Disney Star Wars – the Finances

[Update: the original post had Deadline Hollywood’s estimate of Rogue One’s profits at US$419 million. The correct figure is US$319 million. The calculations in the article have been revised to reflect this.]

One of the Proprietor’s favorite procrastination outlets is listening to Star Wars YouTubers carrying on about how Disney has wrecked the franchise. Lucasfilm President Kathleen Kennedy and The Last Jedi director Rian Johnson are favorite targets.

It’s hilarious, search YouTube for Comic Artist Pro Secrets, Geeks + Gamers, and World Class BS for a great laugh. 

So why is Practical Economics writing on this subject for our first real post? 

Firstly, Star Wars was a big part of the Proprietor’s childhood. Secondly, Episode IX: The Rise of Skywalker, the final film of the Disney Trilogy and perhaps the last Star Wars film for some time, will be released next week and we thought it would be interesting to look at financials and see whether all of the fuss has been financially worthwhile for Disney.

Disclaimer alert! We’re relying on various websites as sources for information, and we have no idea what is credible and what is not, so please treat this as a bit of fun rather than an authoritative analysis.

And please read our Disclaimer and do not under any circumstances make any financial decisions on the basis of this post.

First a bit of background.

Disney paid US$4.05 billion for LucasFilm in October 2012. We understand this included rights to the Star Wars and Indiana Jones, although rumors are that George Lucas kept some rights to the original trilogy Star Wars characters. To our knowledge Disney hasn’t yet done anything with Indiana Jones.

Whenever we talk about money in this article we mostly mean US dollars in nominal or dollars of the day terms, unless we say otherwise. Nominal dollars are then discounted (see below) back to financial year 2012/13 terms so we can compare them with Disney’s 2012/13 purchase price.

Disney released its first Star Wars film, The Force Awakens, in December 2015, followed by: Rogue One in December 2016; The Last Jedi in December 2017; and Solo, A Star War’s Story in May 2018.

A passionate negative fan reaction, which was muted during the The Force Awakens (US$2.1 billion box office takings), became louder during the less commercially successful The Last Jedi (US$1.3 billion box office) and reached fever pitch in the lead up Solo: A Star Wars Story. Solo became the first Star Wars film to make a loss (-US$80 million from a box office of $390 million). In between, Rogue One scored a respectable US$1.1 billion at the box office.

News outlets have noted that ‘Disney bought Lucasfilm six years ago today and has already recouped its $4 billion investment’, highlighting the US$4.8 billion in box office takings to date.  It adds that Disney also gains from merchandise revenues.

However, this is conflating gross revenue with profits. Profits are what are really needed to pay back Disney’s investment.  Even the article linked concedes:

The receipts don’t account for the estimated $200 million to $300 million Disney shelled out per film in production costs or the money spent on its robust marketing campaigns to promote each release’. 

But even this doesn’t tell the full story.

Deadline Hollywood estimates the net profit for various films including the Disney Star Wars movies.  For example, The Force Awakens made US$2.06 billion in box office receipts, but revenues to Disney (we assume after theaters have taken a share) were US$1.56 billion, including home entertainment (DVD, Blu-ray and streaming).  After Disney’s production and marketing costs, its net profit becomes US$780 million.

Importantly, there doesn’t appear to be any depreciation or amortization of the intellectual property asset purchased in 2012. This makes it appropriate for the present value cashflow we’re about to perform.

We’ll treat Deadline Hollywood’s estimates as Disney’s Earnings Before Interest, Tax, Depreciation and Amortization (EBITDA) for each movie. There is a figure of $18 million for interest in Deadline Hollywood’s The Force Awakens calculation, so we’ll give back profits of US$20 million to each movie to make sure.

Deadline Hollywood estimates Rogue One made US$319 million in film profits, The Last Jedi made US$417 million, while Solo lost $80 million. 

As the CNBC article above notes, merchandising profits need to be considered.  For example, Wired estimates that Disney made US$150 million in royalties from The Force Awakens toys. 

Additionally, Disney is able to utilize and develop Star Wars at its theme parks presumably without a licencing fee, despite reported problems at its Galaxy’s Edge facilities, plus whatever else it manages to come up with. 

We’ll make the assumption that Disney made profits equal to 20% of the gross box office from each film in merchandise and theme park profits (for e.g., US$430 million from The Force Awakens, over and above additional costs) counted as if it were all received in the financial year the film was released.

We also need to consider the time value of money.  Disney paid for Star Wars in October 2012 but didn’t receive a dollar in film revenue until 2015/16. We’re ignoring any saving to licencing Star Wars in Disneyland/Disnetworld (a positive for Disney) and that it incurs the cost of films before it receives revenue (a negative for Disney). 

If you’re not familiar with corporate finance, the simplest way to think of the time value of money is if you take out a US$100,000 mortgage at 6% interest but don’t make any repayments for three more years, then the amount you owe increases to US$119,000 before you’ve paid back a dollar.

The further into the future revenue is received, the higher it has to be in nominal (dollars of the day) terms to repay the original amount. In corporate finance, the adjustment usually occurs in the opposite direction to the mortgage example above, with the initial purchase cost left unchanged but future revenues (and costs) discounted by a firm’s Weighted Average Cost of Capital (WACC).

We won’t get too much into the technicalities of WACC, but put simply it’s the return Disney’s creditors and shareholders want in return for lending money to or investing in Disney. A quick look on the internet reveals Disney’s WACC to be in the region of 9.63%. While not completely clear, this appears to be a pre-tax nominal WACC and so is the appropriate figure to discount Disney’s nominal EDITDA from each film.

It’s not likely to be completely accurate, but will do for now.

Tax is an interesting question. The income tax paid for each film depends on how Disney decides to allocate (amortize) the cost of the Star Wars purchase across each of the films, which we’re not privy to. For now, we’ll make the assumption that Disney pays no income tax, which, given the financial performance listed below, and if Disney has half reasonable accountants, might not be that unrealistic. If Disney pays tax then its finances deteriorate from what we show here.

O.K. here goes. The Table below shows Practical Economics’ calculation of Disney’s net profit discounted to dollars equivalent to its purchase of Lucas Film in October 2012.

Disney Star Wars Profit (2012 $US billion)

The bottom line is that Disney has to date suffered a $2.3 billion loss in 2012 US dollars from its LucasFilm purchase. Certainly not close to recovering its costs as claimed in the media article linked above.

Importantly, the discount factor is starting to seriously impact on returns from this point forward. For example, The Rise of Skywalker in December 2019 will have a discount factor of 0.57, and any future films will face an even larger discount.

This means that if The Rise of Skywalker performs roughly as well as The Force Awakens and makes say US$750 million in profit, it will be discounted to US$423 million for appropriate comparison with Disney’s US$4.05 billion purchase price. 

What is also interesting is what would the movies had to have made for Disney to be within striking distance of recovering its costs. Had The Last Jedi and Solo performed as well as The Force Awakens and Rogue One (nominal film profits only), then Disney would still be down
US$1.63 billion. Still some work to do but more than possible to break even or better.

To recover such a large purchase price Disney needed its early films to deliver consistently large profits. Unfortunately for Disney it hasn’t managed this.

The financial loss from Solo is well known, but this analysis makes it apparent just how badly The Last Jedi performed. While it was profitable it made far less than Disney needed from films in its flagship Star Wars trilogy.  Even The Force Awakens just did barely enough.

While it is taking a break from Star Wars films, Disney does have some other activities, such as The Mandalorian on its streaming service, which is getting positive reviews. Who knows its value to Disney given its role in launching Disney’s new venture?

Once again, these figures are unlikely to be accurate to the last dollar, but it’s show it’s unlikely Disney will ever recover the cost of its investment in Lucasfilm.

Do you think we have the finances correct? Are we using the appropriate numbers for each comparison? Are our sources credible? Let us know in the comments.

The Python code for the calculations is shown below. Feel free to parse, run and comment/criticize.

Python Code

The Python code for the analysis to construct the Table above is below. You can copy and paste this into a Python file you have created, or just paste it into the editor window and hit enter. The only required package is pandas, which comes already installed on Anaconda.

Quotation marks (single and double) often copy out of Python in the incorrect font, so you may need to manually overwrite them in your Python file. If you’re having too much trouble paste it into a word document, re-copy, and then paste into python.

If you’re not familiar with Python/Pandas the finances are read in through a Python dictionary (between the curly brackets) and then converted into a pandas DataFrame.

Practical Economics’ posts on installing and running Python are located here and here.

“””—————————————-“””

import pandas as pd

merch_Factor=0.2

WACC=0.0963

interest_placeback=0.02

homemedia_margin =0.5

star_Wars_Finance = {

'movie' : ['purchase','theforceawakens', 'rougeone', 'thelastjedi','solo'],

'fin_year' : [2013, 2016, 2017,2018,2018],

'gross_film' :[-4.05,2.066,1.056,1.321,0.3929], 

 'profit_film' : [-4.05, 0.78, 0.319, 0.417,-0.080]       

}

df_finance=pd.DataFrame(star_Wars_Finance)

df_finance[‘profit_film’]=df_finance[‘profit_film’].astype(float)

df_finance[‘profit_merch’]=df_finance[‘gross_film’].apply(lambda x: max(x*merch_Factor+interest_placeback,0))

df_finance[‘profit’]=df_finance[‘profit_film’]+df_finance[‘profit_merch’]

df_finance[‘dyear’]=df_finance[‘fin_year’]-df_finance[‘fin_year’][0]

df_finance[‘dyear’]=df_finance[‘dyear’].astype(float)

df_finance[‘discount_factor’]=1/(1+WACC)**(df_finance[‘dyear’])

df_finance[‘discounted_profit’]=df_finance[‘profit’]*df_finance[‘discount_factor’]

print (df_finance)

print ()

print (‘Disney net profit on Star Wars to date is ‘ + str(round(df_finance[‘discounted_profit’].sum(),2)) +’ billion in 2012 dollars’)

“””—————————————”””