Disney-Lucasfilm Deal Part IV: Movie Revenue – Modeling the Scenarios

(This is Part IV 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! Performance, Implications, and Cautions)

Let’s talk about confidence.

When I built my film financial model, explaining it here, and after I reviewed the economics of blockbusters, I did the next logical thing: I built a financial model forecasting the performance of Star Wars films for the next ten years. I called Star Wars: Episode 9 (the next film in the Star Wars franchise being directed by JJ Abrams, Episode 9 from here on out) a “super-hit” and called the next Indiana Jones film a “hit”. (Indiana Jones 5 from here on out.) I decided that no movie from Lucasfilm would be a flop. This is Star Wars after all.

(Again, this was March.)

I liked my decisiveness. I felt confident. Then Solo: A Star Wars Story came out and proved that even a Star Wars movie could flop. (And it’s floppiness mirrored exactly what I set out for “flop” performance, with one analyst forecasting losses nearly exactly what I had forecast.)

So I began to question my confidence in that initial “single model”.

Then I slapped myself in the forehead. And said, “Duh, I need to model multiple scenarios.”

Which is how today’s article came about. See, any one model can be wrong. But multiple models that capture the uncertainty properly can be more accurate, on average. They better describe the range of outcomes and hence improve our confidence.

As they gaze towards 2028, two things will determine how much money Disney makes off the Lucasfilm acquisition, one of which they can control, the other which they can’t: how many films Disney makes and how well those films perform at the box office. These two variables gives us the solid foundation of a scenario plan. Using these discrete scenarios, we can chart out essentially the 90% confidence interval for how well this franchise will do. The columns are the best through worst case production outcomes. The rows are how well Star Wars continues to perform. It would look something like this:Slide 24Today I’m building out that simple table. But as simple as it looks, it will have a lot of calculations driving it. Basically, the film financial model I built here, the specific Star Wars models I built here and the performance of franchise blockbusters I analyzed here can now be combined.

Building a Scenario Model of Future Lucasfilm Movies: Scheduling

Let’s start with the production side of the equation. This is what the studio (mostly) controls. The studio decides what movies to make, how to develop them creatively and then produces them. Disney could keep making one film per year or decrease to one film every three years (the old Star Wars average) or increase to multiple films per year. Hmm.

Let’s start with what we can “estimate” with confidence. When I started this series, I forgot that Steven Spielberg was teaming up with Harrison Ford for another Indiana Jones movie. So we know that at least one movie is coming out in 2019 (Episode 9) and believe one will come out in 2020 (Indiana Jones 5). After that we know that two trilogies are in development by Rian Johnson (of Brick, Looper and The Last Jedi fame) and David Benioff and D. B. Weiss (of Game of Thrones fame).

Everything else is a guess from Boba Fett and Obi-Wan movies that are on and off to nine films in development to Lucasfilm pressing pause on future spinoffs. Everything is a rumor and counter-rumor.

The unenviable task I have now is to turn the rumors into scenarios. Fortunately, the specific name of a film doesn’t really matter. I just need numbers for the sheet and enough plausible names to fill it out, which I have.

Let’s start with the base case. I’m going to go with the simplest assumption for our base model: from 2019 to 2027, Disney will average one release per year of either a new trilogy or a standalone film. This is roughly what they have averaged since the start. Yes, Solo: A Star Wars Story and The Last Jedi were five months apart, and Episode 9 will come out at the end of 2019, an 18 month gap in films. That still works out to an average of one film per year.

The argument against this is that one of either trilogy could fall through the cracks. I almost expect this to happen. Three of the five Star Wars films have had to replace the initial director, a bad ratio. A good financial model should account for this inability in production. Also, Harrison Ford is old and I could see Indiana Jones 5 not coming together. (It doesn’t even project to start filming until next year.) In that scenario, I see roughly two films every three years going out, with Indiana Jones 5 missing production.

On the converse, in success, Disney would accelerate the release of films to get to a “Marvel Cinematic Universe” pace. People forget it took time for the MCU to get up to its current pace. The MCU went from one or two films per year to two per year to three per year going forward. Disney would replicate this pace if it could see continued returns with Star Wars.Slide 25Taking that all together, I see three scenarios. First, a base case of one film per year. This is the most likely scenario. Second, an MCU-style accelerated schedule where Disney takes it up to two Star Wars films per year. With Solo: A Star Wars Story missing expectations, this is the least likely scenario. Third, a worst case scenario where bad development and production cause disney to release 2 films every 3 years. So three scenarios:

1. “MCU-style”: 1-2 films per year (through 2027, 14 additional films)
2. “Status Quo”: 1 film per year (through 2027, 9 additional films)
3. “Issues”: 2 films every 3 years (through 2027, 6 additional films)

Slide 26(I used abbreviations for the film titles. The most confusing are IJ=Indiana Jones, RJ=Rian Johnson trilogy, BW=Benioff and Weiss trilogy. Also the names of individual films are just place holders and might as well be TBD, but names are more fun.)

Making our Outcome Scenarios

After production, though, well your film’s performance is in the hands of the box office gods. As I wrote in my last article in this series, I acknowledge forecasting box office for any given film is difficult. I don’t just throw my hands up in despair, though. Instead, I gather what data I can and plan for wide ranges of performance.

Specifically, I’ll calculate how well “franchise blockbusters” have performed on average. Or better, the “distribution” of box office performance of franchise blockbusters.

When I started making my comparables model, I created greenlight models for four types of films: “super-hits”, “hits”, “median” and “flops”. I also had a table showing the number of films by adjusted domestic box office by franchise divided by every hundred million dollars. This is the distribution of these types of films. Again, these were all franchise blockbusters in our data set going back to 2008, adjusted to current box office. Now I’m going to convert that table to our comparable model:Slide 27Great. So we can stop there and make our scenarios?

Not quite. If you’re a Disney or Lucasfilm exec, you can see an enticing upside where “Star Wars is Star Wars”. Meaning it continues it’s dominant run a the box office. To calculate this, I pulled the box office performance of Star Wars films in adjusted box office since 1999. (I also did one with the old trilogy, but the adjusted box office gets wonky going back to 1977.)

If you’re a skeptic or hater or realist, you instead may fear the contagious disease of “franchise fatigue”. “Franchise fatigue” is, defined (by me), a general decline in a franchise’s performance in the US. Crazily, I saw this in every franchise at one time or another in my data set except in Star Wars and Marvel. So I pulled the counts for all blockbusters without Marvel or Star Wars since 2008. Here’s our three revised box office performance scenarios:Slide 28Since “worst case” and “best case” are boring, I replaced them with fun names like I did for production: The best case is “Star Wars is Star Wars” meaning the franchise continues to spin off super-hits at a rate above 40%. (Again, I used the performance since 1999 since the original trilogy was so huge and so long ago.) The average case is “blockbuster average”, the average of our entire franchise data set. (See last article for details on that calculation.) The worst case is “Franchise Fatigue”, where there are no more “super-hits”.

Now we need to convert our percentages into specific films, ranging from 14 in the MCU-style best case down to 6 in the “Issues” worst case scenario. So here’s how I converted the percentages to specific numbers of films through 2027:Slide 29That’s not easy to look at. I’ve taken 2D tables to their limit here. Sorry, I said this was going to get complicated. Basically, for each performance level, I put the three production scenarios below it. I multiplied the number of films by probability of box office and either rounded up or down to make it all even numbers. You can’t have 1.3 movies after all. I did round down from “2.6” in two cases to make the model slightly more conservative.

Also, I specifically excluded one scenario where Disney increases to two films per year while franchise fatigue sets in. I just don’t think Disney would increase the number of films that high if they didn’t think each would launch (which the latest Solo rumors confirm). So I put a redline through that space. Here are our updated scenarios with the names I gave them:

Slide 30

Making Our Financial Projections by Scenario

So the one shortcoming with the greenlight model is it doesn’t factor in when revenues come in and costs go out. I made that clarification in Part II when I finished with a table showing my models for the four Star Wars films since the merger. By 2027, the time value of money (in form of the 8% cost of capital reduction) really bites into gross profits. (As a reminder, I’m evaluating this deal in terms of the price Disney paid in 2012.)

That said, while we do need to spread out revenue to understand the timing implications of costs and revenues, we can trim some of our assumptions. Spreading out revenues over four years is needlessly complicated when we’re guessing how many films will come out in the first place. We’re dealing with a lot more uncertainty now. To simplify my model, after Indiana Jones 5, I’m going to account for all revenue in the year after a film is released. The costs will occur in the year a film is released.

How did I account for when hits and flops would occur? Well, I assumed in any case where super-hits happen, Episode 9 is one of those. (That’s good for Disney in terms of the Lucasfilm deal since it decays less by the time value of money.) Then I assumed Indiana Jones 5 was, for the most part, a “hit”. Then I just spread out the hits and flops randomly, but maybe a little front loaded. Here’s an example of what the “status quo” production model (1 film per year) looked like for the scenarios:

Slide 31The colors match the comparable model performance level. Again, don’t try to match the performance of a specific random film title with a prediction for how well it will do. The point is the films will achieve these on average more or less.

So now I built the complicated model beneath my “First Four Film” timelines. I separated out Episode 9 and Indiana Jones 5 into their own lines to analyze those too. I made all costs their own line along with all revenues as their own line (minus participations, of course). Oh, and for both costs and revenues, I had them grow by 3%, which has been my growth rate throughout the model. (It’s one of those numbers I don’t have a tremendous justification for, but I like costs and revenues growing above inflation rate, but this isn’t a huge growth rate either.)

Here’s an example of what I will call the “base case” where the films perform to blockbuster average and production is “status quo”.

Slide 32Phew. We’re done.

(I calculated the model back to 2014, but hid those columns to fit it all on one page. I hid some rows as well to make it not too unwieldy. So if you wanted to know why some totals are higher then shown, that’s why.)

Look at those numbers: In the “base case” Disney makes $7.9 billion in total dollars, or $4.2 converted to 2012 dollars, or 106% of the initial price. So yeah, it looks like Disney did a great job with this deal.

Put It All Together

I repeated the process seven more times. (If you’re curious, I did them on three different Excel worksheets, keeping production levels together.) And then the fun part could really start: the analysis of the results. Next post, we’ll review the summary of the results and finally oh finally will we be done with the movies portion of this analysis.

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