Category: Explained!

Disney-Lucasfilm Deal – Appendix: Feature Film Finances Explained!

(This is an “Appendix article” to 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 after a planned family vacation and an unplanned family emergency, I’m back with my series estimating how much money Disney has made on the Lucasfilm acquisition. The next place to go is movies. How much will Disney make on the new Star Wars films?

Well…

Listen, I was all set to dive into the economics of Star Wars movies. Then I realized some readers may not know how movie accounting really works (or doesn’t work?). Before I can get into the specifics of these films, I feel like I should explain all feature film economics.

Can I explain it all? Given that some professionals spend their lives working on this and books have been written on it and courses taught on it, no. What I think I can do—what I will try to do—is provide enough of a summary right now that you’ll know how I calculated the movie returns, and you’ll have an idea for how this works.

I also decided that this isn’t really “Part II” of my series. If I were writing a report on this, I’d put this section in the Appendix. You don’t have to know it to get to the conclusion, but you may want to read it. And if you don’t know it, you’d want to read it before Part II. So here is is: my explanation for how film economics works and my confidence in various pieces.

A Brief Movie Windowing Model
A movies’ finances breaks down into four rough areas: costs, revenues, studio fees and back end. They appear (either going out or coming in) in roughly that order, which is also important. (As I wrote in Part I about the time value of money, you can skip ahead if you know this, but you may still enjoy it.)

A note before I start. I call this a “windowing” model, but I’ve heard it called all sorts of things. If you make it before the film is released, then you’d call it a “greenlight” model. It’s called that because you forecast all the numbers to give a movie the “greenlight” to release. It’s called a windowing model because each phase comes in successive windows. Otherwise it could be called an accounting statement for purposes of talent.

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How much money will Disney make (or lose) on the Lucasfilm deal? Part I

(This is Part I 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 me take you into the mind of a business school student. While in school, you’re taught to be super critical of any business presented to you in the form of a Harvard case study. Even if things look super rosy, there are some bad numbers hidden in the appendix you need to find.

At the same time, you’re taught to be super positive for any business that is doing well on the stock market at the moment. You don’t have appendices to go searching through to find flaws. It’s a weird dichotomy of simultaneous criticism and optimism.

The company that was flying high when I was at business school—and has been a darling of Harvard case studies since the 1990s—was The Walt Disney Company. During my first year as an MBA student, Disney acquired Lucasfilm, the maker of Star Wars and Indiana Jones (if somehow you didn’t know that). I was so enthused by the deal that I used it as my topic for our speech class. To call me “enthusiastic” would undersell my opinion: I thought it was a guaranteed home run.

So when I came up with my first “analysis” article for this website: “How Much Money Has Disney Made on the Lucasfilm deal?” I remembered I’d already tried to answer that question. In that presentation above.

So I pulled out the presentation. I searched for my numbers to see what I said. I only found one slide with any numbers on it. I laid out the challenge for The Walt Disney Company: to make a good return on its investment, Disney would need to earn nearly $550 million per year to make up its money.

Slide1

That’s a huge number. So did my speech predict how much money Disney would eventually make on the deal?

Nope.

If I could make one change to the entertainment business press—and I’d make a few—it would probably be to enforce this rule: You don’t have a strategy if you don’t have any numbers. Looking back on that presentation in speech class, I didn’t obey my own rule! My presentation didn’t have any numbers. Well that’s not quite true, I had some tables showing that Disney does well at the box office and international growth is important, but I didn’t project how much money I thought Disney would make or lose by that deal. I just said I loved it and listed some general strategic points.

That’s what most of us do day in and day out in business, and I want to change that.

Strategy is numbers, and today I want to look back at that deal. It feels like a good time to update our thoughts on the Lucasfilm acquisition. While the last film was a box office smash (the number one movie in 2017), it had the worst customer feedback since The Phantom Menace. Worse, Solo had a troubled production, worrying fans on the Twitter/Reddit. And when Disney announced a new trilogy with Benioff and Weiss, it was met with a giant “Eh” and articles worrying about “saturation”.

Today, as a business analyst who loves Disney’s model and a Star Wars fan who loves the franchise, I want to combine these two things and answer a question I haven’t seen anywhere else: How much money will Disney make on the Lucasfilm deal?

Blink and Gut Analysis
When I write an “analysis” article, I’m going to try out an approach different from most other analysts. I laid out my rationale here, but to summarize, too often when we think about complex questions (like the one I laid out above) we don’t clearly own up to our initial reactions and gut thinking, even though that inevitably informs our final analysis. To combat that, I’m putting my “blink” and “gut” reactions right up front, then seeing how they change as I run the numbers. Read More