Category: The Disney-Lucasfilm Deal

The 2019 Star Wars Business Report – Toys

This is part III in a multi-part series estimating how much money Disney made off “Star Wars” in 2019. Go here for my larger series on Disney purchasing Lucasfilm in 2012.)

Introduction and Feature Films
Television

I started this series in January. Do you remember back then? Before the world turned upside down? Reflecting on how much money Star Wars made in 2019 feels almost like a waste of mental energy. Who cares how much Disney did or didn’t make in 2019 when the whole company may go bankrupt by the summer time? 

Perhaps, if we understand the underlying drivers of Disney’s business model, we can better understand how quickly they may go bankrupt or return to normal. And what they can do in the meantime to prevent it. Previously, I’d estimated the performance of the feature film and television business units in dollar terms. Today we move onto “licensed merchandise”, which is my term for toys, apparel, games, and anything sold in stores. 

I’ll discuss the narrative around licensed merchandise, review my top and bottom line estimates, and briefly touch on the impact of coronavirus on toy sales.

(Nomenclature: I’ll use consumer products, licensed merchandise and even “toys” interchangeably in today’s article. Yes, when I say toys I mean everything from shirts to furniture to video games to actual toys. Also, when I use “licensing” I don’t mean content licensing, but licensing for consumer products.)

Licensed Merchandise: The Missed Opportunity of 2019?

If Star Wars fans had a complaint in 2019, it’s that this little guy…

IMAGE 1 - Baby Yoda

…wasn’t available to purchase. I saw quite a few tweets speculating that this spectacular failure was worth potentially BILLIONS to Disney. (Don’t worry, toys are on their way…so long as Covid-19 shutdowns don’t delay them.)

Well, it wasn’t. Which you’d have known if you read my first article on “licensed merchandise” for Star Wars back in 2018. Star Wars on the whole generates between $2-3 billion total retail sales for Disney every year. (With a one time boost in 2015 due to The Force Awakens.) It’s unlikely that one—admittedly excessively “toyetic”—character would have doubled that. 

Even if he had done really well as a toy property, the whole “Baby Yoda” saga reveals some important learnings about toys in general and in the Star Wars universe specifically.

– First, toys in particular aren’t a quick game. It takes Disney (or any toy licensee) months to design, approve, and then manufacture toys. And then put them on a boat and sail them from China (mainly) to the United States. This is why even as Baby Yoda blew up, Disney couldn’t spin out new toys quickly.

– Second, toys (and lots of merchandise) aren’t as lucrative as the headlines usually suggest. Take those retail sales I just mentioned. Those become the “revenue” line for retailers. The toy companies only get the “wholesale” line, which is about half the retail take. Disney, on the other hand, only books 5-10% of the wholesale total. Which is still a lot! But an order of magnitude less than the total retail numbers suggest.

– Third, Star Wars merchandise had already burned retailers in the 2010s. Even if Disney had made Baby Yoda merchandise despite Jon Favreau’s desires, retailers would still have been skeptical. The huge boost in toy sales in 2015 when The Force Awakens came to theaters, burned retailers when Rogue One had anemic sales. I heard from quite a few retailers they were stuck with excess merchandise after Rogue One—when the $5 billion in sales didn’t repeat—so a lot of merchandise sat on store shelves. As a result, retailers dialed back orders for Solo and The Last Jedi.

– Fourth, is Star Wars merchandise for kids or adults? On one hand, kids. Obviously. Look at all the toys and young children wearing Star Wars shirts. On the other hand, look at all the adults wearing the shirts too. Adults are tricky for licensees, as I’ve mentioned before, because they aren’t as lucrative as children. And more finnicky/less reliable. Lots of folks speculated that the reason The Force Awakens generated such a one time boost in merchandise sales was because a lot of adults snapped up merchandise, but didn’t continue into Rogue One.

All of which leads into another “best of times; worst of times” summary of licensed merchandise. Star Wars is huge in the consumer product game, but it’s uneven and possibly trending downward.

Licensed Merchandise – My Estimates on The Top and Bottom Lines

Merchandise sales tend to be one of the harder business lines to estimate for a specific franchise or property. Studios don’t usually release the specific numbers, but the industry trade License Global does release an annual ranking of top content licensees, with some data for companies. Sometimes, specific franchises are called out. This historically happens in May, but last year was delayed until August. (It looks to be delayed again.) In the interim, I’m usually left to guess based on historical data.

The good news is that for toys and merchandise, they don’t have quite the lumpiness that you see in films for evergreen franchises like Star Wars. Other film-driven franchises like say Minions or Trolls see peaks and valleys for when new films come out or don’t. Non-film driven toy properties have similar steady state or peaks and valleys depending on whether they are evergreen or not. However, Star Wars has had a few decades of steady, multi-billion dollar retail sales. Its a safe assumption to assume that continues.

Thus, my toy model is fairly simple. Not a lot of bells and whistles and mostly extrapolating the trend line based on whatever has been publicly reported and then assuming it holds steady. There is still some uncertainty even in the publicly reported numbers because the inter webs have quite a few toy numbers for Star Wars, many of which are contradictory. (Wikipedia for example is wildly inaccurate.)

Let’s start at the top line, total retail revenue:

Screen Shot 2020-05-04 at 12.10.31 PM

First, there were quite a few estimates, as I just mentioned, that The Force Awakens saw a boom in retail sales to $5 billion. However, I lowered that number dramatically after reports that retailers were burned by Rogue One over-ordering. Indeed, even in Disney’s annual reports in 2017 and 2018 they blamed lower sales of consumer products partially on Star Wars.

 

The question is whether or not I think 2019, with The Last Jedi and The Mandalorian, saw a huge boost in sales. Based on the handwringing about Star Wars not resonating with kids, and the fact that another Disney property got most of the attention by stores (Frozen II) I think it did, but nowhere near the 2015 level. And yes, Disney said in their last earnings call that Star Wars and Frozen helped contribute to a big Q4. Hasbro—whose fortunes partially rise and fall on Disney’s fate—said the same thing. So we can’t untangle Frozen from Star Wars, but likely both were up fairly well.

Add it up and here’s my take. 

Screen Shot 2020-05-04 at 3.02.18 PM

The total revenue for retailers was likely around $3 billion dollars. I could see it swinging 20% either way. Of that, Disney likely took home $150-300 million. My estimate is towards the lower end—5% of retail sales—but some folks have said that Disney with its dominant position can demand better royalty rates on wholesale goods. More like around 10% of retail sales. So that’s why the range exists. The good news for Disney is that $300 million is basically a successful blockbuster domestic box office. That’s a great revenue stream to have! (And consumer products have pretty healthy margins as well. The costs are mainly for making the films and TV series in the first place.)

The worry, for Star Wars watchers, is how this fares going forward without another movie until at least 2022 (if not longer with the Covid-19 impact on production).

The Impact of Coronavirus on Licensed Merchandise

I should do a deeper dive like my other two looks at Coronavirus, but I’ll say quickly that I see two hold ups. First, if factories are shut down in China or elsewhere, that will delay toy production accordingly. Many toys have pretty long lead times, especially when bought in bulk, so I could see some delays impacting this process. This is even more true for plush or stuffed animals, that have stringent safety measures. Apparel can churn faster since laser printing has decreased run times considerably, and even on-shored a lot of US production.

Second, if films are delayed, their tied in toy sales need to be delayed too. This makes all the tricky scheduling complications even more difficult.

The question is whether the coronavirus impacts toy sales more broadly, and that I have no clue. I could see arguments on both sides:

More toy sales. With kids stuck at home, parents buy them toys as a distraction element. And they’re still consuming content like they were before, just not feature film content.

Less toy sales. Well, the lack of birthday parties could be killing the toy industry. That’s where lots of toys are purchased. Plus, despite Amazon/Walmart’s dominance, the closure of retail sales isn’t completely offset by digital shopping. Add to that a potential global depression, and toy sales could easily be a victim. (Just losing 5% of sales is enough to really hurt the industry.)

Add them up and I’d be more worried about toy sales than optimistic. But like all my Covid-19 thinking, I am incredibly uncertain.

Consumer Products Impact on Brand Value

As a reminder, as well as calculating the money made in 2019, I’m putting it into context of the Lucasfilm deal from 2012, and the future brand value of Star Wars.

Money from 2019 (most accurately, operating profit)

Well, I just covered that. Another $225-300 or so million added to the ledger for toys, apparel, video games, and such. 

Long term impacts on the financial model and the 2012 deal

I will point out my “discounted time value” though, because it’s the part people forget the most often when saying, “Man, what a great deal for Disney.” It was, but not just because the box office was high. What I’ll point out is that, in terms 2012 dollars, making $225 million in bottom line revenue “only” translates to $142 million in 2012 dollars. In other words, about 3.5% of the total price of the deal ($4.05 billion) was earned back in toys just this year.

Moving forward, the fact that Star Wars won’t have another film until 2022 (at the earliest), could cause an even steeper drop off in licensing revenue going forward.

Brand Value

The last question is whether the merchandise business as a whole built brand equity or detracted from it. This is almost all value judgement, and I have to say I don’t think the brand was hurt by not having Baby Yoda merchandise. Did Disney miss an opportunity to build some brand equity? Yes, but that’s not the same as hurting the brand equity. 

A Final Caveat

When I put these numbers out there, I should put a caveat on how to use these numbers. These aren’t actual sales or profit and loss statements from Disney. If I had those, I’d say so. (And if you have them, please share!)

Instead, these are my estimates. Which some can and have dismissed as “just my estimates”. I can also imagine the strategy teams inside Disney saying, “Oh man, he’s so off on this or that number in the analysis.” Sure! Of course I am. Any estimates are more wrong than they are right.

My defense is that this is my strategic estimate. When I was doing military intelligence, it’s not like Al Qaeda in Iraq or Jaysh Al-Mahdi or the Taliban gave us their number of fighters and locations. Right? That’s for them to know and us to estimate, and plan accordingly.

This estimate is the type of estimate I’d hope—but doubt they are—big studios like Universal or Warner Bros are making about their competitor Disney. In the battle of franchises, it’s worth knowing who’s doing well and who isn’t. That’s the type of analysis I’m trying to put out here.

Final point: I also provide my estimates in real numbers, unlike some other prominent strategy voices. You win and lose on the bottom line, and that’s the estimates I’ll give you. Strategy is numbers after all.

The 2019 Star Wars Business Report Part II – TV: Baby Yoda Saves Star Wars

Star Wars did so well in TV this year, that virtually everyone knew which character was the “symbol” for 2020: Baby Yoda!

We know Baby Yoda conquered the social landscape, but how does that translate to Lucasfilm/Disney’s bottom line? Well that’s my topic for today. If you missed it, read Part I for my methodology and the performance of Star Wars films. As I was writing “everything else” I decided that each business unit deserved its own article. It’ll make each article smaller and easier to read, while providing regular content for the site. 

We got a lot to cover, so like the Jawas escaping Sand People, we’ll move fairly quickly.

TV Series

Whether it’s only because of one adorable (non-CGI) character, or the authenticity of this latest series, or just drafting off of the popularity of Boba Fett among Star Wars fans, Disney’s new streaming service launched with one of the top new TV series of the year in The Mandalorian. As always, here’s the Google Trends data:

Screen Shot 2020-02-13 at 8.08.54 AM

Other research firms back up this popularity. Parrot Analytics awarded The Mandalorian its “most in-demand new series”. The service TV Time saw The Mandalorian surge in interest as well. So it’s popular. It’s a hit.

This is a big change to my model. I’d assumed a Star Wars TV series would do well. Sort of like the Marvel TV series for Netflix well: lots of doubles and triples, but no home runs. Instead The Mandalorian is a home run with a chance for a grand slam, if its second season sustains what season one pulled off. (Which is no small feat. Lots of great season ones fade quickly. The Black List. Gotham. Mr. Robot. The Man in the High Castle. The Handmaid’s Tale. Every Netflix Show that didn’t make it to season 4.)

So I have a few changes to my model then. (Here’s my article on TV from last time.) First, I increased the value of what I called “the Jon Favreau series”. I calculated the value of the series as a percent of the production budget because, for Lucasfilm, they are acting as a producer here. And this is what I think the series would be worth, roughly, on the open market. (As for their value to Disney+, I’ll discuss that in my last article in this series.) However, hits are still worth more, so in the event of a blockbuster TV hit, I tripled the imputed fee from 30% to 90%. (Meaning it went from 130% of the production budget to 190%.) Also, I lowered the number of episodes to 8, but kept it at a little more than $15 million per episode. (Which is the consensus cost.)

Screen Shot 2020-02-13 at 10.35.32 AM

As a result, here’s how the value of The Mandalorian changed from being a “hit” versus being just “another TV show”. 

Table 3 - Mandalorian

Are these numbers reasonable? Probably, with just a pinch towards the high end. As you can see, if you take my “high case” as a “revenue per sub”, I basically think it’s worth $11.40 per subscriber. Which on it’s own is huge, but more a function of how few subscribers Disney+ has right now.

The next change was moving the Obi-Wan series back a year. And this brings up the biggest risk for Disney, which is getting these TV series out on time. Frankly, The Mandalorian has done a great job at releasing a season 1 and having season 2 ready to go later this year, only 12 months a part. However, the Obi-Wan series recently switched showrunners and won’t be out until 2021 at the earliest. As a result, I moved back a few of the series.

The last change I tried to make was to move my “imputed license fee” model to an “attributed subscribers” model. But I utterly failed. Why?

Well, I just don’t know enough about Disney’s finances. I took a guess at “customer lifetime value” of Disney+ subscribers, but the pieces we don’t know are too huge to make it reliable. For instance, we have no data on the average number of months we expect a customer to subscribe because it hasn’t happened yet! I also have a guess on marketing expenses per subscriber, but it’s all a guess. (We know revenues were $4 billion in the last quarter, so assuming 20% marketing expense on that, and you have about $800 million. But even that could be low.) About the only thing we know is that the average revenue per subscriber is $5.50. 

Moreover, trying to attribute subscribers is nearly impossible. Because we don’t know how many folks actually watched the Mandalorian, let alone subscribe to it. Also, given that Disney+ is growing so much, it too tough to attribute subs to Mandalorian versus all the other content. Unlike HBO or Netflix, this is far from a mature service to judge.

The final change I did make was to eliminate my “low case” model. Frankly, I think Disney would really have hurt the Star Wars brand to release anything less than five TV series over the next decade or so as they launch Disney+.

As a result, here’s my current base case model:

Base

You can see how I value kids content as well, which is I only count it as a production cost. If the upside for kids TV series is selling merchandise—which is a simplification, but not entirely wrong—than I’ll calculate the upside in the “toys and merchandise” article.

KidsAnd the “high side” case:

High

Money from 2019 (most accurately, operating profit)

So the The Mandalorian is huge. What is that worth? Well, less than you think, especially compared to the films. If the feature films are Executor-class Super Star Destroyers, hit TV series are regular old Star Destroyers. Still huge, but look at the size of Super Star Destroyers!

Thus, in my model, The Mandalorian, in success, is about a $95.5 million dollar profit engine this year. Which pales in comparison to Rise of Skywalker, but that’s because films just have much higher upside in success, due to multiple revenue streams. Next year will be a bit higher, though, because I think Disney will monetize The Mandalorian in more non-toy ways, potentially even via home video. 

(What about potential Baby Yoda toy sales? That will be covered in the “licensing” section. And yeah, Disney didn’t have any available anyways!)

Long term impacts on the financial model and the 2012 deal

As for the future, I’m not ready to change my basic model going forward. Repeating huge TV hits is a tough business, and with the wrong showrunner, the Obi Wan TV series could be as middling as anything. Indeed, that series is cycling through showrunners. As a result, through 2021 we’ll still only have one Star Wars TV series. 

However, the upside case is now higher for TV. If the Lucasfilm folks can generate just a few more hits, than they’ll be able to drive subscribers to Disney+ and a lot of potential value. The key is getting more huge hits. Even though costs would stay about the same in both my base case and high case, the revenue could jump from $5.6 billion to say the $8 billion over 8 years. 

Brand Value

In this case, we can tell that The Mandalorian helped revive any lingering doubts Star Wars fans had about the direction of the franchise. The buzz around Baby Yoda led to countless articles singing his praises. As a result, if you take my critical acclaim chart, you get this:

Screen Shot 2020-02-13 at 12.10.23 PMLook at that! The Mandalorian is the most critically acclaimed of any Star Wars property. (With the caveat that since it isn’t global, the overall number of ratings is fairly low compared to the films.) If you want to know how to make Star Wars, this is it.

Recommendations

I didn’t have recommendations on the film side, but TV really did have one for me. And that recommendation is one person’s name: David Filoni.

He’s been the showrunner on every Star Wars animated projected and he executive produced The Mandalorian. I’m ready to give him a heaping doses of credit for The Mandalorian given that his animated series are fairly well regarded by the fandom too. In other words, if Disney is looking for their Greg Berlanti, this is it for Star Wars.

From an operational perspective, I do think they should ramp up to one Star Wars series per quarter. This seems crazy, but the universe is clearly big enough to support that many stories. Especially if one is a kids series and then you have three adult series and/or limited series filling out the gap.

(And I’ll repeat it until I die to wish it into existence, but if you want a killer limited series, turn the book series Tales from Mos Eisley Cantina into a series. You can thank me later.)

91YK2vwbfZL.jpg

The 2019 Star Wars Business Report – Part I: The Economics of Star Wars Films

If I didn’t have a little Padawan join my family in November, one of my goals was to update my massive “How Much Money did Disney Make on the Lucasfilm Acquisition?” series. That delay actually helped because I wouldn’t have been able to get that article up before Rise of the Skywalker came out. Meaning I would have had to guess on a billion dollar variable!

And since I didn’t have to guess, we know that Rise of Skywalker joined the caravan of Disney billion dollar box office film in 2010s. Still following Lucasfilm/Star Wars in 2019 had a sense of dread. For every good news story there was a bad one. So how do we truly judge—from a business sense—how well Lucasfilm did in 2019?

We use numbers. Strategy is numbers, right?

Since Disney doesn’t release franchise financials—why would they?—I have my own estimates. I last updated these in the beginning of 2019 (with films updated in 2018) so I’ll do a big update to the model to learn what we can about how well Lucasfilm did in 2019. I’ll break it into two parts. Today’s article will cover movies; next week, I’ll review the rest of the business units, TV, licensing and theme parks. Previously, I only focused on the price Disney paid compared to their performance. Today and next week’s article will instead act as a report card on how 2019 impacted Lucasfilm and Disney’s business/future.

What this Analysis is NOT

There are so many cultural takes on Star Wars, especially since The Last Jedi, that I feel it’s important to clarify what I’m NOT doing here. (A UCLA forum I follow, for example, had a 60 page “debate” on the latest two films.) 

To start, this isn’t my “fan” opinion on the franchise. My opinion is just one person’s opinion, so whether or not I “loved” the latest film, or the one before it or “the baby of the same species as Yoda” doesn’t matter. In the aggregate, Disney does and they track this via surveys and focus groups. But lone individuals online? Whether they love or hate recent moves? Not so much.

To follow that, this isn’t a “critical” perspective either. I haven’t been trained in the dark arts of cultural and film criticism, so my opinion again just doesn’t matter. (Does Disney care about the critics? Controversially, I’d argue not really.)

What this Analysis IS

Instead, I’ll focus on three areas per business unit for Star Wars (read Lucasfilm):

Profit from 2019 (most accurately, operating profit)

In my big series on the Lucasfilm acquisition, I was looking at a specific question about the value of Star Wars vis a vis the price Disney paid. But if you’re Disney, that deal is now a sunk cost. What matters for Disney strategists or brand managers is how much money the franchise is making now. That’s the focus.

Long term impacts on the financial model and the 2014 deal

Since I have a gigantic spreadsheet filled numbers that I can update putting this all in terms of the $4 billion (in 2014 dollars) context, I may as well update how the model has changed. Further, some decisions Disney makes now will directly impact how much potential profit they can keep making on Star Wars. So I’ll update that too.

Brand Value

This last part is the hardest part to quantify, but is crucial as well for putting the above two decisions into context. See, a brand manager doesn’t just care about making money this year, they care about making money next year and the year after and so on. And there are ways to make money in the short term that damage a brand in the long. Threading the needle of making money while building brand equity, not just drawing it down, is crucial for a brand manager. 

This is admittedly a tough section to quantify, but it still feels particularly important. (Again, the goal is not to sneak in my opinion, but use data where possible to figure this out. Though narratives will likely figure in.)

With those caveats, let’s hop into the most important business unit, the straw that stirs the blue milk, films.

Movies

As of publishing, Rise of the Skywalker grossed $1.05 billion, with a 48% US/Canada to 52% international split. In my model—which I’ll repeat is a lifetime model, meaning all future revenue streams—I’d expect Rise of the Skywalker to net Lucasfilm $798 million, nearly identical to Rogue One. (As I clarified before, my model is a bit high compared to Deadlines’ model. There are a few reasons, but mainly I calculate lifetime value.) So that’s the first building block for how Star Wars did in 2019. In my framework of films, I’d have called this a “hit”. Here’s a table with Disney’s 5 Star Wars films in the 2010s:

Table 1 - First Five Windowing ModelBut what does this mean?

Star Wars Feature Film Trend Lines

That’s where things get tricky. The key question for me is context. If we were using “value over replacement” theory, and you looked at the last Star Wars in “value over replacement film”, well it does terrific. Very few films get over a billion dollars at the box office!

However, I’d argue that’s the wrong context. This is a Star Wars film. So how did Episode IX do in “value over replacement Star Wars films” context? Not very good. To show this, I updated my giant “franchise” tracker through 2019. 

Let’s start by just charting Star Wars film performance. First by category, separating “A Star Wars Story” into their own category. Second, by release order by decade.

Chart 3 - Star Wars v03

Chart 2 - Star Wars v01

The worrying issue for Star Wars brand strategists are the trend lines. This isn’t a series trending upwards or even maintaining consistent film launches. If Disney wanted to reassure themselves, they could say it isn’t their fault, lots of franchises lose their mojo over time, like Lord of The Rings, Transformers or Pirates of the Caribbean. Here is the chart I made in 2018 for franchise performance, updated through 2019 launches. They show the US adjusted box office and how series have trended over time:

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Most Important Story of the Week – 8 November 19: Franchise Lessons from all the Game of Thrones and Star Wars News

What happens when one week has so much news and the next has very little? Well, you roll one topic over. So the “most important story” this week is last week’s runner-up. 

The Most Important Story of the Week – Game of Thrones and Star Wars Franchise Lessons

Last week began and ended with dueling Star Wars and Game of Thrones news….

– First, HBO cancelled it’s “Age of Heroes” prequel series for Game of Thrones.
– Second, HBO announced another prequel series for Game of Thrones, based on the book Fire & Blood about the Targaryens.
– Third, David Benioff & DB Weiss—the Game of Thrones showrunners—had left the Star Wars prequel they planned to make

Since HBO Max sucked up the oxygen out of the entertainment biz room last week, I didn’t really have time to examine what the big franchise moves meant for entertainment. Which is a shame; monetarily, these announcements would have been the most important story in most weeks.

Here’s why: both of these franchises are worth billions. As I’ve written extensively on here and here. And it’s not too bold to say that how HBO manages Game of Thrones and how Disney manages Star Wars will play a key role in either launching successful streaming services or failing (and losing billions).

Today, let’s look beyond how fans will feel about these announcements, to what we can learn from a business strategy perspective. Meanwhile, Marvel will keep coming up, because it’s the most well-run franchise in the game right now.

Business Issue 1: Pilots Are Great Investments

You’ve probably heard the old story that Seinfeld tested very poorly as a pilot. Development executives bring this up all the time when a pilot inevitably gets bad reviews. “Well, Seinfeld tested poorly too!” It ignores obvious counters that most pilots that test poorly ended up being poor TV series. Conversely, quality pilots are highly correlated with successful series. Take Game of Thrones. Sure, the initial pilot tested poorly, but the reshot pilot is one of the greatest in TV. The Breaking Bad pilot was similarly fantastic. 

This is why, I praised HBO for making a pilot for their “Age of Heroes” GoT prequel. You’re about to invest maybe a hundred million dollars in a TV series. Make a pilot and see if it’s good. Except then HBO went straight-to-series on their House of the Dragon prequel series. Sigh. Essentially, HBO Max made a good decision (make a pilot, it tested poorly, don’t go forward) and then made a bad decision (go straight to series). 

When it comes down to it, overall going straight-to-series is just another example of how prices are increasing for distributors without actually increasing the top line. It increases the upfront costs (full season commitments to talent) while decreasing the hit rate (no pilot data to kill duds early). HBO feels like it has no choice, though; since Netflix and Amazon are pushing everything straight-to-series, to stay competitive, everyone has to make everything straight-to-series.

Creative Issue 2: The Source of Game of Thrones Greatness

Still, there may be business logic for why HBO chose one pilot over the other here to go straight-to-series. Looking at what made Game of Thrones great, a lot of things contributed from the showrunners crafting a great story to Peter Dinklage just owning it. But if I had to pick the single biggest driver, it would be George R.R. Martin. Yes, Benioff & Weiss successfully managed a monster TV show, but at its core they wrote in an extremely fleshed out world of George R.R. Martin’s creation.

As a Game of Thrones fanatic, I’ve read everything GRRM has written on the series. Including a history book and the Targaryens Fire & Blood book (the one that is the basis for the straight-to-series order). If you asked me, what has a more fleshed out world, the Targaryen reign or the “Age of Heroes”, it’s the former by a landslide. (The Dunk & Egg books seem like a no brainer for a limited series as well.)

If that’s where you think the source of GoT’s success comes from, that makes the decision for which prequel series to order much easier. Go with the “Targaryens” every time. It has literally hundreds of pages of source material that will require much less from its showrunners than the “Age of Heroes”, which has about a dozen pages of material to draw from. 

Even in Disney’s own house, as the latest departure shows, they can’t  learn any of the lessons about leveraging your source material. Star Wars decided to toss out all it’s source material after the Lucasfilm acquisition. Specifically, the dozens of books in its “Legends” universe. (I’ve, uh, read all these too.) Instead, Kathleen Kennedy and team burned it all to the ground, and as a result had to come up with new stories from scratch. (Sometimes these stories had a vague connection to the Legends universe, but emphasis on vague.) Which makes the hit rate much lower than what Marvel is doing. It also requires A-List directors–or at least Kathleen Kennedy wants to work with A-List talent–which makes business point four below much harder.

Alternatively, Kevin Feige leaned into Marvel’s history. This source material is part of the reason Marvel has been so successful. It’s not like Kevin Feige is writing all these Marvel stories from scratch. He’s just adapting the best Marvel stories of all time, like Civil War or The Infinity Saga. 

Business and Creative Issue 3: Avoid Bad Villains

Multiple friends—all Game of Thrones fans; all unsatisfied with the finale season—complained to me about the prequel series being about the rise of the White Walkers. The logic goes, “They were dispatched so quickly and easily, I don’t want to see them in another series.” Yes, this is an unrepresentative sample size, but it speaks to very real creative issues.

If that sentiment showed up in the testing—and I believe HBO tested the latest pilot with focus groups—then that alone could explain why the prequel didn’t move forward. Doubly so if combined with the lack of source material on the “Age of Heroes”. 

There is a business lesson here too, one about coordination and intertwining storylines. If the ending of the White Walker story was more satisfying for viewers, then maybe my friends message saying, “Man, I can’t wait to see the beginning to that.” Instead, the abrupt/rushed downfall of the White Walkers in a dark episode of television fundamentally ended the ability to create another revenue stream for HBO/AT&T. 

Star Wars faces this too. The last trilogy create a brand new bad guy (Snoke), then [spoiler alert] killed him off, and is currently debating if the big bad guy–Kylo Ren–will become a good guy. Notably, in Avengers Thanos stayed bad the whole time. And now Star Wars may bring back Emperor Palpatine. In other words, after one of the best bad guys of all time–Darth Vader–Star Wars doesn’t know what to do.

Business Issue 4: Franchise Management is Hard. Really Hard.

The challenge for a network like HBO or a studio like Disney is managing not just the creative for one series, but thinking how the movements/plots in one TV series impact the larger business. Or one film impact the larger brand perception.

My current working theory is that Warner-Media doesn’t have as ingrained “franchise management” as a skill as someone like Disney. Disney has TV series and movies for Star Wars, Marvel, Disney animation and Pixar. Every character worth their salt has teams dedicated to manage that brand, building value over time. They really are experts at it and integrating it everywhere.

Compare that to GoT. Game of Thrones acts like an HBO property first and foremost. So HBO gets first crack at all the TV shows, but then nothing else happens. (Part of this is due to the fact that George R.R. Martin still owns the rights, but obviously AT&T should try to buy those.) We see the same thing with Harry Potter going the other way: lots of movies, no TV shows. (And slipping viewership.) DC probably has the most things being made, but with little connection between the movies and TV shows, just volume. (And a comic strategy of rebooting the whole thing every five or so years.)

This is likely the key issue with Lucasfilm too, in that top tier talent doesn’t want to sacrifice their creative vision for the larger universe’s needs. Which begs the question, “Why doesn’t Kennedy bring in creatives who will fulfill her vision?” That would mean not flashy names–like Benioff & Weiss–but directors who get the job done.

Really, only one person has figured out how to reliably do this right now.

The Reality: Marvel/Kevin Feige is the Best at Franchise Management Right Now

If you take all the lessons from Game of Thrones and Star Wars above, Marvel does each one well. Pilots? Feige does test shoots for controversial films to make sure they’ll work. (He did with Ant-Man, for example.) Source material? Yep, he picks the best stories and adapts them well. Good bad guys? Yep, Feige finds fresh bad guys each film. (Though arguably kills them off too quickly.) Coordination? Um, yeah we just saw that with Avengers: Endgame. (He found a set of directors who shared his vision, by the way, in the Russo brothers and gave them four huge films.)

Finally, he keeps the quality high. That’s a unique skill he has. (Unique as in one of maybe 5 folks in Hollywood.) Which is a credit to him. Marvel was barely anything when this century started. But by giving Kevin Feige the reins, his successful stewardship has created tons of value. And now he’s taking over TV whereas HBO/HBOMax is trying to figure it out and Lucasfilm fumbles for the next creative vision.

Other Contenders for Most Important Story – Apple TV+ Launched

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Disney-Lucasfilm Deal Part XI: Disney Will Make A 107% Return on the Lucasfilm Acquisition (And Other Conclusions)

(This is Part XI 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
Part IX: Bibbidy-Bobbidy-Boo: Put It Together and What Do You Got?
Part X: You’ve Been Terminated: Terminal Values Explained and The Last Piece of the Model

This series has been the equivalent of an all day trip to Disneyland for me. Arriving when the park gates open, I stayed all day, walking the park and going on every ride. I’m exhausted, and now all I have to do is wait for the fire works. My feet are killing me, but I’m almost there. So yes, today is the fireworks of this process, though the rides (articles) have been great along the way.

I spent Tuesday and Wednesday building our exhaustive models, so let’s  “generate insights” from the data, since insights are a hot business term. I’ll start with the big numbers. I’m going to do this as a Q&A.

What is the Bottom Line, Up Front?

Or “Bottom Line, 10 Parts Later”? 

Here it is: Disney will NOT lose money on this deal, even discounting for the time value of money. So yes, the people claiming success on behalf of Disney are indeed correct. They crushed it.

To show this, here are the totals for the deal. But, to show what “making money” means, I’ve broken my three scenarios into unadjusted, discounted for cost of capital and discounted for inflation. Again, these totals include my estimates for the last six years, the next ten years, and a terminal value for all future earnings:

Table 1 Totals(All numbers in millions, by the way.)

Here is how those values relate as a percentage of the initial price ($4.05 billion). (So subtract 100% to get the return.)

Table 2 PercentagesIf you said, pick one as “the truth”, I’d pick my median scenario—that’s what median is for, right?—and I’d chose the cost of capital line. That really is the best way to look at investing in entertainment properties, and Star Wars is as pure entertainment as you get. (It’s also what the finance text book would tell me to do.) So it is smack dab in the middle of the table.

Using that number, the only conclusion is that Disney crushed it. Disney got a 107% return over the lifetime of the deal. (A 5x deal in unadjusted terms.)

Even looking at the high and low cases, this makes sense. Even the most pessimistic scenario shows a 38% return. (Which is a 3x return in real dollars. Again, huge for a low case.). Bob Iger and Kevin Mayer made a huge bet and it still had a nice return. In the high case, Disney will make an unadjusted 9x on the asking price. That’s a great deal.

Why do you focus on the discounted numbers compared to the totals?

I ignore “unadjusted” numbers—unadjusted is my best term for it—because I can’t help myself. One of my biggest missions with this series is to remind all my readers of this key finance point. A point—leveraging the time value of money—that the New York Times made when writing about President Trump’s taxes (and which he incorrectly criticized). So it needs to be repeated: A dollar today is worth more than a dollar tomorrow. Financial models need to reflect this reality.

To illustrate it, here’s an example. Disney could have take $4 billion dollars (and yes, they paid half in cash, half in stock) and put it in the S&P 500. If they had done that, they’d have earned a 10.5% inflation-adjusted CAGR from 2013-2018. So if Disney had done nothing, they’d earned 10.5% on their money. This is why the “cost of capital” exists. It accounts for the return you should expect for the risks of a given industry. If you make an investment, it isn’t just good enough to make some money, you need to beat the industry costs of investing in said industry.

Well, why did you also include inflation?

It’s easier for many folks to understand. The cost of capital is what we should judge the deal on, but “cost of capital” is a finance term that most of us don’t deal with on a daily basis. Inflation is easier to understand. It is the everyday reality that the things around us get more expensive over time. Inflation is the cost if you don’t do anything with your cash. It’s just another way to look at it. (And while it fluctuates, it’s hovered around 2% for so long that I’m using that as a placeholder.)

How does the cash flow look by time period?

Glad you asked, because I want to answer this question to keep this Q&A flowing. Essentially, this question asks how earnings flow in by our three major periods: what has happened (2013-2018), the near future (2019-2028) and the far future (the terminal value). Here are 3 tables showing this by model:

Table 3 Totals by Period

To make it easier to read, here’s that breakdown in percentage terms of the total for each line.

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Disney-Lucasfilm Deal Part X: You’ve Been Terminated: Terminal Values Explained and The Last Piece of the Model

Disney-Lucasfilm Deal Part X: You’ve Been Terminated: “Terminal Values Explained” and The Last Piece of the Model

(This is Part X 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
Part IX: Bibbidy-Bobbidy Boo: Put It Together and What Do You Got?

Yesterday’s article was pretty audacious, trying to estimate 6 years of past revenue and 10 years of future revenue. But the eagle-eyed among you may have noticed I left out a crucial detail:

What about the future? 2029 and beyond? Surely Lucasfilm is worth something then too?

Yes, it is. But predicting the far future is the toughest part. Which ties into one of my biggest pet peeves in valuation. I loathe business models that project near term middling performance (or even losses), but a far future of wild success. 

Usually, this wild success is summarized in an outsized “terminal value”, one of the most crucial concepts in equity valuation. It can be hyper-dependent on the growth rate. If the growth rate raises by a point, then the model’s value can shoot through the roof. (And yes, many tech valuations follow this model.)

Yet, terminal values are the best tool we have to solve this problem. If we use them properly. Today I’m adding that last piece to the model, but explaining how I got there and what it is.

Terminal Values…Explained

What is the terminal value? Well, the last number on the spreadsheet that captures all “future” earnings. Look at my model (this is the median scenario), with the new lines added:

Table 1 - Empty ProForma wTerminal Values

In a word, the “terminal value” tries to capture the value of all future earnings after your model stops. Say you feel confident you can predict revenue out five years. Okay good enough. (I mean no one can really predict revenue, costs and hence earnings, though we still try.) But what about 10 years? 15 years? There are too many variables.

You can see the need for this in the Lucasfilm acquisition. Can I really predict what will happen with release dates of films, even two years out? I already had to remove Indiana Jones 5 from my models. Take another line of business, licensing. If you used the toy sales of 2015 to forecast the future, well you’d be much, much too high. (2015 was probably the peak of Star Wars toy sales.) Back when this deal was signed, Disney didn’t know if they were going to launch a streaming service (I assume) but they still could have sold Star Wars TV series. Possibly for even more money. Not selling to others changes the model.

Here is where the science of modeling has come back to the art. (Which isn’t a bad thing, despite current connotation. Good art is really, really hard to make. Great art even harder.) The traditional way to model a terminal value is to use the future cash flows of the last year of the model, and assume those hold steady into the future. In other words, you make a “perpetuity”, a cash flow stream that continues forever. Alternatively, if your company has a large variance in cash flows year to year, you can use a three or five year average to get the base number. To be even more conservative, you can assume instead of a perpetuity, it is an annuity, where the future revenues only last for a given period of time, say 10 or 20 years. (If you need a refresher on “time value of money”, go here.)

The Specific Terminal Value Calculations

How long will Star Wars be valuable? Davy Crockett was the Star Wars of the 1950s, and it isn’t worth $4 billion dollars. Mickey Mouse has been Mickey Mouse since the 1920s, and he’s worth well more than $4 billion dollars. Which way will Star Wars go? I’m going to assume for a long time. Essentially for decades, but with one scenario where it shrinks over time. Which I’ll control for by tweaking the discount rate. (Either having it grow or shrink.)

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Disney-Lucasfilm Deal Part IX: Bibbidy-Bobbidy-Boo: Put It Together and What Do You Got?

(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:

Table 1 Empty Proforma

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:

Table 2 CALENDAR of Lucasfilm

The Three Scenarios

Let’s walk through what I put in each model.

The “Average”: Status Quo Continues

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The Economics Behind Not Releasing Star Wars Films Exclusively on Disney Plus – Part II

(If you missed yesterday’s post, click here.)

Let’s continue with where we left off yesterday. The risk for eliminating theaters and associated early windows (home entertainment and pay-per-view) is in the hundreds of millions of dollar range. So can Disney make that up by releasing new Star Wars films directly and exclusively on Disney Plus?

Part II: Calculate the value of “exclusivity” and “day and date”

Running your own streaming service could be worth all the revenue per film you exchange in box office, pay-per-view, EST and DVD sales. Maybe. The bulls like me would say, “So Disney should exchange making money in theatrical sales for losing billions like Netflix or Hulu?” Hmm. The bears would say, “Look at Netflix’s market capitalization.”

But we’re not looking at the whole platform. We’re looking at individual films. The problem is most of the ways people calculate the value for an individual title on a streaming platform are more wrong than they are right. Or let’s say “suboptimal”. Let’s review how NOT to calculate this number. (With the caution that I can/will write a bunch of articles on this)

Suboptimal Method 1: “Multiply number of people by price per month”

Let’s say 50 million people watch a Star Wars film when it releases on Netflix. (Yes, I think that’s a pretty good estimate. Call it “one Bird Box”.) So the math is:

suboptimal 1

Bingo! $550 million! We should skip the theatrical window.

Hold on. I see some problems with the math. Actually, that method is simultaneously both too high and too low.

(And I bring this up because I hear this discussion of streaming economics all the time on podcasts. I don’t know why podcasts in particular do this math, but it happens.)

First, on the, “this math is too high side”, how do we account for a customer who subscribed to the Disney platform, binges 12 “tent pole” movies, then unsubscribes? Do we have to divide by the number of films? Or what about the new Star Wars series, if a customer watched both? This is why you factor in the total value of the catalogue. So it’s too high.

On the converse side, I could be shortchanging the film. What if it acquired customers? Attracting new customers has to be more valuable, right? They aren’t just worth one month, they’re worth their “lifetime value”. A good model should account for that. And that happens to be…

Suboptimal Method 2: “Multiply number of people by CLV” (even higher)

To start this analysis, we need to estimate a “customer lifetime value”. Note, when Disney launches their service, they won’t have a clue what this is. They’ll have estimates—which aren’t much better than guesses—but they won’t know. If you have no subscribers, you lack the best data to judge retention rate. Sure, you can use Hulu’s data, but there are a host of variables you would need to account for. (Say how their price fluctuates wildly to bring in customers.)

So back of the envelope, let’s assume a new customer stays for on average two years. They pay $11 per month, and you paid $30 to acquire them through partnership bounties and direct marketing. Here’s the math:

sub optimal 2

So if Disney releases a film, and 50 million people watch, that’s worth nearly $12 billion dollars! Release 12 movies like that and then it can make 144 billion dollars!

Do you see the flaw in this logic? 

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The Economics Behind Not Releasing Star Wars Films Exclusively on Disney Plus: Part I

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):

film revenue model

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:

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Disney-Lucasfilm Deal Part VIII: The Theme Parks Make The Rest of the Money

(This is Part VII 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: Disney-Lucasfilm Deal – Television
Part VII: Licensing (Merchandise, Like Books and Comics and Video Games and Stuff))

If you’ve been reading along after 47 pages and six months of writing, you know that Disney more than made its money back on its purchase of Lucasfilm through releasing wildly successful Star Wars sequels, and then making another $1.7 billion in licensing revenue. So they made their money back.

But to truly get a great return on investment—as I wrote in the introduction in my “gut” section and again when referring the licensing & merchandise—theme parks are the whipped cream and cherry on top. In 2019, if it stays on track, in Disneyland and in Disney’s Hollywood Studios, Disney will open Star Wars: Galaxy’s Edge, which have been under construction since 2016.

And they could be huge money makers.

Theme parks allow The Walt Disney Company to make more off its IP than any other studio. (That’s its competitive advantage.) So let’s figure out how to quantify that benefit. Then, we’ll figure out the costs.

The Challenge: Disentangling the Marginal Benefit of new Theme Parks

With movies, calculating the revenue is messy, but we have lots of data. With toys, forecasting the revenue is easy, but we have way less data. What about for theme parks? In this case, the toughest part of the process is assigning the value.

Think of it like this. We know that putting in a Star Wars: Galaxy’s Edge at Disneyland will drive attendance and revenue. The problem with theme parks is untangling how much revenue they will drive.

In other words, the “marginal benefits”.

Some day I’m going to write “Marginal Benefits Explained!” because it’s a core economic principle—the core principle?—and I’ve seen 7-figure-earning business execs screw it up. Marginal benefits are the additional revenue a business generates by changing an input. So if you’re making a million dollars a year and raise prices, and it goes up to $1.2 million, your “marginal benefit” for the price raise is $200K, the additional revenue you generated.

(You want to know my biggest frustration/pleasure with this website? Every time I write a new article, I think of two more posts to write inspired by it. The “hydra problem” of the Entertainment Strategy Guy.)

This idea is what stymies the analysis with theme parks. Let’s visualize it with an example.

Next year, I’ll walk into Disneyland in the off-season (probably September-ish). I’ll be wearing a Star Wars shirt. My brother will probably rock a Marvel shirt. That said, I’ll also have a three year old wearing, if current trends hold, either an Elsa (Frozen) or Belle (Beauty and the Beast) dress.

So how much of that trip do you allocate to the opening of Galaxy’s Edge? (Punctuation side note: do you italicize theme park lands? I did, but should I?) My family already averages one trip to Disneyland every year, and my daughter knows that Mickey lives at Disneyland. So she’d go anyways. But what about me? I’ll definitely go to see the new park at some point. We could make an analogy of a theme park to a content library on a streaming platform. People pay for the whole thing, not the parts. With content libraries—which is essentially what a theme park is—untangling and clarifying the value offered by each piece can be tough.

The Economics for Theme Parks

When in doubt, I like to boil things down to a simple formula. So let’s do the rough “business model” for a theme park. I came up with this:

Slide63

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