Disney-Lucasfilm Deal Part III: Movie Revenue – The Economics of Blockbusters

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(This is Part III of a multi-part series answering the question: “How Much Money Did Disney Make on the Lucasfilm deal?” Previous sections are here:

Part I: Introduction & “The Time Value of Money Explained”
Appendix: Feature Film Finances Explained!
Part II: Star Wars Movie Revenue So Far
Part III: The Economics of Blockbusters
Part IV: Movie Revenue – Modeling the Scenarios
Part V: The Analysis! Implications, Takeaways and Cautions about Projected Revenue
Part VI: The Television!
Part VII: Licensing (Merchandise, Like Toys, Books, Comics, Video Games and Stuff)
Part VIII: The Theme Parks Make The Rest of the Money)

A peak behind the curtain into how long I’ve been writing this series. I started sketching thoughts on the Lucasfilm acquisition back in February, then started writing this article in April. I’m still finishing it in June. Fortunately, this extended timeline managed to teach me a rare lesson in humility about forecasting.

See, when I started writing, Solo: A Star Wars Story was still three months away. At the time, I needed to estimate for its box office performance to calculate the movie revenue. So I searched for projections. In early March, I found forecasts for Solo’s US opening north of $150-170 million, ending in a total US run of $350-$475 million. At the time, we all assumed Solo would be a sure thing at the box office. So I put that in my model. So I put into the model that Solo would do a bit less then Rogue One, at about $800 million in total worldwide box office.

By May, the estimates had lowered but still projected an opening weekend of $150-170 million. Days before the launch, the estimates had dropped even further, to $130-$150 million. The estimates continued to decay even as the weekend progressed, as this updated article from Deadline shows. Ultimately, Solo ended up with an opening weekend of $101 million domestic on track for about $350-360 million worldwide. (The March estimates had it at $350 for just the domestic market.)

Using the tracking data above, I see a “floor” domestically of about $300 million for Solo.

There’s a very famous quote about what people do and don’t know about movies. I won’t repeat it here, but I will agree that forecasting box office returns (and hence all revenue for a filmed project) is incredibly difficult. Even a movie as closely watched as Solo: A Star Wars Story missed most of the “ranges” offered by box office projections. My initial assumptions about Solo were way too confident which meant my entire analysis was off.

So we need to go into today’s post with a little humility and our eyes open. Last time, I asked a few questions:

Lucasfilm and Disney are doing well, but how well? More precisely, how much cash did they make on these movies? And how well do we think they will do going forward? Could they start losing money?

I answered the first two questions (doing really well; $3.7 billion in unadjusted gross profits or $2.5 billion in 2012 adjusted terms) in the last article. That was the easy stuff; what I called, “What we know” last time since I just had to plug the results into my model with some sleuthing.

Now comes the hard part. We have to estimate how future films will do and then guess about the rest of the potential slate. Which I’ll try to do this week. But first, I need to illustrate how hard this is…

Difficulty in Forecasting Box Office

To show the difficulty, let’s start with the difference between Solo: A Star Wars Story and The Force Awakens. One grossed $2 billion dollars at the worldwide box office. The other did under $400 million. That’s a gap of more than $1.5 billion dollars. That gap also roughly equates to how how large our confidence interval could be when projecting box office for films that aren’t coming out for two years (or longer). To capture that, look at this chart I made (using approximate numbers):

Slide 15a

I put in these numbers as placeholder estimates. What they are are the fictional “90% confidence interval” for The Force Awakens. In other words, at greenlight, you could have guessed that a new Star Wars movie would do $2.4 billion in total box office or $400 million, and you’d be right, 90% of the time.

If that seems huge, it is. Projecting box office is tremendously uncertain and hence inaccurate. The internet and its data has improved the process, but only by about 4 to 8 weeks, not months out from release. But, again, as Solo: A Star Wars Story showed, this too can be off. As I’ve said before, this is why you can’t use data to predict how well movies will do. If it’s hard predicting a movie that has already been made, like Solo, it’s even harder when it is just an idea or script.

As we look towards the future of Lucasfilm, I want to acknowledge this. I’m not saying I can say, “Hey this movie will gross $X million dollars,” because frankly that’s nearly impossible. Instead, I need some analytical tools to get an approximate performance for all these films in total. The tools I will work with are using “comparables” to determine the range of outcomes and then “scenario modeling” to account for those ranges of outcomes.

Using a “Comparables Approach”

We’ll start with the “comparables approach” to box office forecasting.

I hinted above at a famous quote about “knowing things” when it comes to movies. I’m still not going to repeat it here, but the implication of the quote is I should give up now. If nobody can reliably forecast box office outcomes, it seems like it would be pointless to even try to make a model predicting future Star Wars films performance.

But just because we can’t forecast box office with tremendous precisions doesn’t mean we know nothing about box office. While we can’t forecast with 100% accuracy, we do know something: these movies are blockbusters. Moreover, they’re Star Wars films. We can use both of these facts to inform our predictions of how well these movies could do.

The best way to categorize this is the difference between a film’s box office floor and its box office ceiling. Blockbusters—like Harry Potter or Lord of the Rings or Marvel or DC or Star Wars films—have a peak ceiling in the billions. Small independent art house films have a very rare ceiling in the hundreds of millions. Different types of films also have different floors. May art house films have a literal floor of zero dollars. They get made, don’t find distribution and lose all their production money. Blockbusters can usually put up something of an opening weekend and make some money, but they just lose a whole lot more when they completely flop. (I’m looking at you, John Carter of Mars and The Lone Ranger. I wonder what studio made those?)

We know that future Star Wars films aren’t like horror films or serious dramas or raunchy comedies. They’re like other blockbusters. Knowing these are blockbusters, we can make a list of other blockbusters franchise films and see how well they did. Moreover, we can refine our list to comparable films that are in the same league as Star Wars, or trying to be. And even further, we can only include major franchises that released films recently.

So that’s a “comparables approach”. We make a list of films who most resemble the film we’re greenlighting. (Or films in this case.) We are careful to include both successful and unsuccessful films to know the true frequency of their occurrence. Then we analyze how well they did domestically and internationally. Then we create forecasts based off that data.

The Economics of Franchise Blockbusters

To start, we need our data. I made a data set of blockbuster franchises: Star Wars, Marvel Cinematic Universe, Harry Potter, Indiana Jones, DC Cinematic Universe, X-Men (Fox), Pirates of the Caribbean and Transformers. (Notable omissions: Jurassic Park, Star Trek, Fast and Furious, and James Bond.) Six franchises dating back to 1977 through 2018, encompassing 74 films.

Slide 15bI tracked both adjusted and unadjusted domestic box office gross. Why both? First, I need unadjusted box office growth to track how the Star Wars films actually did for the financial model. That said, adjusted box office growth accounts for the growth in ticket price inflation over time. This is even better than accounting for inflation because it is the real rate of ticket price raises. This is a much better projection of the true box office appeal of a film than real world dollars. (And yes, the entertainment press focuses overwhelmingly on “unadjusted” box office records. This leads for flashier headlines but will cause entertainment execs to be make worse decisions.)

Unfortunately, adjusted gross is only available for the domestic market. I still pulled unadjusted worldwide box office where it was available.

So we have our data. First, I wanted to see how Star Wars as a franchise performs. I pulled out the adjusted domestic grosses for each of the three Star Wars trilogies (Originals, Prequels, Current Star Wars) and an interesting pattern emerges. Take a look.Slide 16Financial analysts use the term “hockey stick” to describe sky high growth projections, but honestly it looks better here for the Star Wars films. And sort of uncanny. Now the usual caution should be applied that this is a small data set; three examples (three trilogies in this case) is hardly a representative sample. There is also the caution that I put Rogue One in as the second film in the current series. I could have pulled that out and put in Last Jedi in the second spot. Overall, the shape would look the same, but we would expect a slight bump for Episode IX if the trilogy follows this pattern. Either way, the main conclusion is that it is unlikely that Episode IX achieves The Force Awakens heights, but will likely exceed The Last Jedi’s performance. And that the non-“episode” films have done much worse overall.

Slide 17

Those two charts are just the warm up. One franchise isn’t really a data set; a comparable approach with just one franchise is too small. Let’s see how all our franchises have performed over time.Slide 18The above table tracks each franchise in release order by domestic adjusted gross. The purpose of this table is to see how the franchise trend over time. That’s why I have the films in “release order” not “year released”, which I’ll chart in a second. I’m using adjusted domestic gross to try to keep the comparison as apples to apples as possible. What I wanted to see is if franchises follow a uniform pattern or any pattern at all.

They don’t. Still, let’s zoom in since only the MCU went over 11 films. Here’s the first 8 films in my data set:Slide 19Star Wars has that “hockey stick” that I mentioned above, but the trilogies themselves don’t have an overall growth pattern. The MCU films have been one of the few franchises to generally grow overtime, with a few big leaps up. I expected Avengers: Infinity War to go even higher than Black Panther and it delivered. Some other franchises have decayed overtime, like Harry Potter until the last film of the original run, which peaked up again, then the newest installment dropped back down. The Lord of The Rings had an upward trend in the first trilogy, then dipped throughout The Hobbit series of films (which I’m sure Amazon Studios was aware of when it bought the franchise. Sarcasm.). Transformers and Pirates have been on a downward trajectory. X-Men recently pulled up from its downward trend.

Using a “Comparables Approach”: Creating our Comps

So let’s turn general performance into specifics. To make our “comparables” range, I made a new chart and table, but trimmed the date range. Going back to 1977 seems like too much. Adjusted gross starts to get wonky going back that far because so many variables change. So I kept my sample size back from 2008 to 2018. Do I have some great justification for starting at 2008? No. But I ended up with this cool chart where I put the franchises by name by year the film was released. Starting from 2008 drops our sample size from 74 films down to an even 50 for this section. But again, I just thought this looked really cool as a visualization:

Slide 20See that band between 200 million to 500 million where most of these franchises land? That tells me there is a “median” performance for most of these films. Only a few films have breached out of that, and only a few films have fallen below that.

To show that in numerical terms, here’s a count of each film by adjusted domestic box officeslide-21.jpgYou can see 70% of all films are divided between that $200 and $500 million mark, but they’re evenly divided. Only 10% of blockbusters in this sample exceeded the $600 million mark. The great thing about this table is we can use it to (finally) make our comparables models.

Models plural. I usually make three levels for a comparable model: hit, medium and flop. At greenlight, I’d usually include a “break even” to show what you need to make the money back. For this model, I’m going to add a fourth level on top: super-hits.

Super-hits are the ultra rare films that go well beyond most other films. I’d put Jurassic Park, Titanic, Avatar, Star Wars and three MCU films in this category. For my model, in box office terms, this means $700 million in domestic and $700 million in international box office.

Next, I made a “high”, “middle” and “flop” categories. High is $500 million domestic gross. Middle range is $300 million domestic gross, right between the band of $200-400 million. Any franchise film that can’t break $200 million in domestic gross I disparagingly call a “flop”, though it does mean the film will likely lose money. Normally, I’d need to model the international growth too, but Star Wars has helped me out there. Ultimately, Star Wars films have a much more even split than other franchises like Transformers or Lord of The Rings.

Slide 22So we’ll assume—but a fairly strong assumption—that international grosses match domestic. Again, sometimes this will be higher or lower, but in the aggregate it will even out. With these new box office projections and our cost estimates from last time, I created four greenlight models:

Slide 23If you want to know why movie studios make so many franchise sequels, well worry no more! Just look at the economics of the four films above: Even a “flop” like Solo will only lose $44 million dollars. (And again I’m not modeling toy revenue with movies; they’ll have their own section.) But if you can get a “hit” like Star Wars, then you stand to make a billion dollars. If you can make one billion dollar film for every 20 franchise films, you make money. It’s an expensive but data driven strategy. (See my thoughts on “moneyball”  here.)

So that’s our “comparables” model. Essentially, in the world of “franchise blockbusters”—a category different than “blockbusters”—we have four categories of performance and we know how frequently they happen. But to build that business model, well, we need our “scenario modeling” which will happen tomorrow.

The Entertainment Strategy Guy

The Entertainment Strategy Guy

Former strategy and business development guy at a major streaming company. But I like writing more than sending email, so I launched this website to share what I know.


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