I love Han Solo.
To put out my Star Wars bonafides—as if proving I’m a hardcore nerd makes me cooler—I’m the type of Star Wars fan who read the both the Han Solo trilogies, one from the 1980s and the other from the 1990s. Don’t believe me? Here’s my collection of just Han Solo books dating from again 1980 to 2015:
So it isn’t a coincidence that I chose the Disney-Lucasfilm acquisition for my first “analysis article”. And it’s partly why I can’t stop writing about the disappointment of Solo: A Star Wars Story at the box office. As a hardcore Han Solo fan who loves the business of entertainment, sort of combines two loves into a just overall intriguing topic.
Today’s article is a response—in as near real time as I get—to the Star Wars issue of the day: the future of Lucasfilm’ business slate. First, Collider revealed that Lucasfilm was putting spinoff films on hold. Then The Hollywood Reporter clarified that Lucasfilm was just being careful with future development. Then other outlets jumped in to comment or repeat the news.
I’m not a traditional journalist so I don’t have those inside sources. But I do have expertise in the business ramifications of these decisions. And having spent the last four months analyzing all of Lucasfilm’s finances, I have a complicated model on how their movies perform. This model will allow me to answer some questions about why Disney is slowing the pace of production for Star Wars.
Questions sound like a good way to go. So I’m going to set this up as a fictional Q&A:
Question: Can you explain in one chart why Disney/Lucasfilm are slowing development?
Sure. Here’s the “hockey stick” shape of box office performance from my article on the economics of blockbusters
The take away is pretty simple: the spin-off movies are doing about half as well as the “episode” films. If you look at this chart, you’re tempted to say, “Hey, we should just make Episode films only, and not make spin-offs.”
Question: Do you buy this explanation?
Not really. We’re in the realm of small sample sizes. Ten movies, to be exact. So just assuming that calling something an “Episode” film will make it perform better doesn’t make sense. We need a deeper explanation of the underlying forces.
Question: What are the underlying forces?
Well, as I tried to model, the “economics of franchise blockbusters”. I created a comparable films data set of 75 films, but then trimmed it down to answer specific questions. I modified it in four different ways: Star Wars films since the beginning, Star Wars films since 1999, all blockbuster franchises since 2008 and finally any franchises that showed “fatigue” since 2008. Again, I used adjusted US gross to even these out. Here are those four categories:
The takeaway of this is that Star Wars does really well. In just the films since 1999, 43% have been “super-hits” (over $700 million in US adjusted box office). But franchises that start to show fatigue didn’t have any super-hits. So we can see that keeping box office performance strong can have a tremendous upside.
Question: Can we quantify what the upside is?
Yeah, I can. Here’s the financial models I made for my “comparables” at each level:
As you can see, a super-hit isn’t worth just a bit more, it’s worth over four times as much as just a “median” blockbuster hit. (And flops cost you $40 million or so dollars.) In other words, you can attempt nearly 20 franchise blockbusters to try to get a hit.
(One note, the comparable numbers are lifetime numbers. In my model I condensed revenue to a four year period, but the point is Disney, with the blockbuster that is The Force Awakens will make money off of it for decades with resales, DVD sales, or putting it on its own SVOD platform. My numbers seem high, but for a film with a huge box office you make money off of it for years.)
Question: So can we combine the performance and comparables models?
Absolutely, and we get the “expected value” per film. In other words, if you make a franchise blockbuster, what is the expected value? Here is the a combination of the two charts, with the expected value.
Calculating “expected value” is easy, just multiply the probability of the various performance by the net profit. Once you do that, you see that if Star Wars can sustain at it’s historic level, it’s worth $731 million per film, whereas if it decays into franchise fatigue, that’s only $284 million per film.
(Side Question: Does this expected value apply to all blockbusters?
No! My franchise blockbusters are films in an already established franchise. Attempts at new franchises (which is what most blockbusters are nowadays) can differ in two ways. First, when they lose money, it isn’t just $40 million dollars. Even Solo had a gross of $375 million. And it is lumped in for sales with other Star Wars films. Flops like John Carter from Mars or The Lone Ranger can be in more of the $280 million dollar range. I was going to put The Mummy from last year in this, but it still did $400 million in total box office globally, with only $80 million in the U.S.
The other factor is the new blockbusters have a naturally lower hit rate then established franchises. These two factors make blockbusters riskier than established franchises, but less risky then lower budget films. This table is why, though, I said that Legendary could be doing “moneyball” with movies. They have seen this math, so their key was getting enough capital (billions) to back large movies like this to see the return. Back to the questions.)
Question: So Lucasfilm can’t lose money on these movies? Is that what you’re saying?
In the aggregate, yes. If you make enough films, and your movies perform according to the historical pattern, yes you won’t lose money. Of course, once “franchise fatigue” sets in, a film studio will chose not to keep making as many movies. And if it were on a true, sustained downward trajectory, then the value could drop further. Moreover, all these expected values are just one input into a model with a lot of uncertainty. If you deliberately made a lot of bad movies, yeah Lucasfilm could figure out how to lose money.
Question: So knowing this, how many Star Wars films should Disney make?
To answer that, I really need to go back to my model. (I explained how I got these numbers here, here or here.) To figure out how much money Disney will make on Lucasfilm, I needed to model the expected value over the next ten years. This needed to account for different production issues and different box office performance. Put it all together and I got 8 scenarios. This chart is new, though, and only calculates what Disney could make on Lucasfilm movies over the next ten years, discounted back to 2018 dollars.
Why discounting to 2018? Well, we’re looking forward so unlike my analysis that is partially backwards looking, we’re evaluating the value of Lucasfilm into the future. Since 2018 is the year Disney/Lucasfilm has to make the decisions about new films, that’s when we need to time our dollars.
(Question: Does the above chart include Episode 9 or Indiana Jones 5?
No included them in my overall analysis of the deal, but not here since I am assuming Disney is already committed to them. They’re sunk costs so don’t effect the planning for the rest of the future Star Wars films.)
Question: Okay, that’s a lot of numbers, any takeaways?
Yeah, first Disney doesn’t lose money in any scenario going forward. In the one scenario where they could—making a ton of films as fatigue set in—they would pull the plug on that course of action, as they are contemplating right now.
But the biggest takeaway is that sustaining the “Star Wars is Star Wars” scenario is more valuable than any production decisions. Accelerating to “MCU style” definitely has higher up side, but if you can’t hold onto the audience, then you lose 40-66% of the value. Even a troubled production slate (“Issues”) achieves a higher return than going to MCU-style if you can keep “Star Wars is Star Wars” at the box office.
(So if you’re a Star Wars fan who’s disappointed in Disney for making too many Star Wars films, here’s you counter-argument to show to Disney execs. Say, “See, Disney if you make fewer films you can make more money.”)
Question: Do you buy this?
It all hinges on is correlation. Is the number of films causing the franchise fatigue, or is it unrelated? The model I have here shouldn’t be interpreted to say that franchise fatigue is caused by increased film output. I consider these two things independent in the scenarios.
That said, as I wrote in the Solo: A Star Wars Story post, yeah, I do think they are related. There is a reason why only one franchise has been able to release multiple films per year and not decay, and that’s Marvel. (And that reason is Kevin Feige.) Otherwise multiple films in a year or even more than every three years tends to yield a decline at the box office eventually. In short, hardly any film franchises can sustain sky high box office if they release a film every year.
Question: You just said that franchise fatigue is both related and not related to the number of films. So which is it?
The better way to say it is franchise fatigue is related to film quality. To go back to the Marvel example, the films keep being excellent. Dr. Strange is the worst reviewed movie in 18 months, and was still well-received. Before that you’d have to go back to Ant-Man. So when Marvel says we can do more movies and keep them great, then franchise fatigue doesn’t set it.
The last two Star Wars films both had mixed customer or critical reactions. That’s what causes low box office more than anything. Increasing the number of films increases the odds of more bad films, which causes fatigue. Very, very few franchises can keep the quality sustained at a high rate for that long, besides Marvel (and again Kevin Feige).
Question: Any other concerns with the model?
Well, the “Star Wars is Star Wars” version is a very small data set. Only 10 films so far. And it is a franchise that is unique in that there were two large gaps between initial films and the prequels (15 years) and the new films (10 years). This built up massive enthusiasm. This is why I don’t model another hit the size of The Force Awakens. I think Disney knows meteoric hits are rare, and as dependent on quality as they ever were.
Question: So after all that, why is Disney making this decision from a business perspective?
Disney is slowing to one film per year, roughly, to keep the quality high. It will also avoid risking bad films and hence franchise fatigue. At the same time, decreasing below that rate leaves money on the table, as our expected value chart and scenarios show. So expect Disney to keep one film per year.
Question: Do you have any other concerns?
Well, the worries about fatigue will only amplify is Lucasfilm releases one or multiple TV series aimed at adults on Disney’s new streaming platform. Even dialing back the movie releases won’t mean Star Wars isn’t in the culture. If the TV series aren’t good or the marketing machines over hype the new series, cutting back on the number of films may not matter.
Also, the TV shows bring up another issue I haven’t really addressed yet, which is the other lines of business. Keeping Star Wars relevant impacts the toy sales, the streaming service, the kids TV and the theme parks. That’s another reason to focus on quality movies.
Question: What is the biggest assumption in this analysis?
The big assumption, and I assume Disney believes this to be true, is that development executives at Lucasfilm can indeed improve quality by slowing down production. Of course, that assumes that development execs are skilled at development and can indeed make better movies, they just might have been spread to thin.
I actually don’t believe this. Assuming that you can simply make better films with the executives you have by trying harder…isn’t really a data-based position. I have a ton of thoughts on how to improve development—most of which Hollywood doesn’t do—but not enough time in this article. Keep reading this site and I’ll get to it.
Question: Do you have any creative concerns?
I do, but this is me putting on my “development executive” hat.
As I was researching Solo I read that Rian Johnson’s new trilogy due in the 2000s will close out Rey and Finn’s arcs. While critics praised The Last Jedi, they tended to gloss over the larger plot: the Resistance lost. I mean, the Resistance is basically 20 people on a ship and the First Order took over the galaxy. With such a deep hole, and knowing that Rian Johnson is making three more films to close out the story, the key question for Episode 9 is this:
Will the good guys win?
If they don’t, and it ends on another “cliffhanger” a la Empire Strikes Back, I think you could see another negative fan reaction. Or at least, it will have to be a pyrrhic victory, where the good guys win, but the First Order is still in charge.The fans want closure to this arc; if they don’t get that, it could impact future box office. This is one of those creative decisions that could impact the business, but is super hard to model.
Question: Fine, just for fun, what would you do if you were Lucasfilm?
Make a Tales of Mos Eisley TV show. It’s still in the core world, but exploring possibly the best short story collection in the larger Star Wars universe. Which is to say, spinoffs shouldn’t be dead quite yet.
