It’s been over a decade since Disney decided to purchase Lucasfilm for 4 billion dollars. While the studio had some commercial success with movies like The Force Awakens and… The Last Jedi (only if we consider its $ return), while other projects had limited success, to put it mildly. This raises the question: Did the purchase of Lucasfilm pay off for Disney? After all, Disney and its shareholders expected a high return for such a sizable and risky investment. So, let’s see how much Lucasfilm made for Disney through its movies, TV shows, experiences, and merchandise, and compare how this investment fared against a safer alternative investment Disney could have made.
- The deal
Lucasfilm’s purchase agreement was signed in October 2012 for $4.05 billion, with cash and Disney stock (roughly equal amounts of each). This deal allowed Disney to profit from Lucasfilm’s existing IP, produce new movies and TV series, collect royalties on its merchandise and TV and streaming deals, all while cross-promoting the IP. While paying upfront $4 billion for a company that owned a few movies seems risky, the IP included the most successful movies of all time and is still beloved by millions; I mean, what could go wrong…
To determine if the deal was lucrative, we need to evaluate how much cash the studio has made for Disney, which isn’t straightforward, as Disney doesn’t disclose such information about its business, so, for the most part, where financial reports are insufficient, I will rely on industry estimates, some assumptions, and guestimates (and even some wild guess – you were warned). So, this analysis should be taken with a grain of salt.
While the studio will continue to generate additional income in the future, I will limit this calculation to the profits (or losses) that the studio has made for Disney up to 2024 from:
- New movies;
- Home entertainment (e.g., TV and streaming services, Blu-ray and DVDs);
- TV series produced for Disney+;
- Merchandise and licensing agreements;
- Theme parks.
Let’s start with the big-ticket item:
- New Movies
For our analysis, we need to consider the profits after deducting the share of movie theaters’ take, as well as production and marketing costs.
For revenue, as a rule of thumb, studios typically receive only half of the proceeds at the box office, with the other half going to movie theaters.
Figure 1: Total Box Office Revenue
The production expenses for all these movies were estimated to be over $2 billion. These estimates are primarily based on figures from reputable sources such as The Numbers, Box Office Mojo, and Forbes. We need to add the marketing costs to these numbers, which are harder to come by and will mostly rely on industry estimates and similar high-budget movies.
To understand the calculations, let’s take The Force Awakens as an example. It grossed over $2 billion at the box office. However, Disney only received $1 billion after deducting the share of the theaters’ take. The movie’s production budget was estimated at $447 million, which includes tax breaks from the UK. For such a high-profile movie, the marketing budget is estimated to be $175 million, which is also the industry’s estimate and is based on similar mega-blockbusters at the time. Deducting these costs brings the operating earnings to $413 million – a 41% of operating profit – not a bad start for a rebooted franchise, at least at the time.
Similarly, I calculated the operating profit or loss for each movie.
Figure 2: Total Profits per Movie
While all six movies generated over $3.16 billion for Disney, the weak performances of the last three movies led to losses. In total, the operating earnings from all six movies were only $116 million, a profit margin of 3.7% against the net revenue. So, the big ticket item didn’t bring in much. We still have a long way to go to at least break even, let’s move to:
- Home Entertainment
After a movie’s theatrical release, it can still generate revenue from DVDs, Blu-rays (at least back in the day), licensing agreements with network television, and streaming services like Netflix, at least before the advent of Disney+. Moreover, the existing IPs, such as the prequels, original series, and Indiana Jones, are likely to continue being viewed and generating income for the studio.
Here, there is no reliable data, so we must make educated guesses that could be way off; therefore, it should be taken with a healthy dose of skepticism.
I assume that since 2013, the existing IP has generated $ 50 million per year with an annual growth rate of 5%. For the new movies that came out, I assume that each generated an additional profit of 10% of the gross box-office outlays in the first year if the film was profitable (like The Force Awakens) and 5% for those that didn’t turn a profit (like the new Indian Jones). Then, in the subsequent years, each movie made an additional 2% of the box office revenue as profit, which diminished by 10% each year.
For example, let’s consider The Force Awakens again; as the chart shows, the stream of income falls off after the first year, and by the end of 2024, the movie had generated an additional $334 million.
Figure 3: The Force Awakens Home Entertainment profits over time
Based on these assumptions, I calculated the earnings of all movies from Home Entertainment, which yield an additional $ 1.6 billion.
Figure 4: Home Entertainment profits for all new movies
To ensure the calculation isn’t significantly off, I also reviewed the money Disney reported from Home Entertainment and TV/VOD licensing agreements. The share of Lucasfilm, based on my calculation relative to this segment’s operating profit, comes to around 7.5%, which seems like a reasonable percentage.
- TV Series
Disney+ started streaming in November 2019, and since then, Disney has released seven series related to Lucasfilm, up to 2024. Only the Mandalorian had three seasons; the rest only had one season.
While the budget for each series is available online based on industry estimates, the challenging part will be determining how much each series earned.
Since Disney doesn’t disclose how much each series generated, we must develop a more “creative way” to guesstimate these figures.
Disney discloses in its financial reports the number of subscribers and revenue from Disney+. So, we can start with that.
Let’s assume each subscriber started watching Disney+ in 2020 with an average of 5 hours a month and a growing pace of an additional hour per year till it reaches 9 hours a month by 2024. From this, we can estimate the number of hours viewed, which can be used to determine the revenue each series generated for Disney.
Let’s use an example from The Mandalorian Season 2; based on reported estimates online, the show’s initial run was viewed in the US for over 8.38 billion minutes, or nearly 140 million hours. Assuming the number of international paying consumers equals the number of consumers in the US, we can add another 140 million viewing hours for the international audience, bringing the total viewing time to 280 million.
Table 1: Estimated Income from The Mandalorian Season 2
In 2020, based on these assumptions of viewing per subscriber and the total number of subs that year, the number of hours viewed on Disney+ was 4,422 million. So, the share of viewing hours for The Mandalorian Season 2 was roughly 6.3% of the total viewing time on Disney+.
Now, the streaming service generated $4.2 billion for Disney in 2020. If we assume the viewing percentage equals the revenue generated. In this case, The Mandalorian Season 2 is “responsible” for 6.3% of the total revenue from Disney+, which amounts to $268 million in 2020.
Let’s also assume the series generated an additional 50% of its initial revenue in reruns, resulting in a total of $402 million. Again, these are very rough assumptions that don’t capture how popular one show could be, and perhaps it is the main driving force behind Disney+ subscription growth. Not all shows are born equal, and some, like Game of Thrones, can even carry a streaming service. This is just one point among many other nuances that these assumptions gloss over. However, I think this method provides a rough estimate for our purposes.
So, The Mandalorian season 2 generated over $400 million against a reported budget of $120 million. These figures indicate that the show made an operating profit of $282 million.
Similarly, I calculated the profits or losses for the other series. As seen, The Mandalorian was the most viewed and profitable series, while Acolyte and Willow were the least, as they lost money for Disney due to their high production cost and low viewing time.
Figure 5: Estimated Income from All Lucasfilm Series
So, the TV series generated $605 million in profits for Disney.
- Merchandise
This segment includes toys, costumes, t-shirts, and pretty much anything Disney thought of making a product and slapping its IP on it to triple its price. It is among the most profitable for Disney, with its annual revenue from merchandise and licensing steady at an average of $4.7 billion per year over the past decade, and a profit margin of 47% last year alone.
One of the primary ways Disney generates revenue is by selling merchandise directly or through licensing agreements, such as those it has with Hasbro and Lego.
While Star Wars is a juggernaut in merchandise, Disney has many IPs, which means that Lucasfilm movies would only account for a small margin of the total operating profit. So, for this calculation, I will assume that 5% of the earnings from the merchandise are due to the Lucasfilm franchises.
Figure 6: Estimated Income from Lucasfilm in Merchandise
Since Disney reports its annual merchandise revenue, we can deduce, based on our assumption, that the Lucasfilm IP generated a steady income of close to $100 million annually, totaling $1.1 billion.
- Parks
Disney introduced Star Wars rides in the late 80s, and it was rumored that Lucas was paid $1 million per year per ride in his first licensing deal with the then-CEO of Disney, Michael Eisner. Since then, a great deal has changed, and Disney has built numerous Star Wars and Indiana Jones attractions in its parks worldwide.
Here, too, it’s a bit challenging to distinguish how the Lucasfilm IPs contributed to Disney’s financial success. But let’s give it a shot.
Of all of Disney’s parks, four have Star Wars or Indian Jones-related experiences or rides.
In the US, Disney provides information on domestic revenue and profits from parks and experiences in its financial reports, but doesn’t specify the breakdown by each park, which is essential, considering not all parks are related to Lucasfilm IPS, such as Epcot, Magic Kingdom, or Animal Kingdom. So, we will have to make a rough estimate.
Based on the number of tourists that arrive, and assuming the income per visitor is the same across all parks, I know this is a very simplifying assumption, but roughly a third of the visitors in recent years have arrived at Parks that have Lucasfilm rides or experiences.
Figure 7: Visitors in Disney Parks in the US
Therefore, I will only consider one-third of the total income Disney reported in the US for this estimation.
Now, recall that Disney operated Lucas’s IP-based experiences and rides long before Lucasfilm was purchased. Hence, we need to determine how much Disney would have paid Lucas and consider that as the additional profit for Disney from this investment. I think 5% of the profits seems a reasonable assumption.
As such, this brings the total operating profit from Lucasfilm’s IP rides to roughly $615 million in the US parks alone from 2013 to 2024.
What remains to be included are Euro Disney and Tokyo Disneyland for the international parks.
For Tokyo, Disney doesn’t operate the theme park but instead collects royalties from Oriental Land Company (OLC); therefore, we have financial statements for this theme park. According to some reports, Disney receives a 7.5% royalty from the company’s revenue in Tokyo Disneyland. And here, too, I will assume that Star Wars accounts for 5% of this theme park’s revenue, bringing the total income from Lucasfilm IP to around 172 million.
For Euro Disney, there are no financial reports, so I will have just to guess; based on the number of visitors, which is roughly 60% of that in Tokyo, I use its profits to guess that the Star Wars IP in Euro Disney brought in also 60% – for a total of $104 million.
Table 2: Estimated Income from Lucasfilm IP in Parks
Summing everything up yields a total income of $891 million.
* There are also Hong Kong and Shanghai Disney Parks, but in the former, there is only Hyperspace Mountain, which is limited and seasonal, and in the latter, there is no Lucasfilm ride.
- Comparison to other alternative investments
So, after making all these calculations, where do we stand?
To sum up, the movies generated $116 million, TV series $605 million, Merchandise and Licensing $1,160 million, home entertainment $1,658 million, and parks $892 million in profits. Combining these figures yields a total operating profit of $4.4 billion.
Figure 8: Chart of breakdown of income by segment
The PIE chart shows that Home Entertainment and Merchandise accounted for over 60% of these profits.
Figure 9: Pie chart of breakdown by percentage of income by segment
Let’s also deduct another 10% from these profits for indirect costs, such as management and interest payments. The total cash flow pretax would be around $4 billion, resulting in a cumulative return on investment (ROI) of 98%. In other words, after 13 years, the initial investment was barely covered. Moreover, the annual ROI was less than 6%.
At first glance, these figures may seem reasonable; however, we must remember that this investment was very risky, even with well-established franchises, as evidenced by the recent box office failures of some of these movies. While an investment of $4 billion in 2012 may seem insignificant for a company like Disney with a market cap of over $100 billion, it was still a sizeable investment to which Disney shareholders would have liked to receive a high return for the risk the company took.
To understand how this investment performed compared to other less risky ones Disney could have made, I examined an alternative. Recall that the original deal was financed with $2 billion worth of Disney stocks and $2 billion in cash. So, let’s look at what would have happened if Disney had kept those 2 billion dollars of its own shares and invested its cash in a simple 60/40 portfolio that comprised 60% of the S&P 500 – the main US stock market index – and 40% in US treasury bills.
The plot shows the changes in each investment over time, in billions of dollars. While the stock investment fluctuated significantly, especially around 2020 due to the pandemic, the overall performance of this portfolio shows that it outperformed Lucasfilm by over $1 billion. And the cumulative return on investment would have been 126% by 2024, with an annual return of 7%.
Figure 10: Comparison of Lucasfilm return vs. a 60/40 portfolio and Disney stock
So, a no-brainer investment like Disney keeping its own stocks and putting some cash in a 60/40 balanced portfolio would have yielded Disney an additional $ 1 billion compared to Lucasfilm. While these calculations should be taken with a grain of salt due to the numerous assumptions and second-hand data they relied on, they still paint a picture that isn’t too flattering. These calculations could be off by a few tens or even hundreds of millions of dollars. However, even so, they would still not be enough to justify such a risky investment, given a meager 6% annual ROI that doesn’t even beat that of a less risky investment.
- Conclusion
Disney profited from Lucasfilm, but these earnings barely cover its initial investment after 12 years, and they aren’t substantial compared to other less-risky and easier-to-implement investments. And, of course, there is still potential for upside in the future, including the sale of new merchandise, royalty deals, and the development of new experiences, such as movies, TV shows, and other entertainment ventures. However, the box office failures of the last several movies may have also harmed the reputations of Lucasfilm and Disney, a phenomenon that has a dollar value, albeit one that is even harder to quantify.
These figures highlight the main problem with this investment: it wasn’t the price tag as much as the execution. Indeed, Lucasfilm could have been a viable profit center, as it seemed to be, at least initially, when The Force Awakens was released. Despite the movie’s many flaws, it made more than enough money to demonstrate that Lucasfilm could produce major blockbusters. Alas, at this point, a significant course correction would be required for this studio to start producing mega-blockbusters that would justify the initial investment made back in 2012.
