Disney-'Star Wars' deal: Wishing upon a Death Star

  • Article by: THE ECONOMIST
  • Updated: November 4, 2012 - 5:20 PM

Buying out George Lucas, the creator of "Star Wars," makes a lot of sense for Disney.

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In this publicity photo released by Disney, Robert A. Iger, left, chairman and CEO, The Walt Disney Company, and George Lucas, chairman and founder, Lucasfilm, sign the agreement for The Walt Disney Company to acquire Lucasfilm Ltd. on Tuesday, Oct. 30, 2012, in Burbank, Calif. The Walt Disney Co. announced today that it was buying Lucasfilm Ltd. from George Lucas for $4.05 billion. The deal brings Lucasfilm under the Disney banner with other brands including Pixar, Marvel, ESPN and ABC, all companies that Disney has acquired over the years.

Photo: Rick Rowell, Associated Press - Ap

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"Star Wars" fans raised their light sabers to rejoice. Yet another whiz-bang, good-vs.-evil trilogy looms, starting in 2015. And it's all thanks to the darkest force in the galaxy: Mickey Mouse.

Last week, Walt Disney Co. agreed to buy Lucasfilm, the production company behind "Star Wars," for $4 billion in cash and stock. The entire bounty goes to George Lucas, the creator of "Star Wars," who owns 100 percent of Lucasfilm. It cements his reputation as the most financially canny filmmaker alive.

Lucas, 68, is expected to retire. Kathleen Kennedy, a business partner of Steven Spielberg and producer of hits such as "E.T." and "Jurassic Park," was appointed co-head of Lucasfilm only four months ago, perhaps with this transition in mind. Yet Lucas will remain a forceful presence. He will be one of Disney's largest shareholders, and he is sure to advise it on the new "Star Wars" films.

For Disney, buying another mega-franchise makes sense. Disney has been doing well on strong growth in its theme-park, TV and movie businesses. As of June, it had $4.4 billion in cash on hand. But analysts recently started to downgrade Disney's shares, doubting that its stellar recent performance would continue.

Lucasfilm gives Disney material for fresh hits in tough times. Studio bosses complain that the only films that pull crowds to cinemas are familiar franchises such as Batman or James Bond. People are spending more time watching small screens and shelling out less to watch features on large ones, even when studios are spending more to make them.

Nearly 1.3 billion movie tickets were sold in America last year, the fewest since 1995. This summer would have been dismal without the success of "The Avengers" and "The Dark Knight Rises." Studios have kept revenues stable only by raising ticket prices.

What's more, few people buy films on DVD these days, which has hit studios hard. They are scaling back the number of films they make by around a third. If Disney is going to place fewer bets, it makes sense for "Star Wars" to be one of them.

Since 2005, when Bob Iger replaced Michael Eisner as boss, Disney has been good at empire-building. In 2006 it paid $7.4 billion for Pixar, an animation studio co-created by Steve Jobs of Apple that made hits such as "Toy Story" and "Finding Nemo."

In 2009 Disney bought Marvel Entertainment for $4.2 billion, thus recruiting an army of comic-book heroes to cast in blockbusters such as "The Avengers," which has grossed more than $1.5 billion worldwide this year.

Both were tricky deals. Disney's rivals, such as News Corp. or Sony, might well have messed them up. But Disney found synergies with the new firms, while allowing their creative types the freedom to carry on with what they do well.

Disney knows that big hits can help it make big sums on toys, T-shirts and other products. This year a quarter of Lucasfilm's revenue -- around $200 million -- will come from licensing toy droids, Sith Lord helmets and the like. That is not bad for a year which has not, alas, seen a new "Star Wars" film. Disney hopes to help expand Lucasfilm's global reach and integrate its characters into its cable networks and theme parks.

But the real prize in Lucasfilm may be its technology. Hollywood today is in a "special effects arms race," says the boss of a major studio. Lucasfilm's THX sound systems and Industrial Light & Magic special-effects unit are regarded as the best in the business. (Pixar sprang from Lucasfilm's animation technology.) Video games, which rely on special effects, are a bigger part of the business than ever.

Jeffrey Katzenberg, who co-founded DreamWorks Animation with Spielberg and David Geffen after being forced out of Disney in 1994, recently described new animation technology as "maybe the most powerful paintbrush ever put in the hands of artists."

In the past four years, DreamWorks, whose hits include "Shrek" and "Madagascar," has joined forces with chipmaker Intel to devise even zappier technology. The empty theaters playing "John Carter," a sci-fi flop, reminded Disney that live-action films are less predictable hits than animated ones. Animated films also are easier and cheaper to tweak if test audiences hate them.

In 2005, when the last "Star Wars" film was released, Lucasfilm generated around $550 million in operating profit.

Disney is hoping for similarly vast rewards. And indeed, there is plenty of life left in old franchises.

Sony's "Skyfall," the latest installment of a franchise that began even further back than "Star Wars," is expected to be the most lucrative yet.

As Yoda might have put it: "Dollars, billions you will make."

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