Last week, Bob Iger said in an interview with Barron’s that Disney had no plans to start releasing new Star Wars films—by which he means the ones that will come after Episode 9, releasing later this year—on Disney Plus, their soon-to-be streaming service.
I agreed with this move. Some didn’t. Here’s a tweet that Rich Greenfield of BTIG and prominent Netflix bull, retweeted:
There were others and I got into a debate with Jason Hirschorn of MediaREDEF fame on Twitter:
Twitter is a great medium for some things (getting me exposure to a lot of people for one thing) but bad at others (like the racism and and sexism). I’d also add its bad at discussing things that revolve around numbers. Hard to pull out a spreadsheet on Twitter, you know?
So my case for keeping Star Wars films in theatrical releases is here instead. As I look at it, theaters represent a huge proportion of potential revenue for feature films. For any company that wants to maximize shareholder value, capturing that revenue by releasing in theaters makes sense. To ask Disney to release its blockbuster tent pole films day & date, exclusively on its streaming service is to ask it to forgo billions in potential revenue.
That just doesn’t make sense for shareholders of Disney.
I often rely on an aphorism that “strategy is numbers”. (I stole it from a professor in business school.) When you skip putting numbers to a business strategy, well, you’re at risk of cutting corners. In other words, you’re still talking numbers, but you just don’t have to hold yourself accountable to them. By not calculating the numbers, it makes qualitative or narrative points much sexier.
Fear not, today, we’ll put numbers to this debate. The goal won’t be for me to “decide” the debate, as this is the type of strategic decision that is impossible to decide with numbers alone. Instead, the numbers will help define how big a leap our qualitative judgments need to make. In other words, it will define how “strategically valuable” skipping theaters to support streaming needs to be. We’ll go in three parts: the Disney numbers, the streaming numbers and the qualitative arguments.
Part I: Weigh the specific economic risk for Disney
This is fortunately really easy. I spent a large part of 2018 writing a novella on the Disney acquisition of Lucasfilm. As a part of that series, I created individual film accounting models per Star Wars film to “show my work”, partly to help the audience learn about feature film accounting and partly to run the numbers myself.
First, here’s my assumptions on the current distribution for revenue for the lifetime of a feature film (emphasis on lifetime):
As you can see, I currently project that 30% of a feature films value come from theatrical rentals, which is how much a film actually collect on box office results. (Roughly half of the box office, but less overseas, particularly in China. Read the whole series for more.) Taking that with some estimates on production budgets and marketing budgets, here are my estimates for various types of Star Wars films:
Now, after publishing this, I’ve seen other estimates that have lower profit estimates than mine. Why? The main reason is that I accounted for everything as a percentage of box office. This is probably the biggest assumption in the feature film models. Even though box office can have huge outliers, something like the “Pay TV window” is determined in advance by pre-sales. Meaning, they don’t actually increase as the box office of a film increases. I debated changing this in the model, lowering home entertainment and the Pay TV window. I didn’t, though, because the “value” of a Pay TV window is related to how many blockbusters you have. Disney has increased the value of their Pay TV deals because of their monster track record this last decade, with huge blockbusters like Star Wars and Black Panther.
(I’ll note my model estimated a loss of $40 million on Solo, which is what leaks from Disney suggested the movie lost. So the model works.)
For today’s question, let’s just assume that Star Wars films are “hits” generating an even split of $500 million in the US and overseas box office. Even if we say my estimate was too high by double, for a $1 billion grossing movie, we’re talking a range of $350-$700 million in gross profit for one film.
How does that compare to Disney licensing a film (or all their films) to Netflix? Well, it’s way higher.
Netflix doesn’t release the terms of their content deals. I spent a good chunk of time scouring the internet looking for estimates and they were hard to find. But I did find one estimate, from 2012 when the deal was signed, forecasting the deal at $300 million per year for all Disney films for one year on Netflix in the US alone. This is a bump up from $225 million for the previous Pay TV deal Disney had with Starz for the US. So we have one estimate, which is a 33% jump over the previous deal, and this was from 2012. So let’s call the value of the entire Disney film output in Pay TV as $300-$450 million per year.
If you assume 10-12 films per year, that would be about $30-$45 million per film. That’s way lower than the 12.5% estimate I have above for Pay TV based on box office returns. And Disney probably amortizes costs this way (it helps avoid paying residuals). That said, even if you amortize costs that way doesn’t actually mean that’s what they’re worth. Netflix wasn’t paying for Tomorrowland and The Good Dinosaur (other films released in 2015 by Disney), they were paying for Star Wars and Avengers. Plus, Disney is making money on Pay TV windows globally. (My model didn’t separate US versus international.)
Moreover, attributing up to one-third or one-half of the Pay TV streaming window in a given territory to a Star Wars film isn’t ridiculous. So let’s call that $100-$150 million for the Pay TV window. As a sanity check, Netflix is paying a reported $80-100 million for non-exclusive rights to Friends. Does one Star Wars or Marvel film equal a Friends, non-exclusive, (decades old) TV show? Actually, that sounds right. (Though the Star Wars deal is US only, and the Friends deal is I believe worldwide, but I couldn’t confirm.)
But if a show stayed on streaming, Disney would also forgo the current licensing revenue it is receiving from the windows after the pay TV window too. Like the huge deal with TNT. Unlike the Netflix deal, the linear TV rights deal that Disney signed with TNT seem to have leaked relatively quickly. For a five year deal, TNT is paying Disney about $50 million per year for the Star Wars films alone, and one article said that the fee for The Force Awakens was roughly $30-40 million per year. (Though again, that’s the attributed costs in the contract, not the actual value.) It has been reported that Disney is trying to buy the rights back, but Turner is asking for too much, which should tell us something as well.
Those last two sets of numbers from Netflix and TNT are great comps for us. Basically, they’re saying that all in for streaming/linear TV, you’re looking at somewhere between $150 and $200 million dollars.
Given that we calculated $350-$700 million in profit for a hit film, we’re really debating that delta. The “marginal benefit” of skipping theatrical, home entertainment, and pay-per-view. In other words, we’re debating the value of exclusivity, and that value is right here:
$150-$500 million dollars.
That’s the gross profit hurdle we need to get over. Now, I could have calculated this differently, which is to just add up all the revenue streams Disney would made to see what the revenue losses would look like. Doing that, I came up with $850 million in revenue. (I assumed that Disney could still sell old movies to linear TV or other SVOD if they wanted to in the future.)
That $850 million is an even simpler way to look at this strategic question. All streaming/linear is worth up to $200 million. So is launching exclusively on a streaming platform worth 4 to 5 times what Netflix and TNT pay? On the other hand, maybe you have less marketing costs if you go straight to streaming. Either way, we’re talking about hundreds of millions of dollars in gross profit, or even more hundreds of millions of dollars in total revenue.
That’s the economic risk we’re staring at. But clearly the other side of the debate, being exclusive, day and date streaming, has some value. That will come in Part II.