Disney-Lucasfilm Deal Part VI – Television Revenue

(This is Part VI 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)

So film is dead. TV reigns supreme. We know this.

Except, it’s not?

I mean, we just calculated that Disney made back 63% of their initial investment on Star Wars with four movies, and has many more in the future. At its peak, nothing can challenge the feature film.

Though some gigantic TV shows have come close. Game of Thrones is a juggernaut in ratings, home entertainment purchases and merchandise sales. The top TV shows can command sales figures in the billions of dollars years after their initial broadcast. I’m thinking of Friends or Seinfeld. And not just in America, but overseas, like The Simpsons, which travels well because it is animated.

Of course, now seems like the time to mention that the future of TV isn’t in international sales, but streaming. (That’s semi-sarcastic.) Streaming will play a key role in Disney’s future and, as Disney CEO Bob Iger has put out, new Star Wars series will be a centerpiece of that.

So let’s value two more pillars of Disney’s empire today: adult and children’s television.

TV – Adult

Being frank, this is much more complicated than calculating projected revenue for films. With movies, we know how well they did at the box office and roughly in home entertainment, so we can assume a lot of the other windows. We can also use box office data sets to gauge ranges of outcomes.

We don’t have that luxury with TV anymore. Subscription services like Netflix, Amazon, HBO and Hulu can hide online ratings. They don’t release the costs of the shows. Other windows are more complex than film: Netflix won’t release in DVD if it doesn’t have to, Amazon hasn’t decided, and HBO will release its shows on DVD, merchandise and even sell to other networks. Even Nielsen data is available, but expensive. (I don’t have it since I’m not in a corporate setting.)

I don’t know what Disney will decide, which makes calculating the value for television series so difficult. Given the variability in the rest of the model, I’ve had to make some simplifying assumptions.

To start, how many series will Disney make? I’m going to assume that since Disney has said they are working on a “few TV series” this will mean three series released per year from 2019 (when the service launches) to 2021. And we’ll give each a three year run. Likely, some will do better, some will do worse. (Better meaning 5+ seasons, worse meaning one season. In between is 3 seasons.) Since they’ll keep making TV series, my model has two new series premiering after that through 2028.

Then I’ll use my knowledge of expensive TV dramas costs. (Sorry, I don’t have a link here, but know this by heart.) The cheapest a Star Wars show would make it on the air is at around $10 million per episode. This seems super high, but estimates have Game of Thrones at around $15 million per, and this is Star Wars we’re talking about here. In fact, while the minimum is $10 million, I could see the high of up to $20 million. So I’m going to use HBO’s $15 million as the cost to make the series. I’m assuming this means new TV seasons could cost between $120 million (8 episodes) to $195 million (13 episodes). I’ll split the difference and assume 10 episode seasons.

So how much does Disney “make” on that? First, it depends on who the “who” is within the larger The Walt Disney Company. The SVOD service is technically a different business unit under Kevin Mayer than Lucasfilm. We’ll focus on the latter here. How much will Lucasfilm make?

This will be fairly straightforward. Many streaming services simply play a fee above the production costs to own worldwide rights. I expect Disney to do that here, and believe they would use something like a 30% license fee. So our first set of revenue will be the production costs plus 30%. And if Disney hadn’t acquired Lucasfilm, it still could have paid a similar percentage to air the television series.

Is this 30% a good price? Sure. Like feature films, TV series either flop or become blockbusters; a new Star Wars TV series could go either way. If the new series is amazing, and helps launch the SVOD platform, then it would be worth double the production cost or more. If the series is a giant “meh”, then it won’t be worth even the production cost. That’s the risk.

Of course, if I had to guess, I would assume that Disney monetizes this series aggressively across home entertainment and merchandise. So it should make more than just the 30% license fee. In this case, I’m assuming they make an additional 10% in home entertainment, international sales and merchandise. For timing, I put the license fee in the same year as the season airs, and I put additional revenue in the year after. I also kept productions costs in the same year, growing at 3% per year.

Oh, they’ll also have to market these series. Likely they’ll market them more efficiently than traditional SVOD platforms because they have so many cross-promotional opportunities. As such, I put additional 15% (of the production costs) in the model for marketing. So all in Disney would make 25% gross profit per TV show. (30% in license fee plus 10% in additional revenue minus 15% marketing fee.)

Slide 43

Some cautions, Disney won’t make exactly 25% on each TV season it produces. Otherwise, that would imply you should just make as many TV seasons as possible. That’s obviously silly. But on average, that seems like what it would work out to. I would also bet one of their first three series will flop for creative reasons. Making great TV is hard, and Star Wars is due its own Marvel’s Iron Fist (on Netflix!).

(The Marvel TV series are why I feel comfortable with the “25%” profit rule. There are so many superhero shows on broadcast, cable and streaming. They all stay on, but none are really Game of Thrones. Or they start strong like Daredevil and Gotham, then decay in viewership.)

So with my math…we see that this is a drop in the bucket. Roughly, the adult TV shows are worth roughly $303 million dollars (in 2012 terms) through 2028, off $645 million in unadjusted gross profits. Strategically, it could really help launch the SVOD service, but only if the TV shows are strong.

What if they do generate a The Walking Dead/Stranger Things/Game of Thrones level hit? Well, that’s partly why you make a lot of TV shows. I’ll make a model with that. I’ll define a hit as: a series going six season, with additional revenue (additional revenue goes from 80% from 10%) and an increased license fee from 30% to 90%. Again, if you’re a production company, you wouldn’t necessarily see this upside depending on how you negotiated the deal, but I think it makes sense to capture in a huge hit.

Since everything else is the same in the model, here’s an abbreviated version showing the new “hit TV season” and the effect on revenue.

Slide 44

As you can see, the unadjusted revenue jumps by over $900 million dollars to $1.5 billion. Again, that’s why you make hit TV shows. A true hit is absolutely worth that. What’s the likelihood of this? Well, as I mentioned, only really three TV shows have hit this huge number in the last few years (depending on if I count broadcast TV), so I’d say really unlikely. Something like under 5%. When I combine all the lines of business at the end I’ll factor this in.

Should I make a low case? Well I played with the numbers, but short of abandoning TV altogether—which is an interesting assumption—even poorly performing TV will still help Disney make some money. In my low cases, short of having every season just go one season, the numbers weren’t that low. Think of it like this: even if Disney saw zero ratings on its own platform, I bet Netflix would pay the cost of production just to have some episodes to air. So ultimately I only modeled a base case and a high case. Given the power law distribution of entertainment in general (a topic for later posts), this makes sense with my model.

TV – Children

Children’s television is a space I would say I am “familiar with” but not an expert in. I’ve had two jobs where I looked at strategy in this space, but I don’t live it every day.

Overall, kids TV is a market most people assume is way bigger than it actually is. They assume this because kids TV feels really important. If you have or had a child, you know it and the impact on the child is huge. But don’t let that impact make you forget the numbers: there just aren’t a lot of kids.

Think about it. Would you watch a preschool TV show if you had to? Nope. You turn on Sesame Street, and do something else while your toddler watches it.

Now, if your toddler has an older brother, try to tell the 8 year old to watch Sesame Street. They’ll be insulted.

So the size of the market to watch children’s television is a fraction of the size of the market of adult series. Literally, it is the proportion of kids in America to adults in America. So about 8% of the population is aged 0 to 5 and another 8% is aged 6 to 11.

Which doesn’t mean you can’t still get out-sized hits that make tons of money in license fees, like Spongebob Squarepants, Sesame Street or classic characters like Mickey Mouse. But those are even rarer than in adult TV. And overall smaller in impact than the biggest TV series.

Of course, some popular kids series don’t make money off linear or SVOD television sales…they make their money off merchandise. The current hot example is Peppa Pig. In more than one conversation, I’ve heard that it generates over $1 billion dollars in global sales. So it’s a money maker for Entertainment One. Basically, the TV show is just on air to cover costs and build the brand, then get the kids buy the merchandise. (I own a lot of Peppa stuff.)

Hmm. That may perfectly describe Disney’s strategy for Disney Channel, Disney Junior and Disney XD.

Disney will produce a show that hooks kids, but they generate their profit off successful toy strategies. If you’ll remember from my feature film calculations, I excluded merchandise from my final totals. I did this because it would be so hard to disentangle movie based merchandise sales from franchise merchandise sales. I’m going to do the same for Kids TV. I acknowledge that it’s whole purpose is to push merchandise, but I plan to calculate that later (literally the next section), and don’t want to double count with TV. The kids TV series are a sort of “cost of doing business” to push to merchandise.

So let’s calculate the size of that cost. Disney has been pretty successful with Star Wars kids series to date. It started with Star Wars: Clone Wars (which saw ratings numbers around 2.2 million), which did really well on Cartoon Network. After the acquisition, Disney put Star Wars Rebels on its owned channel Disney XD (and saw ratings numbers about half that on Cartoon Network). After Rebels concluded its five year run, Disney announced a new series called Star Wars Resistance that will follow Star Wars Rebels on Disney XD, but will premiere on the Disney Channel.

From that summary above we can infer a couple of things that help me justify my desire not to count any revenue for kids TV beyond merchandise, which I’ll do later. First, Disney is steadfast at keeping one Star Wars series on the air, but no more than that. Each series runs for about 4-5 years if it’s doing well, then when it hits the end, a replacement pops up. Conveniently, Disney can avoid paying talent participation if it doesn’t run for a long time.

Also, note the move from Cartoon Network to Disney XD to Disney Channel. This isn’t shocking or surprising, they’re trying to boost their formerly “boy-focused” and now “ages 6-8 focused” network with Star Wars. But Disney XD has nothing on Cartoon Network, so the ratings dropped in half. As a result, I don’t think Star Wars Rebels boosted Disney XD’s bottom line, so shouldn’t get any profit from that. Moreover, the move to Disney Channel for the first run emphasizes trying to boost all Disney branded channels. This just justifies in my head that these are cost centers to drive toy sales.

One final note that will come up next post: in a trend for Star Wars, I’ve heard and read a lot of the viewers of these “kids TV” shows are actually adults. The hardcore Star Wars fans. But since they are on a kids channel advertising to kids, you don’t get a huge benefit from them as fans. It could help with additional monetizing opportunities like home entertainment DVDs or some merchandise sales.

The production budgets on kids TV series reflect the size of the potential audience. So if a broadcast drama can be $3-5 million per episode (and larger ones can be $8-15 million), then kids series about about 8% of that. In my experience, kids series range from $250 thousand per episode up to about a $1 million for some live action kids series. And some could obviously be more, if they’re based on pre-existing IP or Netflix is going over board by deficit financing the series.

So let’s make a call. I’m going to assume a simple flat fee per episode of $450 thousand, that grows over time. (With my standard growth rate of 3%. Why 3%? Higher than inflation but not 5%, which feels too high.) So we’ll throw that into the final model. As a cost center, this is how I would model it:

Slide 45

So the “kids TV tax” if you will to help move merchandise is about $169 million in unadjusted dollars which is about $103 million adjusted. Is that an expensive way to market kids toys? Will the licensing and merchandise sales and theme park visits help make that up? We’ll find out next.

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