Option (filmmaking)

In the film industry, an option is a contractual agreement between a potential film producer (such as a movie studio, a production company, or an individual) and the author of source material, such as a book, play, or screenplay,[1] for an exclusive, but temporary, right to purchase the screenplay, given the film producer lives up to the terms of the contract.

Overview

The agreement details the exclusive rights, including the specified time period and financial obligations. The producer usually has to advance the essential elements, such as financing and talent, towards the creation of a film based on the work being optioned. Similarly, producers can also option articles, video games, songs, or any other conceivable work of intellectual property.

Financially, the contract qualifies as a financial option and may be valued by applying real options analysis.[2][3][4]

The term is often used as a verb in Hollywood. For example, "Paramount optioned the short story by Philip K. Dick."

Subject of option

To be more specific, when a screenplay is optioned, the producer has not actually purchased the right to use the screenplay; the producer has simply purchased the "exclusive right" to purchase the screenplay at some point in the future, if the producer is successful in setting up a deal to actually film a movie based on the screenplay.

This is usually a slow process in which a "package" of sorts is created. During this time, the producer must:

  1. Get the screenplay written (if the option was on a book or other work, and not a screenplay);
  2. Obtain informal agreements with the director, the principal actors, and the financiers;
  3. Take it to a movie studio or other potential financier and potentially help with distribution (pre-sales);
  4. Finalize the screenplay to the agreement of all stakeholders—the exclusivity of the option allows this step without risk of a rival attempt to produce the same property.

This process can last for a prolonged period of time known as development hell. If all this tentative planning falls into place, meaning actual agreements are signed and financing is secured, then the producer can start the pre-production phase. A portion of the financing is usually used to exercise the option.

Exclusivity

Film options are exclusive, usually for an initial period of 12–18 months. After the expiration date, the producer no longer has an exclusive right to buy the screenplay, and the writer can option it to a different producer. Most option agreements specify the prices of additional extensions (most commonly one extension, also for 12–18 months), should the producer be unable to put the movie together in the originally specified term, and choose to extend. The fee for the first option period is normally applicable to the option exercise price, while the fee for the extension (if exercised) typically is not applicable, though that is not always the case.

Options in Hollywood

Options are not expensive by the standards of Hollywood movies. For True Romance, Quentin Tarantino received US$50,000 to option his script.[5] Many writers are happy to receive a few thousand dollars. Option contracts typically do specify the eventual cost of the screenplay, if the producer does end up exercising the option.

Since optioning a screenplay is far cheaper than buying it, options are very popular in Hollywood for speculative projects.

Theatrical options

The above rules generally also apply to the option contract for a completed play between playwrights and theatrical producers. A significant difference is that the playwright may refuse to allow their product to be changed in any way without consent and involvement.

The option will provide for the provisions triggered by the purchase of the play when the producer has put his investors and money together. Occasionally, a play will be commissioned by a producing organization, and in that case the writer will not be working "on spec", and the notion of an option will not arise.

See also

References

  1. ^ http://www.americanbar.org/content/dam/aba/migrated/Forums/entsports/PublicDocuments/imanage_311793_2.authcheckdam.pdf
  2. ^ Don Chance, Eric Hillebrand and Jimmy Hilliard (2009). Pricing options on film revenue, Risk 22, 80-86.
  3. ^ S. Young, J. Gong, and W. Van der Stede (2012). Using real options to make decisions in the motion picture industry. Strategic finance . pp. 53-59.
  4. ^ J. Gong, J. Jianxin, S. Young, and W. Van der Stede (2011). Real Options in the Motion Picture Industry: Evidence from Film Marketing and Sequels. Contemporary Accounting Research, Vol. 28, No. 5, pp. 1438-1466, Winter 2011.
  5. ^ Reservoir Dogs: Lawrence Bender's Commentary on DVD Special Edition
A Scattered Life

A Scattered Life is a 2010 novel written by American author Karen McQuestion and published by AmazonEncore a division of Amazon Publishing. Originally released solely as an e-book for Amazon's Kindle, the novel is notable for being the first self-published Kindle book optioned for film. Producer Eric Lake optioned the rights for the L.A.-based production company, Hiding In Bed, in November 2009.Set in small-town Wisconsin and told with humor and pathos, A Scattered Life is the story of a friendship triangle between a young wife, her intrusive mother-in-law, and a baby-obsessed mother of five.

Box office futures

In finance, box office futures is a type of futures contract in which investors trade shares in upcoming movies based on their predicted performance.

Real options valuation

Real options valuation, also often termed real options analysis, (ROV or ROA) applies option valuation techniques to capital budgeting decisions. A real option itself, is the right—but not the obligation—to undertake certain business initiatives, such as deferring, abandoning, expanding, staging, or contracting a capital investment project. For example, the opportunity to invest in the expansion of a firm's factory, or alternatively to sell the factory, is a real call or put option, respectively.Real options are generally distinguished from conventional financial options in that they are not typically traded as securities, and do not usually involve decisions on an underlying asset that is traded as a financial security. A further distinction is that option holders here, i.e. management, can directly influence the value of the option's underlying project; whereas this is not a consideration as regards the underlying security of a financial option. Moreover, management cannot measure uncertainty in terms of volatility, and must instead rely on their perceptions of uncertainty. Unlike financial options, management also have to create or discover real options, and such creation and discovery process comprises an entrepreneurial or business task. Real options are most valuable when uncertainty is high; management has significant flexibility to change the course of the project in a favorable direction and is willing to exercise the options.Real options analysis, as a discipline, extends from its application in corporate finance, to decision making under uncertainty in general, adapting the techniques developed for financial options to "real-life" decisions. For example, R&D managers can use Real Options Valuation to help them allocate their R&D budget among diverse projects; a non business example might be the decision to join the work force, or rather, to forgo several years of income to attend graduate school. It, thus, forces decision makers to be explicit about the assumptions underlying their projections, and for this reason ROV is increasingly employed as a tool in business strategy formulation. This extension of real options to real-world projects often requires customized decision support systems, because otherwise the complex compound real options will become too intractable to handle.

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