Tag: Financial Modeling

How Much Money Did HBO Make on Game of Thrones – Director’s Commentary Part III: Sanity Checking the Model

Today, is the “sanity check” of my Game of Thrones article guessing how much money it made. I’ve explained where the numbers came from, the high and low cases and all my math. But does this make sense? Can we double check my work? Sure. Again, this is in an FAQ format.

Last big area. Double checking your work. Did you do that?

Yeah, I went through the model a few times. I actually woke up in the night it published in a cold sweat worried I had added or subtracted a line wrong and checked the model in the AM right before it published. I didn’t find anything.

I’ll add, building the high and low cases after the fact caused me to go through the model at least twice more line by line. Still no mistakes found, so the numbers add up correctly. (If you disagree with the inputs, that’s a different question.)

(Though, I could tell stories about models not adding up and really, really, really well paid executives missing it. I mean, REALLY well paid executives.)

That’s not what I meant. Is there anyway to triangulate if these numbers are right?

Ahh. As I think I mentioned elsewhere, getting actual profit participation statements from talent would be the best place to start. Some of the agencies or management companies or talent themselves would have these, and they’d give us the nitty gritty details. HBO, though, wouldn’t admit that the series drove subscribers growth in those statements. We’d need HBO’s analysis of subscribers and trends for that, but that won’t get shared outside of HBO.

To be clear, you don’t have those?

No, I don’t. (I don’t think anyone else does. At least, they won’t go on the record about it.)

What other methods could we use sanity check your model?

I tried to double check my work in a few different ways. The first was to try to find other estimates. 

One of my biggest disappointments of this process was that so few people had tried to do this similar calculation. I think the biggest hold up for journalists proper is that it requires estimating and guessing for a lot of pieces, and most websites/newspapers deal in cold hard facts. (Or other people guessing.) The best articles still tend to to talk “top line” costs, and really just say that Game of Thrones cost a lot, and sold lots of merchandise, without quantifying either. Here are some of the better examples:

2011 – The Hollywood Reporter, “Game of Thrones by the Numbers”

2012 – Slate“How HBO and Showtime Make Money Despite Low Ratings”

2014 – Yahoo, “The Burning Question: How Does Game of Thrones Thrive?” (though caution, this has the terrible “mutliply number of subscribers by months GoT is on)

2017 – The Conversation“How Game of Thrones Became TV’s First Global Blockbuster” (Also, not really answering the same question, but a great read.)

2017 – Marketplace“Let’s Do the Numbers on Game of Thrones

Also, this pops up all the time on Quora, and the answers historically are either just revenue totals or way off. (However, I’ve started hopping in some of the threads to correct the record.)

Finally, I just today found this Wikipedia article on “the most highest grossing media franchises”. Like this morning.

Was the Wikipedia article on total revenue helpful?

In some ways, absolutely. In others, not.

Let’s start with the not. This Wikipedia article cites an article that misquotes a New York Times article, confusing HBO’s annual profit with Game of Thrones profit, which is how they estimate the series earned $4 to 5 billion in subscription revenue. Also, the video games and book sales are likely on the low end, and merchandise isn’t included. However, they pointed me to The-Numbers.com for physical disc sales—a website I used in my Star Wars series—and well, I wish I had found these specific pages before. (I couldn’t find them after a bunch of searching.)

So you updated your Game of Thrones home entertainment numbers?

Oh, no. But their estimates were mighty close to mine and I think it shows both the difficulty and fun of trying to get these estimates right. (When I dive back into Star Wars—around December this year #ClickBait—I’m going to tie The-Numbers estimates to that series too.) Anyways, I pulled the last 8 years of top 100 titles sold in physical disks (Blu-Ray and DVD) and calculated how much GoT earned. For fun, here’s a few other TV titles I saw too:

Table 1 - Total DVD Sales By Year

This is another data point that Game of Thrones is just a monster across every other category. The two other arguably biggest shows in TV at the time didn’t even make it past 2013 with sales. However, to put TV disc sales in context, they’re still dwarfed by movie sales. Here’s Harry Potter and Star Wars this decade:

Table 2 Total Movie Sales

Let’s take those numbers, and compare them to my estimates, and see how close I was:

Table 3 - Initial Estimates w THe Numbers

On the one hand, my numbers get to a gross revenue about twice as high, though my exact sales figures are nearly exact. Exact! 

Huh. What happened?

Well, to start, my initial number is lower, while my decay is similar. My sales figures after season four factor raised the price too, compensating for the idea of selling box sets. Or multiple seasons. I also estimated the sales in the last year.

Moreover, The-Numbers numbers have some limitations. First, these are US only numbers. Game of Thrones, as we’ve mentioned before, is huge overseas, including the UK, Australia and Germany, and Europe has a stronger home entertainment market than the US.

Second, these are only top 100 lists. We don’t have, for example, sales of previous seasons. (They never rated high enough to make the top 100, meaning they have a ceiling of $10 million in 2015, which is pretty high when you think about it.) Also, the biggest unit sales were for individual seasons. We don’t know how many box sets were sold in any given year for past seasons.

Third, this year is the year of the whole series box set. And I have 2 million units projected to sell for it this year and going forward. And even with the decline in home entertainment sales (see my later question on this), I still think it will be a thing. (I think entire Star Wars and Marvel Cinematic Universe box sets will be a thing too.)

Would you change your home entertainment estimates then?

Probably, I would drive my base case up by a little bit. I’d use this as the base case for the US—for new series sales. Then I’d have a library sales figure with some box sets driving up the US average. Then, I’d factor in international sales. However, I think the number would get pretty close to the estimates I already have. I’d consider moving down the top estimate to as well. However, these tweaks wouldn’t drastically change the model as HBO was only keeping 20% of these sales in my model.

How has the decay in physical discs impacted this analysis?

Sure, yeah, home entreatment is declining. It still $23 billion in total retail sales, which is more than streamers are displacing. In other words, the studios and all of entertainment will feel this loss at some point. Here’s the total home entertainment sales by year:

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How Much Money Did HBO Make on Game of Thrones – Director’s Commentary Part II: The High Case, Low Case and Uncertainties

There’s a fun tidbit in this massive must-read article on Kotaku about eSports. Here’s the quote I love:

A 2017 Morgan Stanley report leaked to Kotaku claimed that, in its first year, the Overwatch League could conceivably generate $720 million in revenue, about the same as World Wrestling Entertainment. By 2022, says Goldman Sachs, viewership of pros playing competitive games…may be on par with the National Football League’s viewership today. 

Those estimates are just…nuts. Here’s the thing. I believe those reports made them. What I am more skeptical about is if those reports gave their confidence intervals. Basically, was Goldman Sachs estimating their prediction, or their best case scenario? The best case isn’t a prediction, but your hopes and dreams.

My goal is to never do that. Here’s the thing about predicting the future: it’s hard. A lot of the techno-futurists and streaming-vangelists of the world are better than me in that regard. They know how the streaming wars will end and can predict that with unerring accuracy. I’m not that talented.

Instead, I try to tell you how this business works and try to do so with some modesty. Even with my backwards looking estimates, I want to give you my 90% confidence intervals. That’s why for my big, big analysis articles (explainer here) I build multiple scenarios. (I also try to show you my math. And explain what and how I did it.)

Which brings us to Game of Thrones. In my Decider article, I had to leave out some explanations for space. I’m taking those and giving them to you now in a Q&A with myself I’m calling my “director’s commentary”. (See Part I here.)

Let’s start with uncertainty. What was the biggest variables in the model?

I have two areas that could really swing the model. First, in other revenue, home entertainment and merchandise could have been even bigger than I thought. Again, in winner-take-all, as box office regularly and reliably shows us, the winners are multiples larger than everyone else.

Then, in subscription revenue, the numbers again could be huge. And since I don’t have the actual viewership behavior, it’s really a question of attribution. As is, I had it at 57% of total revenue but there’s a real possibility that this show is even more important for HBO, especially on the international and digital sides.

What about costs? Are they certain?

The costs are pretty relatively certain. The production costs get leaked every season it seems and even marketing costs were leaked this year.

So everything else you’re very, very confident in?

Well, no I’m always wracked by uncertainty. Which in a columnist, I understand is a weakness. (If you fail to project anything less than strength, they’ll get you, like Theon getting got by the Iron Born in Game of Thrones.) At a high level, here’s my confidence in my inputs:

Table 1 - Confidence Table

As you can see, there are always lots of estimates in a model like this. And estimates are better than “guesses” but a far cry from leaks or facts. And even estimates can range from pretty high confidence like the merchandise take or studio distribution fees, to pretty all over the place like tax credits. (I’ve seen the rates for Ireland, but it’s unclear how much GoT films specifically in Ireland, so hard to know. There have been some leaks, but only selectively for certain years too.)

So the revenue estimates will provide the biggest range in the final estimate?

Yep. Oh and one more. Profit participants.

(I had called this “talent participations”, but agents aren’t talent. Shade thrown.)

Specifically, the actors and GRRM. I’m fairly confident the showrunners are getting 10% of the MAGR profits. My gut is GRRM is between 5-10% of that (either matching the showrunners or equal share to them), and the actors could be in that range. And for the initial agreements, I’m pretty confident in those guesses. But…

…what about the renegotiations?

That’s the big uncertainty. After season 4, this show is a monster hit, and HBO needs everyone on board to see it to its conclusion. That’s where the power starts to shift to the talent. And even if this show loves to kill off major characters, killing off Jon Snow or Daenarys Targaryen just seems unlikely. So how much higher did all the talent negotiate in the backend? I don’t know.

Okay, let’s get to the high and low cases now that we know the uncertainty. Can you walk us through the changes for the high case model.

From the top.

Home Entertainment

My working theory is that Game of Thrones is the biggest TV series in terms of units sold this decade, and maybe this century. But is that over a billion dollars in retail sales, as I’ve heard? Again, I heard a rumor around 2016 that Game of Thrones had already earned a billion dollars for HBO. That’s through just six seasons. Of course, I didn’t ask the source if that was gross retail sales or net receipts. But that’s my starting point for a high estimate. 

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How HBO Made Billions on Game of Thrones – Director’s Commentary Part I

One of my guilty pleasure TV series to watch is Forged in Fire on the History Channel. Like Making It, there is something really enjoyable about watching people make things, but especially when they do it really well. Especially in a positive atmosphere, which is what Forged in Fire and Making It emphasize.

Well, if I had a version of that hobby, it would be making business models in Excel. Especially bespoke models for brand new businesses. 

I just love it. I love taking a blank spreadsheet and figuring out how to fill in every line. More importantly, figuring out the data behind each number to get a model to be as accurate as possible. That’s my favorite part of the job. I’d do it even if no one was paying me to do it. If I can do that for things I love—like Star Wars, the Pac 12 or Game of Thrones—even better. 

These models don’t come cheap in terms of time required to build. Weeks of work usually. And the final result of even 4,000 plus words explaining them still usually don’t capture all the insights I think a well-built model provides. So—as I did with the Pac 12—today is the first article diving into all my extra thoughts on my Game of Thrones profit model.

I’ll dust off the FAQ format for it. If you have any questions, hit me up on Twitter, Linked-In or email (see the contact page) and I’ll answer those too.

First, can you remind me what your conclusions were?

Sure. In case you haven’t read the model, here is. It’s 35 lines and ten columns, so it’s small. (If you want the actual Excel, email me and I’ll consider sending. I’d have to clean it up first, though.)

Table 4 Final Estimate

The conclusion again is $2.28 billion is my estimate for how much GoT made from this series. That’s what I’d call my “median” estimate if I were running scenarios on this. And again, it is an estimate, not “truth”.

What do you mean by “not truth”?

Most numbers reported by the entertainment press, in my experience, come from one of three sources: the companies (via earnings reports or leaks), bad surveys or an investment bank releasing their analysis. My estimate would best fall in that last category; this is my estimate of the future.

But estimates are just that “estimates”. Since I don’t have every input—what I’d call “the actuals” in an internal document—I had to make a ton of assumptions. Still, estimates like these can be damn useful training for anyone in business. Unless you employ an industrial espionage firm—and I’m not a lawyer but I’d recommend you don’t do that—you don’t have your competitor’s numbers either.

I expect there is a chance some people who are “more in the know” than me can get someone in HBO to give them the real accounting sheets. Though, as Michael Ovitz’ autobiography testifies, there are quite a few people in H*Wood willing to tell you they know something for certain, even when they have no idea.

Let’s get into the model. Starting with the subscribers section. Explain the difference between accounting profit and your projected profit

Well, the key is that HBO (and all TV producers of wholly-owned series) think of a show in two ways. First, what is the “accounting” profit. That’s the amount they need to pay talent. That is usually made in an agreed upon definition called a “Modified Adjusted Gross Receipts” (MAGR). The people who work at the agencies have this knowledge as does HBO’s finance team. If it was leaked to me, we could make these estimates way more precise.

(Same with Star Wars. Feel free, readers, to leak me any info you want.)

MAGR, though, doesn’t come close to capturing the true value of the series. The MAGR definition usually ties the first run license fee (sometimes called imputed license fee) to the production costs. This gets nowhere near the true value of a TV show. It’s so “sub-optimal” that in my articles on subscription revenue, it didn’t even get its own “not-explanation”. I just dismissed using costs as a stand-in for value. Here’s this demonstrated for Game of Thrones.

Screen Shot 2019-05-23 at 4.36.34 PM

To quickly explain, to truly get at how “profitable” Game of Thrones had been for HBO, I needed to know how much subscriber value it added. Since this isn’t a hard and fast amount of cash—the way say theatrical box office or home entertainment sales are—networks like HBO usually set an agreed upon amount before the show airs. As you can see, it’s tied to the production budget of a series, usually at some percentage. Historically, 70% if the show can be sold to other windows.

As this table shows, though, if HBO had to pay off the actual subscriber value, then the talent collectively would have made something like $400 million more off the series. In other words, HBO was able to keep about $1.5 billion in profits from being shared with talent. 

Is this a bad deal for talent?

I mean, not as much as it seems. Estimating the value of subscribers is pretty complicated, and if you let lawyers into that calculations, it would get messy pretty quickly. Arguably this only comes up for the biggest hit TV series anyways, of which there are less and less.

How did you come up with your percentage for the imputed license fee?

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