Disney-Lucasfilm Deal – Part II: Star Wars Movie Revenue So Far

(This is Part II 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)

Today, we continue our series evaluating the Disney purchase of Lucasfilm for $4 billion dollars. (Read the introduction here.) I can hear some of you saying, “Why do you even need to do that analysis? Why did you waste all those words on a question we already know the answer to!” And then you would point to this Hollywood Reporter headline:

Star Wars’ Franchise Crosses $4 Billion [Box Office], Eclipsing Disney’s Lucasfilm Price

Sigh.

I mean, if you want to know why I’m writing this series, that article—or more precisely that terrible headline—explains it. Even the article points out that Disney won’t keep all of the $4 billion in box office, and it doesn’t account for production costs or marketing. So the article itself acknowledges that the headline is as flashy as it is misleading. (And I would throw in that it doesn’t factor in the time value of money, the centerpiece of Part I’s analysis.)

Yet the Star Wars franchise has crushed the domestic and international box office. Doing $4.7 billion (and counting) in total box office since Disney acquired it ain’t nothing. Claiming three number one movies for three years in a row ain’t nothing. Having three films each do over a $1 billion in box office ain’t nothing.

Lucasfilm and Disney are doing well, but how well? More precisely, how much cash did they make on these movies? How well do we think they will do going forward? And could they start losing money?

How to Analyze Lucasfilm Movie Performance

I’ve had a lot of “fun” trying to figure out how to organize this part of my analysis. There’s a lot to go over and explain and justify. I’m really worried that, without realizing it, I’ll tip into text book territory and all my easily distracted Baby Boomer readers will go back to email. (What? Should I have put easily distracted Millennials? I’ll save that for another time.)

The difficulty stems in part from having to differentiate between what I know, what I can estimate, and what I have to, frankly, guess about Star Wars films. And that realization gave me the organization for the rest of the movie section. When I say “know”, I mean that we have the results of how well a movie did. We know (roughly) how movies that have been released did at the box office. “Estimate” means films we know are coming out (or have a high confidence that they will come out) but we have to estimate how well they will do. And all the other potential films? Those are guesses and we’ll need to build scenarios to cover the various options.

So let’s start with what we know: the first four films.

What we know: How well did the first four new Star Wars films do?

Let’s be clear on what “know” means here. It doesn’t mean I have a 100% accurate accounting statement of the films. But since we know the box office results, we have a very strong idea of total revenue and we can make really good assumptions on productions and costs. Take that all together and I can make a single estimate for how well each film did.

But we have some explaining about how I got those estimates.

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Hey Cultural Pundits, Don’t Get Cocky: Using Solo’s Demise to Discuss Bad Narratives

I think this one headline captures the surreality of Disney’s box office position:

Solo bombs with $150 million global debut

The headline above uses “bomb”, sarcastically, though most websites eagerly called it a flop unsarcastically. Yet, most films (and their studios) would love to open a movie over $100 million dollars in its opening weekend. Yet to my yet, expectations for Star Wars films aren’t like normal films; we expect them to win the year in total box office. Indeed, as one analyst pointed out, Solo will likely be the first Disney-produced Star Wars film to lose money. (Not Disney film to lose money. Sorry John Carter from Mars.)

(Though, overall, Disney will still make a lot of money on its Star Wars films. Tune in Wednesday for more!)

If our media loves anything more than success, it’s when the successful fail. And not even when you still make money, but just miss expectations. Given the hype of Star Wars, this under-performance begged to be explained (and entice all those Star Wars fans and haters to click). And critics, columnists and Hollywood watchers jumped into the fray.

Here are the reasons I saw for why Solo failed:

– Fans didn’t want a Solo movie in the first place.

– Star Wars fatigue

– Blockbuster fatigue

Solo was released in the crowded summer months

Solo had a troubled production

Solo wasn’t very good

– Solo had a weak marketing campaign

Star Wars fans were still angry about The Last Jedi

Star Wars fans boycotted Solo because of racism

Star Wars fans don’t want movies featuring white men

So which one was it Entertainment Strategy Guy? You’re so good at analyzing things, why don’t you tell us?

Well, it’s some of them. But I can’t prove any of them.

The biggest thing to remember when doing a “post mortem” (or WWW-TALA: what went well-take a look at; or what HBR calls “After Action Review”), is to acknowledge we only have a single data point. Solo came out and did poorly; if it had come out and done well, then we’d be looking for explanations to explain Star Wars’ continued dominance. In truth, one film shouldn’t adjust our priors that much.

Take the explanation above “releasing in the summer time” frame. I’ve seen that mentioned as a reason that Solo is different from The Last Jedi or The Force Awakens. But every single Star Wars film before The Force Awakens opened in the summer and annihilated the box office. Not to mention, two films were just released in “the summer” and had great box office, so blaming Solo’s demise on its summer release date seems like fitting data points into the narrative.

Which is really what I see in most Solo post-mortems: a desire to craft a narrative that probably won’t really hold up to analytic scrutiny. It will read well and tell a good story (and again subtly inform studio execs as they make decisions) but it won’t necessarily be right and it will be delivered too confidently.

Especially when the goal is to distill a failure like Solo into a single cause and say, “This is why it did well.”

The idea that you can distill success or failure down to a single reason is, frankly, lazy writing. It’s also almost never the case. So what I’m going to do with Solo is figure out my best guess for why it tanked at the box office. I’ll do it in two parts: first, figure out what is true, from a data perspective, if I can. Then, I’ll weigh the strength of each explanation. It won’t be as fun narratively, but it will be more accurate/honest.

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Weekly News Round Up – 8 June 2018

Sorry for the delay in posting these. It has been a bit tough getting back up since my family emergency. The goal is to release one of these a week going forward, so fingers crossed. Since it’s been awhile let’s start with the most important story of the last two weeks:

The Biggest Impact of the Last Two Weeks: Solo and the box office “flop”

So I won’t go too far into the weeds on this this week, because I’m thinking of writing a whole article on it for next week. But I do want to explain why this story is so important.

Normally, a movie winning the box office gets a ton of headlines in the Hollywood Reporter or Variety, so you don’t need me to call it out. Same with movies flopping. That said, Disney has a lot riding on the Star Wars franchise. I mean, it was a four billion dollar deal and inspired me to write an entire series on it. And this flop has lowered the floor of future Star Wars films. If audiences really do get tired of these movies, it can limit the ability to make money by billions of dollars. No, really, billions of dollars. The difference between releasing Star Wars movies every 18 months or every six months (or four months) will add up over time.

The Biggest Impact of the Last Six Weeks: Everything “Viacom” related

Everything related to Shari Redstone trying to have Viacom merge with/acquire CBS fascinates me. And clearly is the biggest business story going on. (Hold on a sec for Comcast/Disney/Fox news.) If they successfully merge, but Leslie Mooves leaves, is that a better company? If some how CBS survives with Moonves, what moves do they try to make? Could Paramount get sold at anytime?

Clearly, how this story shakes out will have the biggest impact on the competitive landscape.

Lots of News with No News

Comcast will allegedly put in an all cash bid on 21st Century Fox. I’ll write about that when it happens as in when the bid is actually submitted.

Listen of the Week: Internet a la Carte

I listen to a ton of podcasts, and this one was one of my favorites from The Indicator over the last week. That said, like most great reads I love, it has some flaws. The upside of this story is that I do buy the premise that this is the order in which customers most value internet services. So the survey discussed at the heart of the story is directionally accurate.

That said I have two data complaints. First is one I’ll make all the time: it isn’t the averages that matter but the distribution. Go read The Flaw of Averages to understand what I mean by this.

Second, customers are notoriously bad at putting a price value on something. As in asking them if they would pay $X for something and accepting their answer. Self-reported answers hardly ever matter compared to behavioral data. So its fine to say that people would need to be paid $800 to lose online shopping, but until you actually offer them that money you don’t know if that amount is correct.

Data of the Week

A good example of a host of news stories that don’t really matter is the “who got cancelled; who got renewed” stories. On aggregate, as this link from Vox provides, it is news.

My contention, though, is that each individual story that made up a post on Deadline was not newsworthy. Or at least not enough that you needed to stop you meeting or work to read who got cancelled. So save yourself lots of time and turn of those alerts, and wait until the end of the season to see who got cancelled and who didn’t.

Long Read of the Week

This article from Slate released a few weeks back was one of the most interesting I have read on the media and entertainment landscape. I’d subtly noticed this trend that HBR was becoming mroe and more pervasive by leveraging itself. That said, many b-schools are mimicking this strategy.

Another point: I learned an absolutely ton from case studies while in business school and read almost all the entertainment ones at the time. One of my long term self-improvement projects here is to catch up on new case studies taht have come out since I graduated. My thesis is that the stories and/or data/financials are better than you would guess, providing unique insights to lots of businesses.

 

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! 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)

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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No, Seriously, Why Don’t You Use Data to Make Movies?

If you want to know the “holy grail” for data scientists, I’ll tell you:

Predicting box office performance of movie scripts.

Here’s how it goes. An aspiring data scientist—ranging from bright undergraduate in computer science to a Ph.D. candidate in statistics to even tenured professors—looks for a new topic. They’re bored by analyzing mortgage applications and discover that no one is very good at predicting box office for movies. So they say to themselves, “I can do that.”

Sometimes they even create a model and/or publish papers. Then they go to the Hollywood studios and claim they can use an analysis of a script to predict box office success. Often this is touted alongside advanced analytics, machine learning and neural networks, or other similarly jargon.

We shouldn’t shame these data scientists for trying, though. I mean, the executives at streaming services like Netflix and Amazon Studios/Prime/Video claim they can also use complicated algorithms to predict how well they pick TV shows or movies. Both those streaming video platforms are constantly asked about—and they in turn release vague hints about—the data and algorithms they use to pick TV series.

I have also fielded those types of questions since I helped work on strategy at a streaming platform with tons of data, as I mentioned in my second post “Theme 1: It’s about decision-making, not data”. It typically went, “With all the customer viewing data, how did you use that to pick TV shows?” In my initial post, I specifically didn’t answer the question, but went off on a tangent.

But it is worth answering, because it will illuminate a common Entertainment Strategy Guy theme, “Be skeptical”. In this case, “Be skeptical” of the streaming services claiming they have esoteric data knowledge and the entertainment journalists who let them repeat this.

Of course, I don’t blame the executives per se for claiming they have complicated algorithms. I blame the journalists who repeat it without questioning it. These media members don’t probe that audacious statement. A quick push will reveal those statements to be a house of cards, if you will. (Wow, brutal pun.) In reality, Netflix/Amazon/Hulu/other streaming services and traditional studios don’t have enough data to actually use data to help them make decisions.

So let’s push back, just a bit.

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Most Important Story of the Week and Other Reads – 11 May 2018

Welcome to my first “weekly news round up”!

This isn’t a comprehensive list of every story that premiered this week or last week or whenever it came out. (I may have just found it and wanted to share.) You have Twitter and access to Variety/Hollywood Reporter/Deadline so you don’t need me for that. (Or try out MediaREDEF’s feed.) They do it better than I can, so I won’t compete.

My goal, instead, is to provide a bit of commentary on the news. Like calling out the news that might be slightly misleading or over-exaggerated in its importance. Just because something gets the most clicks doesn’t mean it will have the biggest impact in the future.

The Most Important Story of the Week – AT&T and Time Warner deal

I’ve been writing “test updates” for the last few weeks to see how long these would take to put together. I wanted to make sure I wasn’t over-extending myself by committing to one per week. I bring this up because I was tempted to refer to a now unwritten update, and I realized I needed to explain myself.

My goal each week is to call out the most important news story. Not the biggest. Not the flashiest. The one with the longest term impact on the business we call entertainment. The other sections of this update will rotate, but I’m going to try to call this out each week. The story I think will have the biggest impact on the future of entertainment.

The success or failure of the AT&T and Time-Warner merger is clearly the biggest news story of the week, and only dwarfed by Disney and Fox acquisition as the most important story of the last year or so. The ramifications of further media consolidation will force every other player to consider how they react, and will likely spur further mergers.

Also, regulatory context is always important, especially in media and entertainment. Trump’s regulatory environment is, frankly, unprecedented in American history. I don’t like consolidation in most industries because I believe it hurts consumers. This is ostensibly why the DoJ is pursuing the anti-trust lawsuit in the first place as they wrote in their final post-trial brief. If that were the whole reason, I’d be really excited because it would mean the next step is breaking up Comcast-NBCUniversal and forcing other content makers to divest their distribution arms. (I’ll have a post on that in the future.)

But Trump’s Department of Justice isn’t pursuing action against AT&T for that reason; it’s likely pursuing it because Trump hates CNN, which is owned by Time-Warner. They said mean things about him in the election and he calls them fake news. That’s why Trump is okay with the Disney-Fox acquisition, because he likes Ruper Murdoch and Bob Iger hasn’t gotten on his bad side. Again, unprecedented.

(Notice, the Michael Cohen and AT&T payment/consulting story isn’t important in an entertainment and media sense, but it is salacious.)

Fun idea

I’ve said before I’m a sucker for frameworks. Well I looked, and I haven’t said that before. Well I’m a sucker for frameworks. (A professor once said this about me; he was so right.)

So when I see an HBR Ideacast with a framework for launching a start-up, man, I’m probably going to recommend that to my audience. And here I am doing just that. Take a listen to “Choosing a Strategy for Your Startup” by Sarah Green Carmichael interviewing Joshua Gans.

I’ve always thought that entrepreneurship is overrated from the standpoint that most companies should be constantly thinking about entering new lines of business. All companies should launch news businesses or business units. Thus, the lessons from this podcast apply just as much to people in big companies as small ones.

Long Read of the Week

One final caveat, I recommend long reads, even if I disagree with the ultimate point. My favorite type of articles are ones that inspire ideas. Sometimes that’s really good articles that I can apply elsewhere (see the podcast above); sometimes that’s articles that make me so upset, I have to write a rebuttal.

The article I’m recommending this week falls somewhere in the middle, “The Revenue Stream Revolution in Entertainment and Media” by PwC’s strategy+business. Let’s start with the negative. In the title. “Revolution”. France in 1789 was a revolution. Russia in 1917 was a revolution. (America is 1777? Depends who you ask.) New revenue streams are a change, they aren’t a revolution.

There are three ways to make money in entertainment: sell ads, sell subscriptions, or sell product. I call these three–and I didn’t come up with this, I learned this in class–advertising, subscriptions or transactions.

And a quick look at the “revolution” is really just different forms of those three things. “Platform” is basically owning the distribution channel…much like every studio already owns TV networks. (Subscriptions.) So yes, the platform is changing, but it’s not a new business model. Or take “the Omni-brand” which recommends moving into different revenue streams for successful IP. I’d say, “What are you, Walt Disney in 1930?” (Transactions, advertising and subscriptions.)

My other criticism is the use of qualitative descriptions that could be quantified but aren’t. Take these sentences from the opening:

“The competition for user engagement and spending has never been more brutal. All these developments have significantly disrupted the flow of E&M revenues. Gone are the days when TV networks, film studios, or companies of any kind could thrive on one, two, or even three reliable revenue sources. Today, profitable growth increasingly depends on having five, six, or even more revenue streams.”

I think I could take each one of those sentences and interrogate it with data. Now I don’t have it all, but I’m sure PwC does. So are entertainment revenues being disrupted? Does that mean they are down year over year? If so, by how much? Competition for spending has never been more brutal? How do I quantify that? Compared to what time frame?

It’s not that the sentences are wrong, just that I don’t see any proof. Otherwise, it could be conventional wisdom that may not be true. If it isn’t true, and you’re making decisions off of it, you might be misled.

Final point, this is a good article and I like trying to define new business models. The idea I had is to take their framework and try to pin additional companies into their buckets. Not just using successful businesses, but all businesses.

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! 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)

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

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