Star Wars has captured the popular imagination and for Disney represents an amazing deal with the $4bn they paid for it in 2012 looking remarkably cheap. This article will examine the potential extent for Disney to profit.
Why were they able to get it so cheap?
George Lucas was not planning to bring out any more films using the Star Wars name but in 2007, merchandise sales were around $1.5bn. As a baseline, assume he got 10% of this figure thus was earning $150 million each year just from royalties!
However, for him to earn the $4bn he sold the company for, it would take over 25 years worth of royalties and without another set of films, it is a strong assumption that merchandise sales would hold up that well.
As a 68 year old, it made logical sense for him to sell rather than accumulate long term.
The trust in the Star Wars brand was damaged by Episodes 1-3. Adjusted for inflation, the original trilogy brought in over $3bn in ticket receipts in USA alone, the second trilogy a relatively measly $1.7bn.
These numbers can be use as rough guides to the revenues that Fox received from Box Office if we use the assumptions that the domestic gross was roughly half of the worldwide gross and that the studio receives about 50% of the revenue.
Disney had to take a gamble. If their trilogy could match the original then they could be certain of generating a tidy profit once merchandise was taken into consideration. However, if the films “bombed” like the second trilogy their task would have been far more embarrassing.
The Star Wars brand and wider Disney brand by association would have been damaged. Disney failed spectacularly with a big budget film The Lone Ranger not too long before buying the series.
The success everyone takes for granted today was far from easy or guaranteed. This is reflected in the price.
5 Key Elements of Disney’s Masterful Strategy
The Importance of Rey
The stereotypical diehard Star Wars fan has always been of a somewhat nerdy male nature.
However for this trilogy the main protagonist is a woman called Rey. She is presented as a highly competent character who can ably fight rather than a damsel-in-distress. This taps into the massive appetite for strong female characters as shown by the success of The Hunger Game trilogy.
While the sample size isn’t fully representative just yet, this appears to be paying off. The original Star Wars has an average rating of 8.7 from males on IMDB and 8.5 for females. The Force Awakens has the same average for men but a whopping 8.9 for women.
Disney could bank on the male market and could have played it safe but by broadening the films appeal, the true genius shines through. It not only means more people pay to watch the film but amplifies the power of the brand in merchandise.
30 years ago, Covergirl and Maxfactor being a partner would have seemed ridiculous!
Disney secured the return of Carrie Fisher, Mark Hamill and Harrison Ford. This was vital to associate their films with the original trilogy which captured the minds of so many.
These three stars lent credibility to Disney and meant long time Star Wars were more likely to trust that the disappointment of episodes 1-3 would not be repeated.
Spin Off Films
This is a technique that Disney have applied to the Marvel series to great effect.
Two additional films in the Star Wars universe have been announced. The first is Rogue One: A Star Wars Story. This caters to the loyal fans who want as much Star Wars as possible and the casual audience who are put off by the main series because they are worried that they don’t know enough of the back story to follow the plot.
For Disney, this means more films to profit from and the ability to capitalise on minor characters from the main series who develop cult followings. Think of how Fox spun off the Wolverine from the X-Men series to produce two films that had a combined gross of $800m.
Investment in Quality
The difference in quality between the original trilogies is clear.
Using the Tomatometer from RottenTomatoes.com, the percentage of positive reviews of the original trilogy was 89%. This dropped to a mere 67% for the second trilogy.
Star Wars mania was in full swing in 1999 for Episode 1 and the film is ranked 17th of all time for box office takings in the US adjusted for inflation. The original three films were all in the top 15 of all time, making this a very respectable performance.
However on the Tomatometer, it performed on the worst for any film in the saga with 56%. It’s hard to argue that the poor reception of the film didn’t impact on the rest of the series box office performance and the next two films ranked 89th and 61st for inflation adjusted US earnings.
While these films all had ticket revenues of over $600m globally, if Disney’s films performed in a similar manner they would be disappointed and it would take them far longer to break even on their initial outlay.
This mean the first film of the trilogy had immense importance. Disney waited 3 years after the acquisition before the release of the film and the reception of the film has been outstanding thus far.
The Force Awakens currently has the highest Tomatometer ranking of any of the films in the franchise with 95%!
Disney announced seven official promotional partners for The Force Awakens. Seven!
These companies are:
- Covergirl & Maxfactor
- FCA US
- General Mills
For Disney this is in effect free high quality marketing from some of the most successful companies in the world!
The free marketing reach goes far beyond these seven though. Hasbro commissioned over 100 new toys for the films and run their own marketing to promote the toys too for example.
The ability to cross sell at Disney is immense. The film was promoted on their own ESPN networks as well as crossovers with popular pre-existing characters.
A single company owns the rights to Mickey Mouse, Winnie-The-Pooh, Snow White, Captain America, Iron Man, Thor, Darth Vader, Luke Skywalker and Indiana Jones. Let that sink in.
No other company in the world can hold a candle to Disney’s portfolio.
In the first four days, The Force Awakens has amassed a $610 million dollar gross. This has smashed box office records.
Avatar’s record for all time highest nominal gross looks very reachable. Box Office Mojo predicts that if the films follow a similar path in the reduction of ticket sales over time, then The Force Awakens will have $580mn just from the US in its first week. For context, that is $50m more than the entire run of The Dark Knight.
Goldman Sachs predicts that the film will make about the same as Avatar domestically, $750m and $1.2m internationally. Currently about half the total gross is American and half the rest of the world. The film has not even been released in China and India yet who are the 2nd and 7th largest markets respectively.
I would argue based on the current commercial and critical success that even this is conservative. Adjusted for inflation, Episode 1 took in $750m in US revenues despite poor critical reception. A figure of $2.5bn in revenue is very achievable and it could possibly even be the first film to amass a $3bn worldwide gross.
If that was achieved, Disney’s share would be roughly $1.5bn.
Now if the other two films do as well, the cost of LucasFilms is covered purely from box office of the official saga!
If the spinoff films do half as well, they would still earn approximately $1.5bn combined. This would imply even without all the other sections, I am about to cover Disney would make a tidy profit on their investment.
Merchandise & Toys
What is sometimes missed when talking about the excitement of box office records is that the total ticket revenue will pale in comparison the merchandise revenue in the long term.
Macquarie Securities estimated that the first film will have merchandise sales of $5bn with $0.5-1bn in royalties for Disney. Disney’s share is likely to be on the high end of the estimate considering that they have significant distribution channels themselves to retail the goods and that they have strong bargaining power.
Assuming this performance holds constant for each film in the trilogy that is $3bn in royalties. Then add on even more for merchandise related to the two spin off films.
And these estimations were made before the movie was released and the box office records tumbled. It is not unreasonable to predict that the merchandise estimates are too low and that in the next 5 years, Disney makes more profit from Star Wars Merchandise than they paid for LucasFilms!
Disney is already the world’s biggest licensor with $45.2bn in sales in 2014 thus will consolidate this dominant position even further.
Most in demand Christmas gift is BB8 mini-droid toy at £129 but a quick search reveals more merchandise than one could ever imagine.
Disney will be selling video games, dvds and toys for years after this trilogy has ended. With costs recouped so quickly, it is the ultimate cash cow.
The sleeping giant in discussion of the value of Star Wars to Disney is the upcoming Star Wars lands in feature theme parks. According to Forbes, a third of Disney’s revenues in 2013 was derived from theme parks.
There was a total of 132.5 million visitors to their parks around the world. That’s one in just over 50 people on the planet!
While I have previously mentioned the broad appeal that Disney have aimed for with Star Wars, I think it is safe to say a few more Dads might be convinced by their children to take them to Disneyland now!
Theme parks rely on new attractions to keep people coming back and Star Wars Land provides exactly what Disney need.
Star Wars can safeguard this important revenue stream for Disney with potential to grow it even further.
So there you have it. The comprehensive guide to Disney’s acquisition of LucasFilms including the Star Wars brand.
I hope you now understand why Disney bought Lucas for just $4bn and how Disney’s strategy enabled it to put itself in the best position to profit. This is without even considering the Indiana Jones brand which has 4 blockbusters too!
I applaud Disney’s efforts though reserve personal judgement for when I see the film this weekend!
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