LucasFilm under Disney: the first eight years, by the numbers

People can be very bad with numbers, and especially so when they want to be. This is often the case when discussions about numbers are tangled together with some other topic: where the cold, factual conclusions are perceived to have a bearing on more subjective matters. This is invariably the case in politics, but it's also the case in less highly-charged fields. Right now, I'm thinking about the Walt Disney Company. More specifically: about its purchase of LucasFilm in 2010. And most specifically: about the financial results that this purchase has yielded them thus far, over the past eight fiscal years.

This has been prompted by a discussion about that topic, in which it became startlingly clear to me that there are people who don't have any idea what the difference between gross revenue and net profit is. Their lack of understanding leads them to proclaim, quite incorrectly, that the Star Wars franchise has made Disney billions of dollars in profits. They can hardly be blamed, because there are plenty of articles, written by supposedly somewhat educated journalists, which posit the same kind of claim. This article for instance, only vaguely references "other costs", but otherwise makes it seem like the gross revenue that the films rake in should be treated as pure profit.

That kind of sloppiness leads unaware readers to look at the bullet points of the article (which compare the price Disney paid for LucasFilm to the gross box office results for Star Wars films), and conclude that Disney is making money on its investment. But is it really? Well... no. Not yet. Disney only gets a portion of the gross revenue in the form of net profits. The grand total of net profits that Disney has derived from LucasFilm, after eight years, does not yet match the multi-billion sum that the company has invested into it. As such, even after eight years, Disney is still in the red on its LucasFilm purchase.

What I want to do here is take a close look at what money Disney has spent on, and made off of, LucasFilm since buying the company in late 2012. What we are going to see is not the amazing success story that it might appear to be if you only look at the gross revenue. The net results are quite different.

THE THEATRICAL FILMS

We'll start with the "main course". The theatrical films. This is by far the biggest deal. Everything else is just a side-show. First of all, we need to understand where the public perception comes from. Films are often judged by their box office revenue, which is of course gross revenue. That's well and good, but that's what everybody involved makes, taken together. From the studio, to the actors, to the film crew, to the theatre owners, to the firms doing the advertising, to the tax collector. (Because gross revenue, of course, is pre-taxes.) So what did the Star Wars films gross at the box office? Here's the listing:

TFA: $2,065,478,084 

Rogue One: $1,055,135,598

TLJ: $1,332,539,889

Solo: $393,151,347

TroS: $1,072,944,222

Of course, that sound like a great result. If you add it all up, you arrive at a good 5,9 billion dollars. Given a purchasing price of just over 4 billion dollars, it seems like Star Wars has made Disney almost 1,9 billion in its first eight years, and that's just the films. But as we have already mentioned, that's just how it seems.

The reality is quite a bit different, because this is what the films grossed. It's the total revenue as it stands before you have to deduct all your expenses. The cut that the theatre takes. The cost of production. The cost of advertising. Not to mention taxes. And there are a few other odds and ends. There are a lot of people who just don't get this. People who treat gross revenue as if it's net profit. But that would only be true if Disney got LucasFilm for free, making films was also free, everybody worked for free, advertising was free, the theatres ran films without demanding a cut of the revenue, and the government didn't ever demand any taxes at all.

Obviously, that's not the case. So the gross revenue is not what Disney really made. Not by a long shot. So how much did they actually make on these films, in actual net profit? Deadline has gone through the numbers in considerable detail. (The linked article discusses the numbers for TRoS in depth, and links to similar analyses for the other films.) Conclusion? The net profit for the films were as follows:

TFA: $780,11 million

Rogue One: $319,6 million

TLJ: $417,5 million

Solo: -$77 million

TroS: $300 million

Despite the fact that Solo lost the studio money, the total still makes for an impressive amount. We arrive at a net profit of 1,74 billion dollars for Disney. That's what the Star Wars films have made them thus far, upon their purchase of LucasFilm. (As the reports that I've linked to indicate, profits from TV rights et cetera are included in these figures. Just in case anyone was wondering.) Of course, we still have to take the initial purchase cost of 4 billion dollars into account. And obviously, 1,74 billion is considerably less than 4 billion. Disney will only be out of the red on their LucasFilm purchase once the net profits of all things LucasFilm (post-purchase) exceed that 4 billion investment. Right now, they're not there yet, at least not when we go by the theatrical films. Based on the 1,74 billion they have netted, Disney is still 2,26 billion dollars in the red on its purchase of LucasFilm, through the end of Fiscal Year 2020.

Of course, the big screen productions aren't everything. There's also series, video games, merchandise/toys, and the big theme park attraction they've built. What do those add to the profits? As it turns out, not much (yet).

GALAXY'S EDGE

Besides the theatrical films, the biggest single investment into the main LucasFilm IP (being Star Wars) that Disney has made post-purchase is its Star Wars theme park attraction, Galaxy's Edge. It's definitely a LucasFilm-helmed operation— to the point that LucasFilm explicitly got to make the call that it was to be "sequel-era" themed, instead of focusing more on the original trilogy and sequel trilogy. (Whether that was a wise creative decision has been called into question, but that's another debate.) The attraction cost Disney a whopping 1 billion dollars.

Crowds were not altogether enthousiastic, however. Disney, having touted an expectation of massive crowds, gave the press a fairly unrealistic explanation for this: there were no crowds because people expected the attraction to be too crowded. That's... not exactly credible. A more probable reason for people to stay away is the fact that the attraction went considerably over budget, which prompted Disney to jack up ticket prices twice before Galaxy's Edge even opened. And when it did open, it wasn't finished yet. Paying top dollar for a half-finished attraction isn't a very... attractive prospect. The result is that, through the end of FY 2019, Galaxy's Edge performed far below expectations. Given that it also has substantial operating costs, it may be called into question whether the attraction netted Disney anything at all, in FY 2019.

The goal was for this to turn around once the main rides were actually finished and opened to the public, thus making for a profitable summer in FY 2020. Well. We know how that turned out. It seems unfair to blame this on Disney, however. They didn't cause the Covid-19 pandemic. If it hadn't broken out, Galaxy's Edge might have recouped a sizable chunk of its cost by the end of FY 2020. As it is, it's barely incurred any profit for Disney. Its failure to perform upon its opening, a year before, can be attributed to Disney. It went over budget, it went over schedule, and they raised the ticket prices beyond the acceptable. The bottom line is that Galaxy's Edge added another billion to Disney's total investment in LucasFilm, and it has yet to make them anything substantial. At best, they've netted a few million on this. Let's be generous (more generous than Galaxy's Edge really deserves, considering its poor performance in FY 2019), and call it tens of millions.

This means, for Disney, that they're now 5 billion down the hole on LucasFilm, and their net results (for the theatrical films and Galaxy's Edge, combined) on same boil down to... maybe 1,8 billion dollars. Again, considering costs for Galaxy's Edge, and its underperformance, that's a generous estimate. The LucasFilm investment is 3,2 billion in the red, at the end of FY 2020.

But I stress again: I want to be generous here. My premise in delving into these numbers is that optimistic statements based on gross revenue are misleading (at best). It would be very easy to go with low-ish estimates and make it look as bad as possible for Disney. But that's not my goal. So I'm going with high-ball estimates across the board. That also means not blaming poor results that are a result of the Covid crisis on LucasFilm. Had there been no pandemic, Galaxy's Edge would no doubt have done much better in FY 2020. (Because as it stands, it didn't make a profit at all, this fiscal year.) Again, we'll assume that, had there been no pandemic, the attraction would have performed as well as Disney could have hoped it would.

Yet even if we assume that Galaxy's Edge would have made about half a billion in FY 2020 (a generous assumption), this would have "only" pushed Disney's net profits up to 2,3 billion dollars. And the attraction still added an additional billion to the initial 4 billion investment. So, even based on generous estimates, Disney would still be 2,7 billion in the red on LucasFilm if there had been no pandemic.

But we're not done yet. There's still the small screen, as well as merch/toys et cetera.

TELEVISION & STREAMING

The TV/streaming revenue is not made public, but we know Rebels averaged about a quarter the views that The Clone Wars did over its entire run. That's... not an indication of a staggering success. The ultimate net profits for that will be in the tens of millions at best. Resistance, meanwhile, got unceremoniously axed. That's an even worse sign. Series don't get cancelled for making money; they get cancelled for losing money. Let's be charitable and assume Resistance broke even. (Since it got cancelled so soon, it almost certainly didn't, but we'll kindly assume anyway.)

This leaves the first eight episodes of The Mandalorian. (Just those, because season 2 aired in FY 2021, the current fiscal years, and thus aren't being considered here). That series is a success, but there is the fact that every episodeis budgeted at 15 million dollars. That's a lot. The series has created a lot of fan good-will, and it provides a launch platform for a host of new small-screen Star Wars projects. That definitely makes the series worth its high costs to Disney, but purely financially, the actual profits won't be that impressive. The costs are too high for that. At least... for the first season, which had (as all first seasons do) high run-up costs. The second season will no doubt see a more promising profit margin. But that's for FY 2021, and thus not under consideration here.

If we assume that Star Wars on the small screen has netted Disney a total of 100 million dollars through the end of FY 2020, that's a pretty generous estimate. Which illustrates that, up until now, the small screen has been peanuts next to the big screen. (Disney is actually aiming to change that, evidently, and they may well succeed. But again: that's still in the future.) This brings net profits up to 2,4 billion dollars, to the effect that Disney is still 2,6 billion in the red on LucasFilm. (And again: that's using a calculation that utterly negates all Covid-related related underperformance. In reality, they're half a billion further down the hole.)

This leaves us with merchandising, toys, video games and all that kind of stuff. Disney refers to this as "Consumer Products & Interactive Media". How has that performed?

CONSUMER PRODUCTS AND INTERACTIVE MEDIA

Put succinctly: all of this is also peanuts, compared to the big theatrical releases. Of course, as with the gross box office revenue, there are loads of journalists who have no idea what the numbers actually mean. So there are a lot of sensationalist articles that speak of tens of millions in merch revenue that Disney supposedly rakes in.

Yeah, forget about that nonsense. People who take that at face value have absolutely no clue how licencing works. It's the same deal as with the gross revenues for theatrical films: Disney doesn't just get all that money. In fact, it's more like the modest cut of book sale revenues that an author gets. You know, the book sells for 20 bucks, and the author sees maybe five percent of it? It's rather like that. To get the picture, all you have to do is look at the annual earnings reports that the Walt Disney Company puts out. Some examples right here: FY 2015, FY 2016, FY 2017, FY 2018...

 Now, under "segment results", these reports indicate "Consumer Products & Interactive Media". That's what we're interested in. This particular segment includes not only all toys and other merchandising, but also video games (both licensed and internally developed/published), online video content, and various other odds and ends.

The segment results show us four columns. Two on the left (for the fourth quarter of the fiscal year) and two on the right (for the fiscal year overall). The top columns give us Disney's revenue (gross). The bottom columns show us operating income. (Definition of that: "Operating income—also called income from operations—takes a company's gross income, which is equivalent to total revenue minus COGS, and subtracts all operating expenses.")

So in the top right column, next to "Consumer Products & Interactive Media", we see what Disney grossed on toys, merch, games et cetera. The cut that license-holders and vendors and such take is already subtracted from that. But Disney also has its own operating expenses. In the bottom right column, next to that same descriptor, we see the net results (after those expenses have been subtracted). In the earnings report for FY 2018, we can see that Disney grossed 4651 million dollars (c. 4,6 billion) in the category "Consumer Products & Interactive Media". The net profit, however, is a "mere" 1632 million dollars (c. 1,6 billion). So much for the misconception that Disney rakes in tens of billions thanks to merch sales every year.

Of course, that's Disney's grand total in that category. This is the profit from everything ranging all the way from Iron Man action figures to Mickey Mouse plushies to Jedi: Fallen Order. So, yeah... the profits derived from Star Wars are included in this number, but they only make up a part of that 1,6 billion. How big (or small) a part? Well... pretty damn limited.

The revenue target for Star Wars merchandise for FY 2018 (which ran from October 1st 2017 through September 29th 2018) was 600 million dollars. Note that this is the fiscal year that saw the release of a major film, namely TLJ. Deadline reports that this revenue target was not met, and that merch revenue capped off at 450 million that year. (One has to scroll down the article quite a bit to get to those numbers, mind.) Certainly, 450 million dollars is a lot of money. But again, that's gross revenue. As we've seen, the corresponding net profit was 1,6 billion — just under 35% of the 4,6 billion gross revenue. We may surmise that of the 450 million in merch revenue that Star Wars raked in (in a "big year" featuring a tent-pole film release), the net profit boiled down to c. 157,5 million dollars. Let's call it 160 million, to be safe.

Again, that's the number for a big year. We shouldn't expect merch sales to be that good in "off years". But then again, there's also things like Fallen Order. Maybe it evens out? Not really probable, but we're set on being generous. So let's assume that in the category "Consumer Products & Interactive Media", Star Wars has made Disney 160 million dollars annually, since the purchase. That's fiscal years 2013 through 2020. This would be a total of 1,28 billion. It's a ridiculously high estimate, all the more so because Disney only started churning out major Star Wars products as of late 2015 (meaning early in FY 2016), but again: the aim here is to tally up the numbers with as much generosity as possible.

ADDING IT ALL UP

Now we get to add it up. First of all, Disney has invested 4 billion dollars (the initial purchasing sum for LucasFilm) plus 1 billion dollars (the cost of Galaxy's Edge), for a total of 5 billion dollar. The net profit needs to match that sum in order for Disney to break even. Does it manage that? You know it doesn't.

Let's have a look at the final tally. And again, we need to distinguish between what Disney has actually made in reality, and what Disney might have made if it hadn't been for Covid-19. In reality, Disney has made c. 3,18 billion dollars on all things Star Wars, from the moment of purchase through FY 2020. And that is, as has been repeatedly stressed, high-balling the numbers in their favour whenever there was any doubt at all. But moreover, we're going to eliminate the lack of income that has resulted from the pandemic from the consideration. And there, too, we'll high-ball the estimates, and assume that if it hadn't been for the pandemic, Galaxy's Edge would have made half a billion dollars.

That brings us to a total net result of 3,68 billion dollars, that Disney would have made by now, if not for Covid-19. Which means that (excluding losses beyond its control) Disney is still 1,32 billion dollars in the red on its LucasFilm investment. Even if we account for Covid, even if we high-ball ever estimate... they're still ten figures down the hole.

CONCLUSIONS

Results like these, eight years down the line, are not what one might call a good result. Eight years, and they still haven't broken even on the initial investment? Not to mention that they've subsequently invested another billion, and haven't made progress on earning that back, either? Wow. By the looks of it, they'll be down-right lucky to break even on the ten-year mark, in October 2022.

Disney is huge, of course. LucasFilm is just one part of its empire. In the long term, the underperformance of Star Wars up to this point is going to be overcome. Their investment in streaming clearly indicates that this is where they expect the easiest bucks. They're probably right. In the long term, the investment will pay off. In the meantime, however, Disney does need to keep its shareholders happy. An attitude of "we'll be golden in the long term" is not something they'll just swallow. Consider the following: right now, eight years down the line, the shareholders are still looking at a net loss on the 4 billion dollar LucasFilm purchase. If they'd simply stuck that 4 billion in the S&P500 back in 2012... they'd have tripled their money by now.

Shareholders don't like it when they could've gained billions, and instead, they're looking at red ink in the ledgers. It doesn't matter that it's the benefit of hindsight at work. Keep in mind, Disney's shareholders already famously stopped supporting the CEO for just that kind of thing. This is how Eisner lost his job. (Despite some accounts, Roy Disney's move over creative decisions was just the excuse; the shareholders sided against Eisner because they lost faith in his ability to bring in the dough.) Naturally, if you invest four billion, you know that it's going to take some time to recoup your money. That's obvious. But it's also obvious that Disney's shareholders must have had reason to believe that sticking four billion dollars into LucasFilm was a better idea than sticking four billion dollars into the S&P500.

So, how well did Disney expect Star Wars to perform for them? Certainly better than it has done up until now. That much can be pretty clearly shown by Bob Iger's own statements (as well as Kathleen Kennedy's) in 2014-2015. They were talking about one Star Wars film a year for the foreseeable future. Keep in mind: they paid four billion for LucasFilm, and that's the same sum they paid for Marvel. They were expecting this franchise to be their next MCU-equivalent cash cow. It hasn't lived up to that expectation. Not by a long shot. After all, Disney broke even on its purchase of Marvel after owning it for eight fiscal years... on the theatrical films' net profits alone.

Of course, during that same eight-year period, Disney also launched small-screen efforts pertaining to the MCU, and saw the market for MCU merch grow exponentially. The total net profits (over eight fiscal years) there certainly exceeded the 1,38 billion dollars that Star Wars raked in on that front (also over eight fiscal years). Marvel and LucasFilm both cost Disney the same amount of money to purchase. But one of them had already made them a ten figure number after eight years of ownership. The other has left then ten figures in the red, after an equivalent period.

Over at Disney, they're keenly aware of this. Bob Iger announced a "big screen hiatus" after the sequel trilogy concluded. That's a world of difference from the old party line ("one film a year for the foreseeable future"), isn't it? That kind of change isn't an indication that the original plan is working out. It's an indication of unhappiness with the present course, and of a coming course-correct. Which we subsequently got, pretty recently: it's going to be a pivot to the small screen. (Covid is actually convenient for them there, since it means a big hike in streaming numbers, but a plan like that must've been in the making before the pandemic even begun.)

So, what does this all mean? Right now, it means that the shareholders probably aren't very happy about the situation pertaining to LucasFilm. Thus far, the investment hasn't been the financial success that Disney hoped and expected it to be. The gloried dreams of an MCU-like theatrical schedule were not just abandoned, but turned right around into an outright hiatus. They were very much expecting to be in the black by now, and they're not. If Disney's shareholders are satisfied with these results, they are the most forgiving shareholders in the history of capitalism

They're committed now, though. Their money's in it. So come the ten year mark, a scapegoat may be selected, blamed for the lack of expected profits, and kicked to the curb. Provided that LucasFilm starts generating net profits after that, everybody will forget about the weak start before too long. In the meantime, don't expect the shareholders to turn this weaker-than-expected showing into a big deal. For the immediate future, all things pertaining to LucasFilm's thus far limited profitability will merely be a side-show to the real issue— which is the huge theme park-related losses incurred due to the Covid crisis. (And LucasFilm's pivot to streaming can actually help ensure that LucasFilm will be seen as one of the best horses in the Disney stable in the coming period. If that results in big enough successes, we may dispense with the scapegoating, even.)

Still, I can't imagine that anyone at Disney is happy with the financial results Star Wars has yielded the company thus far. Nor should they be: during the period FY 2013 — FY 2020, LucasFilm's profitability has simply not been what they evidently hoped and expected it would be.

Better luck next decade.