Tag: Carousel

Disney-Lucasfilm Deal Part XI: Disney Will Make A 107% Return on 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 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 Most Popular Oscars Ever? Nope. (Why The Academy STILL Needs Fixes to Make the Oscars More Representative)

Records have nearly been smashed! After decades in the doldrums, in this year’s Oscar’s telecast—for achievement in the year 2018—popular movies made a comeback. Here’s Todd VanDerWerff explaining for Vox:

For the first time since 2012, the total domestic box office of the eight films nominated for Best Picture topped $1 billion — and that’s without box office receipts for the 10-times-nominated Roma…Indeed, the $1,260,625,731 pulled in by the seven films we have data for is the biggest total for a Best Picture lineup since 2010, when the 10 films nominated (led by Toy Story 3) made $1,357,489,702…the average box office haul of the nominated films we have data for, the number becomes even more impressive: $180,089,390. Though their combined take falls slightly behind those of 2011 and 2010, the average is well ahead of those years ($135,748,970 for 2010; $170,512,813 for 2009), since 10 films were nominated in both those years.

(I changed Vox’s years to the year prior to match the rest of this article.)

This would seem to refute my thesis from last August; I predicted—based on the data—that the Oscars are nominating fewer and fewer popular films. 

So let’s check back in on those metrics I developed now that we have a new year to add to our dataset. But I’ll go above that simple mandate: I want to make an argument for popular films. I think the Academy has a chance to get higher ratings with more popular films and more importantly, I think this would better represent the state of film each year. Let’s start with defining the problem. Before one can solve a problem, one must understand it. Otherwise the solution probably won’t work.

The Problem: The Academy is Nominating Fewer Popular Films

Collecting the Data

This is true. But it’s complicated. My “rule of thumb” when you have a complicated issue that can be measured in multiple ways—like Oscar voting—is to just measure it as many ways as possible, to see where the trends lead you. If most or all the measurements roughly align directionally—meaning one or two measures could be an outlier—then you can generally trust the trend.

(This process is my refutation to the worst quote every about lies and damned lies. Mark Twain did more to set back statistics than anything._

Some definitions before I use the metrics. First, I’m calling critically acclaimed/awards-focused films “prestige” going forward. In olden times, we called these films “independent” but most independent films now have major studio distribution, so that doesn’t make sense. I’m defining “popular” films as films grossing over $100 million dollars in ticket-price adjusted terms. I’m defining “blockbusters” as films grossing over $250 million. That makes that category very, very small—usually fewer than 10 films per year—but that’s the point of the blockbuster category. Finally, I’m adjusting all ticket prices to 2018 box office, since that’s what my data set used in August. 

With that out of the way, to the charts and tables. Before we start, know that the Academy nominates a different number of films each year for Best Picture depending on the voting totals. This year it was 8 films, where 2017 and 2016 featured 9 films. 2014 and 2015 featured 8 films. And 2009 and 2010 filled out ten slots each year. We need to account for that.

(Oh and I’m assuming “box office” is correlated with “popularity”. But feel free to disagree with that, somehow.)

Let’s start with “average box office” per film. This is the metric VanDerWerff quoted above. Crucially, Vox used the the mean (or arithmetic) average. With mean averages, you run the risk of one huge outlier skewing the results. (In finance, see the “Bill Gates walks into the bar, everyone is richer, on average” scenario.). Avatar did this in 2009; Black Panther is doing it now. (Also, Black Panther box office haul is divided by fewer films (7) compared to Avatar’s fellow ten films.) 

One outlier should not mean the films as a body are more popular. To account for this, I calculated both the mean and median average. I wish I had thought of this back in August, but I’m updating it now. Check it out:

box office unadjusted

So by mean average, yes we’ve done it! The most popular Oscars of all time!

But the “median average” shows a huge split. This is evidence that overall, these films aren’t that popular compared to years past, with one tremendous outlier. As I said though, we could look at this in both adjusted and unadjusted terms. Adjusted box office is the equivalent to accounting for inflation in economics: it’s something you should ALWAYS do. Time value of money, and what not. This won’t lower this year’s average, to be clear, but raise past years. So I included both below, with again both the mean and median averages:

box office adjusted v02

The trend lines are the same, but a little even more decline in popularity. However, one of the purposes of nominating the films is to have multiple popular films. Even one blockbuster isn’t enough to get lots of people interested. That’s why I liked counting the number of popular and blockbuster films. (Last time, I included these in both percentage terms and adjusting for inflation, but I think the story is roughly the same without those views.)


This looks a little bit better, though arguably we have been flat at 3 popular films per year. (If you use percentages, it may even look a bit better.)

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Prediction Time: Forecasting the Effect of Netflix’s Price Increase on US Subscribers

Netflix moves the PR needle. Even I jumped into the Twitter maelstrom to generate clicks based on their two announcements last week, especially the decision to increase prices on US customers.

The problem, for me, is that Twitter, as a medium, is really bad at digging into numbers. It isn’t Twitter’s fault; spreadsheets just don’t really fit. (See my last big analysis article for another debate taken off-Twitter.)

As a result, a lot of the “debate” on Twitter devolves into “this is good” or “this is bad”, with some anecdotes thrown in and the occasional Twitter rant. The fun thing in the #StreamingWars2019 is we’ve all clearly taken a side and this war will only end with all our heads on pikes. (I’m rereading Game of Thrones/ASOIAF in preparation for April 14th and George R.R. Martin ends lots of events with that outcome.)

We can do better than Twitter debates. Today, I want to make the subtext of all the discussion on Netflix text. I want to change the terms of the debate around Netflix by moving into concrete specifics. Strategy is numbers, right? 

That means putting our predictions into quantitative terms. I described my process for this regarding M&A back in July and my series on Lucasfilm. So here’s the question:

How will Netflix’s price increase in 2019 impact US subscribers in 2019?

The results will come in when Netflix announces their annual/quarterly earning in January 2020. For the record, Netflix currently has 58.5 paid memberships at the end of Q4 2018, among three tiers of pricing. Over Q1 and Q2 of this year, they’ll increase prices $1 to $2, raises of 13-18%. 

I’m going to walk through my process to make a prediction. First, I’ll explain why I’m predicting customers in 2019, not other financial factors. Second, I’ll evaluate what we know and some good and bad ways to look at the problem. Third, I’ll talk a bit about the data and finally make my prediction. Feel free to leave yours as a comment on this article or in my Twitter feed.

Stating the Problem: If the number of subscribers who leave is lower than 18%, it’s a win.

This is the simplest of simple microeconomics that Netflix is practicing here. If you raise prices, but the units sold (in this case, customers) decreases less in percentage terms than the price increases, you make money. (Assuming no increases in costs.) Since this is digital and each additional “unit” sold has a marginal cost of zero, that math works. (Note: this is still an “assumption”. If you continue to need a larger and larger content library to woo subscribers, well then our magic “marginal costs is zero” isn’t actually true.)

economics model

Source: EconomicsHelp.org

Like the “value creation” model, the above chart is the simplest explanation of price and supply and how they interact, but it is woefully incomplete. Many, many other variables ultimately impact the number of units sold or customers who subscribe.

Yet, as rule of thumb, it works. The number, therefore, to watch out for is the subscriber growth or decrease. If Netflix decreases its subscribers to 55.6 million paid subscribers, that’s a 5% decrease. Since that is still lower than the 18% price increase, the move made financial sense. Thus, the terms of the debate change to, “will Netflix customers grow, slow or halt?” Here’s the past 7 years of subscriber numbers (paid, US):

subs from earnings reports

Predicting the Effects: How Many Subscribers will Drop from Netflix?

There are a couple of ways to try to triangulate this number, but let’s start with how not to do it.

The Bad Prediction Method: Using yourself as a data point.

Many people when discussing TV or film use themselves as the ur-example of a customer. I saw multiple people say on Twitter something along the lines of, “I use Netflix all the time. I don’t care about a $2 increase. Ipso facto, this doesn’t matter.”

Now, if you are a representative sample size of America, then congratulations. This analogy works. (Also, I have a ton of other questions to ask you. Like who will win the 2020 election? You should know.) If instead, you are a single data point, then we need something else.

The Trust Method: Believe in Netflix’s army of economists.

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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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NBA-to-Entertainment Company Translator: Part III “The Rest”

(Read Part I and Part II here and here.

The only downside of my NBA-to-Entertainment translator was that I only had 30 NBA teams to unleash my snark. In entertainment, we have many more companies that just couldn’t make the cut. So I had to expand the world of the NBA just a little bit to fit in a few remaining “just too perfect to exclude” translations.

Here you go: the Rest.

The G-League – Discovery (Scripps) and A&E Networks

I’m a hard core basketball fan like many people. But if you asked me to tell you how many teams are in the G-League, I couldn’t do it. (It turns out there are 27.)

I follow entertainment pretty closely. I couldn’t tell you how many channels Discovery (with Scripps post acquisition) and A&E Networks have either. So I looked it up:

19! For just Discovery (with Scripps).

10! For A&E.

That’s more than I would have guessed for both, and you know what, that gives these two a lot in common. Sure, they have a lot of channels/teams you can’t name, but they keep doing their thing. (The difference is a lot of Americans still watch a lot of these channels, which can’t be said for the G-League.)

LeBron James – Marvel Studios

Not the whole enterprise, just the part run by Kevin Feige. Consider these fun connections:

Both LeBron and Marvel started making waves in the early 2000s. Spider-man and X-Men made a lot of news, and you could tell something was brewing, just as LeBron was being called the greatest high school prospect in the world. Marvel Studios released the mammoth hit Iron Man in 2009, the first year LeBron won the MVP. Marvel Studios released the mammoth world building Avengers in 2012, the first year LeBrown won a championship. In 2014, nobody thought LeBron would leave Miami, but he did, and no one thought Guardians of the Galaxy would be a smash hit, but it was. Either way, both LeBrown and his 14 straight All NBA appearances is the equivalent of Marvel Studios launching all successful films since 2009.

In the present times, LeBron coming to the Lakers was the event of the season, like Black Panther or Avengers: Infinity War, take your pick.

Yet, the questions remain for the future. Can LeBron’s health last? Will Kevin Feige keep churning out the hits? So enjoy the ride of Marvel Studios and LeBron while it lasts.

The ABA – 21st Century Fox

Their spirits live on! The ABA brought us the Brooklyn Nets, Denver Nuggets, Indiana Pacers and San Antonio Spurs. And 21st Century Fox will live on in Avatar and Spider-Man.

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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 ? (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:


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