On a fateful week before Christmas, Paramount Pictures was praying for box-office success for the costliest film it had ever produced. Before opening, the film’s publicity had been all bad, centering on its out-of-control production costs, its 195-minute length, and its uncertain appeal. The film’s opening weekend showed a solid but not spectacular box office ($28 million), and critics’ reviews ranged from favorable to mixed. Fearing that box-office revenues would decline as weeks passed (the pattern for most films), Paramount was impatient to close a deal for the television broadcast rights while the film was faring well. In securing such a deal, the studio had two options:
(1) Auction the TV rights to the highest bidder among the interested networks; or
(2) Negotiate a deal directly with one of the major networks.
Indeed, Paramount had initiated negotiations with NBC, and the two sides were near a deal. Typically, network deals allowed for an escalator provision that adjusted the price paid depending on the size of the theater revenues. (If the movie turned out to be a blockbuster, the price of the television rights would be higher.) NBC’s final offer was to pay $30 million for the TV rights, but only if there was no escalator clause. Although it thought hard about auctioning off the rights, Paramount decided to close the deal with NBC for the guaranteed $30 million.
a. What are the pros and cons of reaching a negotiated deal versus auctioning the TV rights?
b. Do you think Paramount made the right choice? Explain briefly.