Legendary Entertainment: Film Making in the Age of Analytics Written by Alva H. Taylor, Faculty Director, Center for Digital Strategies, Associate Professor of Business Administration On the red eye flight back from Los Angeles to Boston, Matt Marolda T’02, reflected on his new role as Chief Analytics Officer for Legendary Pictures. Marolda had been recruited by Legendary CEO Thomas Tull to bring analytics to his film company. Tull was worried that the film company was becoming overconfident with their past successes such as the Hangover Trilogy, Pacific Rim, and The Dark Knight Rises. Marolda, who arrived at Legendary in 2013, has seen the reliance and confidence of Tull in using analytic information to make strategic decisions. During the interview process however, Marolda was clear to stress that analytics would not give Legendary the answers, but it would help the company base their decisions on facts rather than assumptions and increase the probability of success. While makinkg strategic decisions in uncertain environments is always a gamble, using analytics takes the gamble from playing a random play slot machine to playing black jack and being able to count cards. While Marolda felt the opportunity was clear, the thoughts of how much he had to learn about applying analytics to the film industry was preventing him from falling asleep on the flight. A Start in Sports Marolda founded the analytics company StratBridge in 1999. The initial successful product of StratBridge was StratTix. StratTix was an analysis tool that used data on potential customers and shifts in demand to make pricing and ticket promotion decisions. The analysis is similar to what airlines use to update and change pricing over the time period for a flight. After initial successful use by the Boston Red Sox, the dynamic pricing and revenue software was licensed by all of the National Basketball Association teams. It also began to be used by non-sports organizations such as music concert promoters. StratBridge also developed StratEdge, a talent evaluation system for use by sports teams. Using player stats, video data, and scouting reports StratEdge assists sports organizations to evaluate and value players by generating player analytics. Often called ‘moneyball’ analysis (a term popularized by the book Moneyball: The Art of Winning an Unfair Game by Michael Lewis) the software system takes performance data and calculates statistics on player contributions, forecasts future success, and assigns monetary value. The software enables sports organizations to integrate video and player analysis so that coaches and front office personnel can now evaluate players more thoroughly. Capabilities include: player profile “snapshots,” player comparisons, a proprietary “plays like” feature, and a player board for ranking players for drafts and free agency. Teams can build customized scouting reports with more than 100,000 pieces of information to track players, teams, leagues and agents. CASE: 2017LEG - Center for Digital Strategies, Tuck at Dartmouth – Legendary Entertainment 2 Use of analytics such as that by StratBridge, is not without its critics. One criticism to this approach is that the approach is driven by a set of non-athletic ‘nerds’ who know little about playing the game, and are treating real teams as if they are playing fantasy sports. However, Marolda insists that his products are not trying to turn organizations into fantasy sports teams, but the analytics are inputs to the overall decision making. “It’s true you can’t ignore the quantitative information but you also can’t ignore the stuff you see with your eyes,” he says. Looking for New Opportunities In 2012 Marolda sold the player analytics portion of the business to XOS Digital (for more info see: http://sportsvideo.org/main/blog/2012/07/20/xos-digital-acquiresstratedge-sports-analytics-service/ - sthash.lBPEYncW.dpuf). One of the reasons Marolda sold StratEdge to XOS Digital was that the player analytics space was getting crowded with competitors, and many teams were bringing much of the analytic work in-house. Given that there are only a finite number of teams in each sport, the prospects for long-term growth were limited. Marolda began to look around for other industries where analytics was underused but could provide significant competitive advantage. After considering several industries, Marolda settled on the film industry and joined Legendary Entertainment (Legendary) in 2013. A year later, Legendary also acquired the yield pricing software platform StratTix, that had continued to be owned and operated by StratBridge. The Film Industry For background on movie development, read pages 7-13 of the case Warner Bros. Entertainment (9-610-036). The Philosophy of Analytics Companies have always used data to help inform decisions, but the access to large amounts of information – often termed “big data”, coupled with increased computer and statistical processing power has created the opportunity to analyze data in new ways. Analytics uses huge quantities of data, social media information, location data, real-time response data, and much more to affect business performance. Organizations are starting to utilize such this information and analysis to generate solutions in new ways. The outcomes of the analytic process can provide a more comprehensive understanding of markets, customers, products, regulations, competitors, suppliers, and employees and more. Early Success Thomas Tull, CEO of Legendary, welcomed Marolda to Legendary with open arms. Tull had identified analytics as one way that Legendary could differentiate itself from typical film studios. As a smaller filmmaker, the company had to build a strategy to make smarter bets on its movies. Legendary’s focus was on increasing the hit rate on movies, and getting CASE: 2017LEG - Center for Digital Strategies, Tuck at Dartmouth – Legendary Entertainment 3 bigger returns for each of its successes. Tull charged Marolda with building an Applied Analytics Group at Legendary. Marolda spent 18 months recruiting top minds from the world of analytics, dynamic pricing and the sports industry. The recruits included a Harvard astrophysicist who did his Ph.D. on very complex systems, and experts who designed dynamic pricing for the airline industry. The group eventually grew to be composed of 8 full-time people, with direct access to top management and film developers in the company. Tull felt it was time for film companies for to be smarter in making decisions. “There’s more information available today than has ever been available in terms of people putting their preferences and all kinds of information freely up online,” said Tull. “We want to take advantage of that and be much more efficient about the way we run our business.” Tull sought inspiration from the sports business and its use of applied analytics. “I’ve had a front row seat to a number of things, and I was frankly frustrated in the way in which we deploy capital for advertising films.”1 Tull said the goal was to take people that were used to taking very large data sets and apply that knowledge to have a real yield to real world problems. Future in Film Marolda was thinking about his advice on the first big decisions that Legendary had to make concerning upcoming films. He was determining what information he should be providing, and at what stage of the process should his group be most involved. He also marveled at how different his discussions with Tull are from the discussions most film companies have. Long-term, what should be the role of the group, what standard information should be provided for all films, and where would analytics provide the most value? These were all questions he was considering, when the phone rang and it was Tull. He had one question for Marolda, should we fund the $100 million new film or not? Marolda had the sense that his answer would have a huge impact on whether the film was funded, and it was an early test of the value of analytics for Legendary

Based on the attachment, answer the following questions that Marolda faced:

1. In the short term, what information should he provide to Tull?

2. What data is required to provide such information?

3. At which stage of the film making process should his group be most involved?

4. In the long term, what information should he provide for all film?

5. Where would analytics provide the most value in Legendary's business?

Question 4: Suppose the current exchange rate for the Japanese Yen against the dollar is $1 = 120 yen. Answer the following questions using the long run model of the exchange rate developed in class.

a.           If you expect Japanese monetary growth to be a total of 25% larger than the US monetary growth rate over the next ten years, what is your best guess as to the exchange rate ten years from now? Be as precise as possible. What theory underlies your prediction given you have no other information?

b.           In addition to the higher money growth rate in Japan mentioned above, you are now told that output growth will be higher in Japan as compared to the US by 30% over the next ten years. What is your best guess as to the exchange rate ten years from now?

c.           Given the information in a. and b. where do expect inflation to be higher, the US or Japan?   Where do you expect interest rates to be higher? Where do you expect real interest rates to be higher? Be as precise as possible and explain the assumptions that you make at each step.

Use the following information for questions 11-20: The average cholesterol level in the general US population is 189 mg/dL. A researcher wants to see if the average cholesterol for men in the US is different from 189 mg/dL. She takes a sample of 81 American males and finds a sample mean of 194 mg/dL and a sample standard deviation of 10.4. Create a 99.8% confidence interval for the true average cholesterol level of the general US male population.

11.What is the 99.8% confidence interval?

12.What is the correct interpretation of the confidence interval from question 11?

13.Are the assumptions met? Explain. Conduct a hypothesis test at the 0.01 significance level to test the researcher’s question.

14.What are the hypotheses?

15.What is the significance level? A. 0.01 B. 0.04 C. 0.05 D. 0.10

16.What is the value of the test statistic?

17.What is the p-value?

18.What is the correct decision? A. Reject the Null Hypothesis B. Fail to Reject the Null Hypothesis C. Accept the Null Hypothesis D. Accept the Alternative Hypothesis

19.What is the appropriate conclusion/interpretation?

20.Are the assumptions met? Explain.

1. A fixed exchange rate regime

A. forces a country to give up free international flows of capital.

B. forces a country to abandon independent monetary policy

C. can eliminate exchange rate uncertainty

D. is the model used by the U.S. Federal Reserve.

2. An asset management firm generated the following annual returns in their U.S. large cap equity portfolio:

The 2012 return needed to achieve a trailing five year geometric mean annualized return of

5.0% when calculated at the end of 2012 is closest to:

A. 17.9%

B. 27.6%

C. 35.2%

3. If the exchange rate between the Australian dollar and the US dollar is expressed in direct quotation from an Australian perspective, then a rise in the exchange rate implies

A. appreciation of the US dollar.

B. depreciation of the US dollar.

C. appreciation of the Australian dollar.

D. B. and C.

4. If the AUD/USD exchange rate declines from 1.2500 to 1.2430, then the fall is equal to

A. 70 points.

B. 7000 pips.

C. 700 points.

D. 70 pips

Case:

Forty years ago, Starbucks was a single store in Seattle’s Pike Place Market selling premium roasted coffee. Today, it is a global roaster and retailer of coffee with some 21,536 stores, 43 percent of which are in 63 countries outside the United States. China (1,716 stores), Canada (1,330 stores),

Japan (1,079 stores), and the United Kingdom (808 stores) are large markets internationally for Starbucks. Starbucks set out on its current course in the 1980s when the company’s director of marketing, Howard Schultz, came back from a trip to Italy enchanted with the Italian coffeehouse experience. Schultz, who later became CEO, persuaded the company’s owners to experiment with the coffeehouse format—and the Starbucks experience was born. The strategy was to sell the company’s own premium roasted coffee and freshly brewed espressostyle coffee beverages, along with a variety of pastries, coffee accessories, teas, and other products, in a tastefully designed coffeehouse setting. From the outset, the company focused on selling “a third place experience,” rather than just the coffee. The formula led to spectacular success in the United States, where Starbucks went from obscurity to one of the best-known brands in the country in a decade. Thanks to Starbucks, coffee stores became places for relaxation, chatting with friends, reading the newspaper, holding business meetings, or (more recently) browsing the web. In 1995, with 700 stores across the United States, Starbucks began exploring foreign market opportunities. The first target market was Japan. The company established a joint venture with a local retailer, Sazaby Inc. Each company held a 50 percent stake in the venture, Starbucks Coffee of Japan. Starbucks initially invested $10 million in this venture, its first foreign direct investment. The Starbucks format was then licensed to the venture, which was charged with taking over responsibility for growing Starbucks’ presence in Japan.

To make sure the Japanese operations replicated the “Starbucks experience” in North America, Starbucks transferred some employees to the Japanese operation. The licensing agreement required all Japanese store managers and employees to attend training classes similar to those given to U.S. employees. The agreement also required that stores adhere to the design parameters established in the United States. In 2001, the company introduced a stock option plan for all Japanese employees, making it the first company in Japan to do so. Skeptics doubted that Starbucks would be able to replicate its North American success overseas, but by June 2015, Starbucks had some 1,079 stores and a profitable business in Japan. After Japan, the company embarked on an aggressive foreign investment program. In 1998, it purchased Seattle Coffee, a British coffee chain with 60 retail stores, for $84 million. An American couple originally from Seattle had started Seattle Coffee with the intention of establishing a Starbucks-like chain in Britain. In the late 1990s, Starbucks opened stores in Taiwan, Singapore, Thailand, New Zealand, South Korea, Malaysia, and—most significantly— China. In Asia, Starbucks’ most common strategy was to license its format to a local operator in return for initial licensing fees and royalties on store revenues. As in Japan, Starbucks insisted on an intensive employee-training program and strict specifications regarding the format and layout of the store. By 2002, Starbucks was pursuing an aggressive expansion in mainland Europe. As its first entry point, Starbucks chose Switzerland. Drawing on its experience in Asia, the company entered into a joint venture with a Swiss company, Bon Appetit Group, Switzerland’s largest food service company. Bon Appetit was to hold a majority stake in the venture, and Starbucks would license its format to the Swiss company using a similar agreement to those it had used successfully in Asia. This was followed by a joint venture in other countries. The United Kingdom leads the charge in Europe with 808 Starbucks stores. By 2014, Starbucks emphasized the rapid growth of its operations in China, where it had 1,716 stores and planned to roll out another 500 in three years. The success of Starbucks in China has been attributed to a smart partnering strategy. China is not one homogeneous market; the culture of northern China is very different from that of the east, and consumer spending power inland is not on par with that of the big coastal cities. To deal with this complexity, Starbucks entered into three different joint ventures: in the north with Beijong Mei Da coffee, in the east with Taiwan-based UniPresident, and in the south with Hong Kong-based Maxim’s Caterers. Each partner brought different strengths and local expertise that helped the company gain insights into the tastes and preferences of local Chinese customers, and to adapt accordingly. Starbucks now believes that China will become its second-largest market after the United States by 2020.

Question:

2. Many would argue that Starbucks coffee is expensive, and yet customers get “value” for their money. How do you think Starbucks has been able to transfer this business model and value proposition to international markets?

Case:

Forty years ago, Starbucks was a single store in Seattle’s Pike Place Market selling premium roasted coffee. Today, it is a global roaster and retailer of coffee with some 21,536 stores, 43 percent of which are in 63 countries outside the United States. China (1,716 stores), Canada (1,330 stores),

Japan (1,079 stores), and the United Kingdom (808 stores) are large markets internationally for Starbucks. Starbucks set out on its current course in the 1980s when the company’s director of marketing, Howard Schultz, came back from a trip to Italy enchanted with the Italian coffeehouse experience. Schultz, who later became CEO, persuaded the company’s owners to experiment with the coffeehouse format—and the Starbucks experience was born. The strategy was to sell the company’s own premium roasted coffee and freshly brewed espressostyle coffee beverages, along with a variety of pastries, coffee accessories, teas, and other products, in a tastefully designed coffeehouse setting. From the outset, the company focused on selling “a third place experience,” rather than just the coffee. The formula led to spectacular success in the United States, where Starbucks went from obscurity to one of the best-known brands in the country in a decade. Thanks to Starbucks, coffee stores became places for relaxation, chatting with friends, reading the newspaper, holding business meetings, or (more recently) browsing the web. In 1995, with 700 stores across the United States, Starbucks began exploring foreign market opportunities. The first target market was Japan. The company established a joint venture with a local retailer, Sazaby Inc. Each company held a 50 percent stake in the venture, Starbucks Coffee of Japan. Starbucks initially invested $10 million in this venture, its first foreign direct investment. The Starbucks format was then licensed to the venture, which was charged with taking over responsibility for growing Starbucks’ presence in Japan.

To make sure the Japanese operations replicated the “Starbucks experience” in North America, Starbucks transferred some employees to the Japanese operation. The licensing agreement required all Japanese store managers and employees to attend training classes similar to those given to U.S. employees. The agreement also required that stores adhere to the design parameters established in the United States. In 2001, the company introduced a stock option plan for all Japanese employees, making it the first company in Japan to do so. Skeptics doubted that Starbucks would be able to replicate its North American success overseas, but by June 2015, Starbucks had some 1,079 stores and a profitable business in Japan. After Japan, the company embarked on an aggressive foreign investment program. In 1998, it purchased Seattle Coffee, a British coffee chain with 60 retail stores, for $84 million. An American couple originally from Seattle had started Seattle Coffee with the intention of establishing a Starbucks-like chain in Britain. In the late 1990s, Starbucks opened stores in Taiwan, Singapore, Thailand, New Zealand, South Korea, Malaysia, and—most significantly— China. In Asia, Starbucks’ most common strategy was to license its format to a local operator in return for initial licensing fees and royalties on store revenues. As in Japan, Starbucks insisted on an intensive employee-training program and strict specifications regarding the format and layout of the store. By 2002, Starbucks was pursuing an aggressive expansion in mainland Europe. As its first entry point, Starbucks chose Switzerland. Drawing on its experience in Asia, the company entered into a joint venture with a Swiss company, Bon Appetit Group, Switzerland’s largest food service company. Bon Appetit was to hold a majority stake in the venture, and Starbucks would license its format to the Swiss company using a similar agreement to those it had used successfully in Asia. This was followed by a joint venture in other countries. The United Kingdom leads the charge in Europe with 808 Starbucks stores. By 2014, Starbucks emphasized the rapid growth of its operations in China, where it had 1,716 stores and planned to roll out another 500 in three years. The success of Starbucks in China has been attributed to a smart partnering strategy. China is not one homogeneous market; the culture of northern China is very different from that of the east, and consumer spending power inland is not on par with that of the big coastal cities. To deal with this complexity, Starbucks entered into three different joint ventures: in the north with Beijong Mei Da coffee, in the east with Taiwan-based UniPresident, and in the south with Hong Kong-based Maxim’s Caterers. Each partner brought different strengths and local expertise that helped the company gain insights into the tastes and preferences of local Chinese customers, and to adapt accordingly. Starbucks now believes that China will become its second-largest market after the United States by 2020.

Question:

1. Starbucks prefers a combination approach to foreign market entry: the use of joint ventures and licensing. Do you agree with this approach? Why or why not?

July 2019 Transactions

Date     Description of the Transaction                                                                                                                    

July 1    Borrow $35,000.00 from 1st Bank by signing a 24 month note.

(As an example of how to journalize and post a transaction -- this transaction has already been entered into the General Journal and posted to the General Ledger.)

July 1    Receive $66,900.00 cash from new investors, and issue $66,900.00 of Common Stock to them. July 1       Purchase $36,000.00 of new mowing equipment, paying cash to the mower dealer.

”     July 1    Pay $500.00 cash for the July truck rental.

July 3    Invoice a new customer $3,560.00, for a completed mowing job — customer will pay in 10 days.

July 5 The Board of Directors declares a cash dividend. The total amount of the dividend is $26,000.00. The Date of Record is set as July 15. The Date of Payment is set as July31“

Jul 7.    Pay the employees $6,500.00 for work performed during the 1st week of July.

_          July 10. Complete a mowing job for a new customer — customer pays $915.00 cash for the job.

July 12. Collect $3,500.00 cash from the golf course for special rush mowing job completed on May 31.

July 1.4 Pay the employees $5,000.00 for work performed during the 2nd week of July.

July 15 . Purchase $880.00 of supplies from the mower dealer. The supplies are consumed immediately.

Lenny’s will pay the mower dealer for the supplies in about 2 weeks.

July 15 Collect $3,560.00 on account. The cash that is received is from the new customer for the job

that was completed on July 3.

.          July 17   One of the original mowers purchased in January of 2018 broke down and is repaired by the mower deaIer. The cost of the Mower Repair job is $895.00. Lenny’s will pay the mower dealer in 30 days.

July 19. Purchase for cash $31,000.00 of supplies. These supplies will be consumed over the next 12 months.

July 20 Collect $30,000.00 from the property management company for work performed in June.

July 21. Pay the employees $4,850.00 for work performed during the 3rd week of July.

July 23. Receive a $23,250.00 advance payment from the university. The advance payment  is for 6 months of work which will be performed from August 1, 2019 to January 31,2020.

July 25. Complete a special mowing job for the golf course. The total price for the mowing job is $7,050.00. The golf course pays $1,000.00 cash on this date and will pay the remainder on August 25.

July 27. Complete a mowing job for a new customer — customer pays $400.00 cash for the job. July 27 Pay $880.00 cash to the mower dealer for the supplies purchased on account on July 15. July 28 Pay the employees $5,300.00 for work performed during the 4th week of July.

July 31. Invoice the property management company $25,500.00 for July mowing work. The property management company will pay the invoice on the 20th of next month.

July 31. Pay the cash dividend which was declared on July 5.

Additional Information

Equipment: The $48000.00 beginning balance in the Equipment account relates to the mowing equipment which”was purchased on January 2, 2018. For information related to this mowing equipment see Page 70 in the Solid Footing book. This equipment continues to be used and should be depreciated for the month of July.

The following information relates to the new equipment which was purchased on July 1, 2019:

- The new equipment was placed into service on July 1, 2019 and should be depreciated for the month of July.

-The estimated useful life of the new equipment is 5 years.

- At the end of 5 years, the new equipment will have no future value and will be scrapped. The new equipment will be depreciated using the straight-line method.

Supplies: At the end of July there are $28,150.00 supplies on-hand.

Mowing service at the  University:

The monthly mowing service was provided to the university per the contract signed on April 1, 2019.

Wages due the Employees:   The last wage payment was made to the employees on July 28, 2019. The employees worked on

July 29, 30, and 31. For these three days of work the employees earned $3,175.00 of wages. These three days of wages will be paid to the workers during the first week of August.

Bank Loan:            The interest on the loan from 1st Bank will be paid every three months. The first interest payment

to the bank will be made on September 30, 2019. Lenny's calls the bank on July 31 and the bank indicates that the interest on the loan for July is $860.00.

I NEED A GENERAL JOURNAL FOR THIS INFORMATIONS.

Question 1: Roger Harkel, CEO of Bestafer, Inc. seeks to raise $2 million in a private placement of equity in his early stage venture. Harkel conservatively projects net income of $5 million in year 5 and knows that comparable companies trade at a price earnings ratio of 20X.

What share of the company would a venture capitalist require today if her required rate of return was 50%?

What if her required rate of return was only 30%?

If the company had 1M shares outstanding before the private placement, how many shares should the venture capitalist purchase?

What price per share should she agree to pay if her required rate of return was 50%? 30%?

(Note: Assume investment is in standard preferred stock with no dividends and a conversion rate to common of 1:1)

Roger feels that he may need as much as $12M in total outside financing to launch his new product. If he sought to raise the full amount in this round, how much of his company would he have to give up?

What price per share would the venture capitalist be willing to pay if her required rate of return was 50%? 30%?

Question 2: Benedicta Jones of Gorsam Capital likes Harkel’s plan, but thinks it is naïve in one respect: to recruit a senior management team, she believes Harkel will have to grant generous stock options in addition to the salaries projected in his business plan. From past experience, she thinks management should have the ability to own at least 15% share of the company by the end of year 5.

Given her beliefs, what share of the company should Benedicta insist on today if her required rate of return is 50%? 30%?

Alisha and Diva are the directors and shareholders in Flowers First Pty Ltd. They have been having cash flow problems with respect to acquiring a third vehicle (with equipment) to expand their business. They approach Ali to invest in Flowers First Pty Ltd. Ali has offered to invest $100,000 into Flowers First Pty Ltd on the basis that he will be issued with 50 Ordinary shares in the company (equating to 20% of the Company). At a general meeting of shareholders Ali is appointed non-executive director of the company.

Flowers First Pty Ltd’s cash flow position has improved as a result of the investment from Ali, and substantial profits are earned in the following two years. Ali becomes aware that Alisha and Diva have increased their salaries as executive directors (CEO and CFO) and have also declared bonuses to themselves. Ali becomes concerned that no dividends have been declared and at the next board meeting raises his concerns including his objection to the increase in directors’ salary. Alisha and Diva took offence to this an actioned the following:

• At a directors meeting (no notice provided to Ali) a resolution was passed to assign a recent RSPCA contract to a new company formed by Alisha and Diva as the sole shareholders.
• Alisha and Diva then called a General meeting with shareholders (no notice provided to Ali) and resolved that Ali will be removed as director of the company.
• At the General Meeting of shareholders, the director’s decision to assign the RSPCA contract was ratified by the shareholders with a vote of 80% (Ali not being present).

Ali comes to you with the following questions. You are required to answer:

a)         Can Ali bring a personal or derivative action against Alisha and Diva, and what should Ali consider in making this decision?                                                             

b)         If Ali brings a personal action, should he bring it under the general law or make an oppression claim under s 232 Corporations Act 2001 (CTH)?                       

c)         What remedies should Ali seek?