administrative situation. Copyright © 1999 by the University of Virginia Darden Sool Foundation, Charlottesville, VA. All rights reserved. To order copies, send ‘an e-mail to sales@dardenpublisi ‘No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, oF th in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without iat te Darden Schoo! Foundation. © Dial por IESE Publhing i neces apa, contctenos: wo Jeepcom, Todos los archos reservados o