(This is Part IX 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)
Many of you are interested in knowing how much money Disney made when it bought Lucasfilm for $4.05 billion dollars. How do I know? Well, one of the Google search terms that directs to my site is, “disney profit lucasfilm”. (And really I should be higher in that search ranking!)
This interest comes from that fact that very few people know the answer. Disney CEO Bob Iger does. Kevin Mayer (Iger’s chief dealmaker) does. Christine M. McCarthy (Iger’s CFO) does. And likely many other Disney employees.
As for the public, though, we haven’t the foggiest.
Few other news websites have tried to answer this question. It’s too speculative. Instead, they usually rely on some version of, “Disney has grossed more at the box office than the acquisition cost of Lucasfilm” type articles. These are so obviously wrong—a studio doesn’t collect all of box office for one; it doesn’t account for other revenue streams for two; it doesn’t discount for the time value of money for three—that many of the Disney & Star Wars super-fans want something more. So I did a bottom’s up analysis. (I’m the strategy guy and a super-fan.)
Yet, I’ve left you all wanting. I never finished the damn thing.
Today, it all comes together. Totaling over 66 pages and 30 thousand words with dozens and dozens of charts, tables and financial statements, this article series is my Ulysses. I’ve calculated all the revenues and costs to finally answer the question that started this:
How much money did Disney earn on the Lucasfilm acquisition?
Today, I’m going to walk through building my final model. I will include the final numbers for my three scenarios (through 2028), but today is really about adding in the final estimates to the model. Like a final Harry Potter film—or uncompleted ASOIAF book—this dramatic conclusion will need multiple parts. I’ll explain the model today, tomorrow I’ll calculate the terminal values and then on Thursday, I’ll draw tons of fun conclusions. That’s right, it’s a Lucasfilm week!
Calculating the Final Piece
At first, I was going to make just one model, call it the “average” and be done with it.
But that didn’t make any sense. I’ve been using scenario modeling through out, building best and worst case options where appropriate. In one case—film—I made 8 different scenarios. Scenarios are great because they account for the inherent uncertainty in predicting the future.
To add everything up, I built three versions, the traditional “best case / worst case / average case”. I’m a big fan of using three versions of a model, if they are all realistic. (If you want to goose your numbers with three scenarios, make the worst case very nearly break even.) I treat the high and low case as the equivalent of our 80% confidence interval. The average then acts as my best guess of what will happen. The final summary model looks like this:
The shaded green cells are what we need to fill in, based on our past calculations. Sure, it looks like a lot of cells, but it is really just 11 lines. A lot of time, we act like high finance is really hard. It isn’t. All you do is add and subtract. We don’t even have to do the math ourselves since Excel does that for us.
As I was building this, I realized that in some lines of business, I forecast revenues out to 2027 and 2028 in others. Don’t ask me why I didn’t keep things uniform. For consistency, all these models will go to 2028, the next ten year estimate. Building this final summary was a good proof read of the Excel models as well.
The Final Calendar
To help build the models, early on I built a calendar that represented my best guess for the future of Lucasfilm under Disney. Remember, this deal was signed in December 2012, so I started the calculations in 2013. This calendar didn’t make sense for any individual article, so I’m putting it here, so that everyone can understand the scale of what Disney is rolling out here:
The Three Scenarios
Let’s walk through what I put in each model.
The “Average”: Status Quo Continues
What is the average? Well, not the mean average. In the case of entertainment, winner-takes-all economics usually makes the arithmetic mean average meaningless. I prefer to call this the “median scenario”, but will write “average” since it’s more commonly used. If the world were a simulation run 10,000 times, this is the scenario I think would happen in the median of all cases.
In my mind, in the “median outcome”, the narrative is,“Star Wars is Star Wars”. In other words, the performance of the last few years continue for the next ten. (Even as I try to data this to death, I can’t stop myself from creating narratives to explain these business models.)
Yet, this isn’t as high as you think. I already see the current “status quo” being a bit below The Force Awakens peak, and more like the Rogue One/Solo level. In other words, the decline from The Force Awakens to The Last Jedi continues for future films that aren’t Episode IX, which I see being a “super hit”. Then, future Star Wars films revert to the franchise “blockbuster average”, which is still very good. However, in a change from my article back in June, I’ve removed Indiana Jones 5, which I am skeptical will ever happen. This is probably the biggest change to the model. (So if you compare the movies summary article to this article, the numbers won’t match because I dropped IJ5 from the base case model.)
For the other lines of business, I used the “base case” model for each different line of business. For TV, I made a base case assuming about one Star Wars series per year that goes for 3 seasons. For Kids TV, I’m assuming the “revenue” piece is negligible—since it will mainly be accounted for in toy sales, which I model separately. This is a decision I would make for only big franchises, like this or Marvel or DC. For toys, I’m only adding in revenue, since Disney doesn’t make toys, it licenses the rights to toy, video game and publishing companies. There are costs for the people to work on these projects, but I’ll account for them in SG&A.
The High Case: The Biggest Franchise in History
I mean, Star Wars could already be that, if Marvel hadn’t come on so strong recently. (And yes, James Bond is always out there.) But in my high case scenario, Star Wars bolsters its case by performing well in films TV series and with tremendous toy sales.
The key question to build the high case is summarized in the word “correlation”. In the high case, I’m assuming success in films translates to success in TV and hence toy sales. For films, for the high case scenario, I’m using the scenario that I called “Make More Money”, where all Star Wars films perform like past Star Wars films. (Meaning an outsized number of “super-hits”.) Also, in this scenario, Indiana Jones 5 does come out and is another super-hit. That said, I’ve moved away from the highest estimates in my film model—where Disney goes from 8 films to 12 or 13 over ten years—because the failure of Solo spooked Disney. As a result, they’ve announced a slow down in the pace of Star Wars films, and currently nothing is scheduled—as far as I can find—after Episode 9.
So what is correlated with success like this? Well, first the TV series would do well. If Lucasfilm is making great Star Wars films that build interest, the TV series will benefit, which I calculated with higher revenue and more seasons. Presumably, the toy sales would go up as well. So I used the high case for TV series and I created a high case for toys, where they are 20% higher than I forecast. What about the theme parks? Let’s check in with our final model.
The Low Case: Star Wars Fatigue is Real
Let’s get this out of the way: the “low” case for Star Wars is a financial situation most studio executives would give up their membership at Soho House for. We’re talking a deal where Star Wars still makes its money back for the house of mouse, discounting for the cost of capital, and gets an unadjusted 3x return on the initial price.
What does that model look like? Well a world where franchise fatigue is real.
At the very least, The Last Jedi was polarizing, though we can debate how polarizing and for which fans. Moreover, there is also a definite possibility that Lucasfilm isn’t great—from a production standpoint—at making films and TV series on time. Both spinoff films (Rogue One and Solo) had to fire directors and, again, Indiana Jones 5 keeps moving backwards. So far the TV shows are on track, but what about the other films? To model this, I used the “issues” case, where there are only six new movies between 2020 and 2028, with no Indiana Jones 5. For TV series I assumed only 3 new series, not 5 like I have in my base case model.
For toys, I do see this as correlated with film and TV series performance. If people stop going to see the films, they’ll stop buying the toys. So after 2017, I put in a 40% decrease in toy sales to account for this. (Solo/The Last Jedi really didn’t help sell toys.) This isn’t an outrageous assumption since toy buying patterns can shift year to year and some reports indicate a softness in the Star Wars toy market.
However, even in the worst case scenario, I don’t think the value of the theme park will change. In other words, I think the theme parks are mostly uncorrelated with the rest of the franchise performance. In my mind, the pent up demand for this experience is roughly the same in every scenario. (Disney can thank The Force Awakens for that.) In my opinion, even burnt out Star Wars fans will want to go to Disneyland/Disney World to see the new parks. So the parks have the same performance in each scenario.
To summarize the above three scenarios, here’s a table with what went into each scenario:
The Final Costs
One more line and we’re done. Even a film as successful as Lucasfilm needs people to make these decisions and needs buildings to house those people. On top of all that, are so many other potential costs, from research reports on the health of the brand to consultants to build franchise styles guides. You gotta spend money to make money.
This part of the model is probably the weakest—I’m being honest here to gain your trust—but also the least relevant. The costs in filmed entertainment are much bigger to make the assets in the first place (film or TV show) than in the headcount, unlike some other industries. Retail or fast food, for example, have labor costs at every single location. In Lucasfilm, one person could (hypothetically) make decisions on hiring a licensing partner that will result in toys that reach millions of kids.
So we can use some back of the envelope math from some internet sleuthing and have the cost grow at a steady rate. (The 3% growth rate I’ve used throughout.) Also, I’m keeping costs steady across all three models. The headcount costs are mostly uncorrelated since, in success, you still employ roughly the same number of people. Only until you get to the point of massive lack of profitability do you see huge cuts in headcount.
Trying to find Lucasfilm employees was tough. I found one article reporting that Kathleen Kennedy has 2,000 employees at Lucasfilm. That’s our start. However, this includes the folks working at Skywalker Sound and Industrial Light and Magic, which I didn’t include in my model. (I’ll discuss that in a later article.) My gut says that a very small number of people would actually be counted in the running of Lucasfilm compared to ILM/Skywalker Sound, that are active VFX/sound editing houses. (Linked-In has about 3,100 people connected to Linked-In, but initial searching shows that not all are currently working there.)
For my model, I’m assuming 340 people work on the “low cost” side ($75K average salary) and 10 “high cost” employees (executive types, earning $500K in annual salary). I’m using a “1.5” annual salary multiplier for the all in costs for employees. (Some quick sensitivity testing shows that unless Lucas is employing thousands of people, it won’t crush the bottom line.) Crucially, I’m also assuming that Lucasfilm has no property costs. From my research, it looks like Lucasfilm bought property in the Presidio in 2005, so I think that is paid for, and, if anything an asset. Even if I’m wrong, the effect on the bottom line would be minimal.
I’m calling this SG&A, or selling, general and administrative costs and it gets its own line separate from what I deem variable costs.
The Summary Models – 2013 to 2028
Ready? Well, here are our final models:
The Median Case
The High Case: The Biggest Franchise in History
The Low Case: Star Wars Fatigue is Real
Phew. You’re probably asking two things. What about 2029 and beyond? And what do these number mean? Tune in tomorrow and Thursday for those answers.