Acquired - Episode 6: Lucasfilm

Episode Date: January 19, 2016

Riding closely on the tails of Star Wars: The Force Awakens, Ben and David cover Disney's 2012 acquisition of Lucasfilm. In the episode, they mention Walt Disney's original flywheel diagram, seen below.Sponsors:ServiceNow: https://bit.ly/acqsnaiagentsHuntress: https://bit.ly/acqhuntressVanta: https://bit.ly/acquiredvantaMore Acquired!:Get email updates with hints on next episode and follow-ups from recent episodesJoin the SlackSubscribe to ACQ2Merch Store!

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Another story on the way We've got the truth Welcome to episode 6 of Acquired, the podcast where we talk about technology acquisitions that actually went well. I'm Ben Gilbert. I'm David Rosenthal. And we are your hosts. Just a quick administrative thing. If you like the show show we would love for you

to rate us on iTunes we've been doing a lot of research on podcasts recently and kind of how the iTunes search algorithm works and if you like it and you think other people would like it too we'd love love love for you to leave a review and likewise as always if you have feedback hit us up on twitter at

acquired.fm or leave a comment on the website. Yes. So this week we are, uh, I'd say we're timely. We're probably a month late. We,

uh, we were talking about the Disney acquisition of Lucasfilm and all of Lucas films franchises. Ben, I am your father. Wait, that wasn't in the script cut all right um david over to you first for acquisition history and facts oh man lucasfilm star wars what more can you say so um george lucas obviously, founded Lucasfilm.

1971 in San Rafael, California, which has personal significance for me and my family. That's where my wife is from, where my in-laws live. David, where did you watch Star Wars? say episode seven um we went uh we went over the holiday break to the theater in corda madera that george lucas himself uh helped renovate uh for the i believe for the prequels when they came out it's a one-screen theater uh in marin and uh it was amazing there There's a great Vanity Fair article about this theater and the work that Lucas has done on it. Super fun. So early 70s, Lucas founds Lucasfilm. And the first project that the company does is American Graffiti, which comes out in 1973 and then the next uh the next film that the company produces

1977 is a new hope well i guess it was called star wars at the time we know it as a new hope on this podcast it's just called star wars david all right ben um and uh and and then since then, over the years, I mean, pretty incredible what this company has produced both itself and what's come out of it. I mean, we've already, this is our second episode about a Lucasfilm company. Disney acquisition? Yeah, Disney acquisition of a Lucasfilm company. I was going to try and catch you there. Well, David, I think you mean because pixar was also acquired by disney but was also spun out of lucasfilm yeah well essentially i mean you could

argue started at lucasfilm um the company and the product itself i believe was started at lucasfilm yeah so i guess you know i guess uh they just took two shots at acquiring Lucasfilm. Yeah, exactly. Do you know what else came out of Lucasfilm? That is no longer part of the company. Industrial Light and Magic? Yes, but that's part of the company. This came out of Industrial Light and Magic specifically. I have no idea. Photoshop.

Adobe? Not Adobe. Photoshop. Did Adobe acquire Photoshop? idea photoshop what adobe not adobe photoshop did adobe acquire photoshop adobe acquired photoshop yeah um well there's another episode coming yeah too i believe john i believe john knolls uh was uh an employee of ilm and uh one uh summer uh I believe as part of a movie project. Um, I didn't, didn't read the full history online, uh, needed this piece of software. So he wrote it and then sold it to Adobe. Crazy. Yeah. Pretty incredible company. I think we know what's coming next for Disney among, uh, so those great, uh, organizations aside, other things that that lucasfilm uh contains star wars indiana jones ilm obviously uh skywalker sound uh which is uh film and tv sound production

um quite large video game uh publishing and and development arm uh which now post acquisition has been mostly outsourced to ea by disney um animation arm licensing um and uh and then the other company to come out of lucasfilm was thx the sound uh consumer sound company named for george lucas's George Lucas's first film in film school, THX 1138. Did not know that. So, acquisition. In 2011, this is a great story, Star Tours, which I've done many, many times, most recently just a few weeks ago in December, was being revamped at Disney World in Florida. And George Lucas flies out to

come go to the premiere of the new version, the new revamped star tours ride. And, uh, while he's there, he's talking with Bob Iger, the CEO of Disney and mentions to him that, uh, he's thinking about retiring and maybe selling Lucasfilm. And that was summer, I believe, of 2011. And then about a year later, a little over a year later, October 2012, Disney announces the acquisition, $4.1 billion. Ooh, pretty penny. And Lucas gives quotes in interviews saying he never dreamed of selling it to anyone else. Would have been pretty hard for him to sell it to anybody else.

Yeah. Yeah, yeah. It's interesting because I think we'll get a little bit into Bob Iger, but, I mean, there's fascinating history there. There's a 20-year-old relationship where Bob Iger was working at ABC and actually greenlit the television show Young Indiana Jones for George Lucas, which did not go so well, but he kind of stuck with him through at least the first season. And there's always goodwill between Lucas and the trust that he and Iger had that eventually

kind of led them here. Yeah. Interestingly, though, and I didn't realize this till we started researching this episode. Um, Disney, uh, obviously spends 1.4 point $1 billion to acquire Lucasfilm, um, and acquires a lot within that all the properties we just mentioned ILM and Skywalker sound and whatnot that hadn't been spun out. Um, but the distribution rights to the original star Wars movies were held by Fox and still are. Oh, wow. So Disney was really making a big bet on the future with this acquisition.

Yeah, because it's easy to justify buying that existing cash cow. There's pretty much no chance that those movies are going to stop selling. Raise your hand if in anticipation of The Force Awakens you digital purchased the Star Wars collection. My hand's in the air. I went to watch it on iTunes and the only way that I could do it was like some massive three-pack collector's edition really expensive digital download. I sprung for the six pack on amazon oh nice so so that when i bought that through apple on apple tv is that through fox that money's going to fox watching we watched four five and six again actually this isn't fully true i had i watched the despecialized editions but also i'm not going to get into

that that's a problem but yeah that's crazy so fox was actually capitalized yeah so fox that opportunity i i gotta imagine fox made a significant amount of money in the lead-up to the force awakens uh that doesn't include uh that do you know if that includes merch from those original characters like if you're selling if they're selling a episode for Han Solo toy. Yeah, that's a good question. I think this is on the Wikipedia article about the acquisition. David's giving me homework.

Yeah, giving us all homework. I believe I read in there that at least for Episode 4, I think there's a special deal for Episode 4, that Fox might be even getting those ancillary rights as well. Well, you want to keep going with the... Let's keep going. So, Ben, what's your category? So...

As a reminder, we've got people, technology, product, business line, and the all powerful other. This to me is a product acquisition in the near term, but it's a lot more in the kind of far reaching future. I mean, the way that Disney learned from Pixar and was able to produce in Disney Creative Studios, not in Pixar, Frozen, and put that at the center of the company

and have that insane, it's like 1.4 billion or something, 1.3, somewhere in there, insane cash cow in Frozen. Disney learned from that acquisition without messing with Pixar too much. And that is a Bob Iger thing. I mean, I think that when Bob Iger took over from Michael Eisner as CEO, he's largely

returning to the company's roots. And there's this incredible diagram that shows Disney's business model and the ecosystem thinking and how everything goes and everything else. We should link to this online and on Twitter. We'll put it in the show notes. Awesome. Yeah, and on Twitter. It's amazing.

Like anybody who's ever been pitched a company and wondered, ooh, what's the lock-in? What are the network effects? You know, how does this company build a mode around itself? Disney has this unbelievable ecosystem where everything flows into each other. And the center of the whole thing, as illustrated in this diagram, is phenomenal content in feature-length films. And that's something that's escaped them for a long time. I mean, if you look at Disney's revenues right now, one half are from cable subsidiaries,

from affiliate money that they get when, you know, Which probably 90% is ESPN. Yeah, 50%. Like a little over 50%. Yeah. But, you know, ESPN is a quarter of Disney's revenue. And if you look every year, it's cord cutting, money's going away. Like that future was not sustainable and it was drifting far from Disney's original roots.

So putting incredible content and feature-length films back at the center of the business model is a total change of direction for Disney and something that Bob Iger really kind of came in and shook everything up and did. And he gave a lot of autonomy to all the individual groups. So, you know, the way that Pixar was left alone, the way that Lucasfilm was left to do its thing, the incredible long-term thing, if they can pull it off, is sort of reverse acquiring the things that made that incredible content and letting them produce incredible content in-house. Because right now they bought the Star Wars product. But they have not sustainably proven.

And of course this takes a lot of time. That they can now take the muscle of what that made that content incredible. And make that something that is something they can produce on their own in the future. Yeah, you're raising a couple interesting themes that I, I've been noodling on about this. Um, so one, I would,

it might, in my category. So you said product, uh, you said product today and business line in the future or. Yeah, I guess, you know,

I think it sticks with product, but I think it's that, that sort of reverse infection thing, like the, the Apple to next, like can, it's that sort of reverse infection thing, like the Apple to Next. Can the productness that makes Pixar and Lucasfilm what they are, and I guess you could throw Marvel in there, too. We might have to complete the trilogy here at some point and do Marvel. Yeah.

Interestingly, just almost about the same price that disney paid for marvel as they did for lucasfilm we're gonna have to do an episode on that so uh at the end of the day i think it's product uh that they get this product but the ultimate thing that will prove it this this uh spree of acquisitions in this business strategy was successful as can disney reacquire that muscle to build their own incredible content of all types henceforth yep and you know I think um I basically think the same thing my my frame on it that I was going to say is is this is a product acquisition but what the product is is the product is the juice that flows through the Disney flywheel. And this diagram that Ben was talking about, Walt Disney illustrated it by hand. It's actually beautiful.

There's Mickeys and Minis and Tinkerbells. Turns out the man was a good illustrator. Yeah. All throughout it. But it's this amazing document of business strategy. And what it is is a flywheel. I've been thinking a lot about flywheels over the past few months, inspired by the Everything Store, reading the Everything Store and thinking about Amazon and the Amazon flywheel. And the definition basically being,

you know, how do you create this dynamic in a business where you've got different pieces of the business? And if you push on one piece of the business, it accelerates the whole system. So like in Amazon, it's, you know, lower prices lead to more consumers, which lead to more suppliers in the marketplace, which, uh, um, and leads to more leverage over those suppliers, uh, which enables you to charge lower prices, which gets you more consumers, which gets you more suppliers and more leverage and on and on and on and on. For Disney, the actual diagram is quite complicated, but the nodes in their business are films and tentpole, to use the media industry term, going way back to my days as a media investment banker here, um,

uh, content and, and franchises at the center. And then the parks and the rides and television and music and merchandising, uh, and, um, and publications, you know,

comic books, uh, and everything flowing through that system. And so to me, star Wars is like just a great, um, uh, juice is probably the wrong word but like a

great car to put on that track yeah i like that way of thinking about it too all right next section uh technology themes uh what would have happened otherwise oh yeah which we almost skipped but i think could be interesting here i'm not sure david and i totally agree um what would have happened otherwise so lucas sat on this for i don't know how long uh from uh 40 years yeah but from not he started saying in 97 um no plans to make the sequel trilogy you know i've made the original sat on star wars yeah yeah i mean that we haven't seen anything since since 1997 and he's been adamantly saying, I will never produce more Star Wars, blah, blah, blah, blah, blah. And he's also been saying – I'm glad he didn't.

Howard the Duck. And not only saying that he wouldn't, but saying that he wouldn't listen to anyone else either. And, you know, I think that maybe that's just like that'll wear out over time and this thing has too much value not to go back and remilk and they would have sold it to somebody else. But I think the circumstances were unique that this is exactly the sort of thing that Disney was acquiring as part of its new strategy going forward. That there was a relationship and trust there from Lucasfilm, not only with the relationship with Iger, but also, you know, that, you know, they watched, Lucas watched Jobs take Pixar from him, be extremely product focused about it and very hands on and very intentional to keep that thing separate and then watch the fact that Disney was able to shelter it. And when Disney was able to keep that thing separate and nurture what made

it special. And, you know, I don't, I get the sense that Lucas doesn't have that trust lightly, that this wouldn't have been sold to someone that he didn't feel would, would, you know, keep it in that sort of form. So this was inevitable. Well, I don't think it wouldn't have been Disney or or no one but i'm it's hard to imagine this falling into place with a company other than disney could you imagine uh fox owning star wars well then i mean what if i mean this is that's just as crazy as five years ago saying can you imagine disney owning star wars yeah but but i mean like there was disney and lucasfilm have

always had a tight relationship i mean there's the star tours ride there's the indiana jones rides you know um well is it possible that um lucasfilm would just not have produced more films that george lucas would have retired it would have made boatloads of money off the merch for ilm yeah and like it's just not a company that produced films anymore it was a defunct yeah it's interesting right and that kind of gets to um if you think about acquisitions as a form of investing which they should be um it's just one that you know most companies tend to be pretty bad at, at the core of investing, it's about identifying mispriced assets.

And so if you're Disney, Bob Iger, and Disney's famed technology and strategy group, and M&A group, and you're looking at Lucasfilm, and the worth of Lucasfilm sitting there as an independent entity was X, call it 4.1 billion. But was that mispriced relative to the opportunity, uh, that Lucasfilm had? I think, you know, if, if the force awakens as any indication, uh, you know, I think that the not so secret secret in that I am just like beyond excited about is, you know, we're not going to have to wait too long to see Star Wars land and all the spinoff movies that they've already announced and everything coming down the pipe.

I don't know. I mean, this is the part where I'm going to say there's a spoiler alert. Here's a couple seconds if you'd like to turn the podcast off. If Disney didn't acquire Lucasfilm and no one did and it laid dormant, then we would have Han Solo forever and Han Solo wouldn't be dead. I'm so sad. Well, you know, I saw in doing research for this, I think the second star

wars spinoff movie that disney's gonna make is a a han solo chronicle yeah the first being rogue one and the second being the first of the uh chronicles following han solo man so that's this kind of amazing i mean we we've got five films queued up before 2020. I mean, let's review the finances so far from The Force Awakens. So already it's made $1.78 billion. That's incredible. Yeah, recording this on January 14th. That's including domestic and international, not including any merchandise.

Less than one month. Yeah. Just box office receipts on a 200 million dollar budget now if you look at the prequels as a whole remember that's amazing well yeah it's the most incredible film you know as a business ever created on every metric literally every metric so you know 4.1 billion that's that's the number to hit here at some point. Not to mention, as I alluded to earlier, Jenny and my wife and I went to Disney World over New Year's, which was amazing. And the number of Kylo Ren lightsabers with cross guards. Having a cross guard is so stupid.

You're just going to cut yourself. It doesn't bode well when they're hot lasers. It's useful in one of the battle scenes uh i think it does more harm it's like we can we could have a whole different podcast about this that could be our next podcast all right so vote in the comments if you want to hear it so we're trying to get to 4.1 billion right we're already 1.78 of the way there minus the 200 they spent on it i mean it it's not quite like that but if you want to pencil it out if if you compare that to all of the the prequels the first one uh which it's it's hard even speaking of these when really they don't exist but the the um uh first prequel made a billion dollars, the second 848 million, the second 649 billion.

So total, the prequel trilogy made 2.5 billion on theater tickets. And like we could see that alone from The Force Awakens. Easily, I think. Before we get any distribution outside of theaters. And so we're already looking at that. The Economist quotes that they imagine that $5 billion in Star Wars licensed products will be sold in 2016. And judging by your experience at Disney World and the Star Wars toasters and everything we're seeing everywhere, Disney has the most incredible licensing team in the world. and uh they're taking full advantage of star wars it is it is um they they got an instagram bargain on their hands yeah well maybe not quite instagram all right

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head on over to huntress.com slash acquired or click the link in the show notes. Our huge thanks to Huntress. Let's move on to tech themes because I think this is a good segue. As I was thinking about this, what technology theme does this illustrate for you? I was sitting here and I was thinking, you know, this is our sixth episode. We should have saved this for episode seven. That would have been appropriate, but not as timely. Yeah. And the companies we've done so far for a show that's ostensibly about technology acquisitions.

We've done Pixar, Instagram, Twitch, B twitch bungee siri and now lucasfilm you could argue that that's that's five media companies and one technology company in in siri being the technology company and everything else being yes a technology company but also a media company. And what's interesting for me, you know, this highlights a couple of things, which we've mentioned before on this show. But one, you know, as a I don't know if I need to pay any royalties on this phrase to Andreessen Horowitz. They probably trademarked it, but like software is eating the world. Two, I actually like this phrasing of it better this is from an old version of the sequoia website um that they've since changed but they used to

have a section on there called um oh something like uh what we believe or like what we've learned over 40 years of venture capital or something like that and and uh one of the phrases was technology is the best amplifier of a business very rings true of paul graham's recent technology is a lever yeah exactly exactly and and if you think about technology as a lever um for it always has been for lucasfilm um oh my gosh ilm like they were doing things that were absolutely unheard of yeah yeah um so both within within lucasfilm itself but then also you know now as part of disney i mean there's the whole disney flywheel but like um i think one of the coolest parts about uh episode seven or your coolest you know sort of things that um business things that happened around it is uh disney didn't do a big marketing blowout budget for like who in

the world didn't know that the force awakens was coming out this past december what do you mean they didn't they didn't do a big marketing budget like there was more media for the force awakens than i've ever seen for a movie before yes and it was free from technology from social media uh so there's there's a tremendous amount of earned media there but a tremendous amount of earned media and of course they had a they had a marketing budget for for the film and i believe it was about 100 million dollars but it was on the low end for big tentpole movie releases. And actually, there are a few interviews with Bob Iger about this or stories. There's one in the Wall Street Journal and I think one in Fortune where he really pushed the company to be thoughtful about this and say, hey, do we need to spend a huge amount of traditional marketing on The Force Awakens?

Yeah, it's really interesting i mean i saw there's definitely some some paid media where or leveraging of internal assets where i mean at sports center the day before the movie came out there was a 15 minute segment in the middle of sports center on the the athletic training behind star wars as a gigantic star it was incredible and i'm like i that's a i need to watch very nice disney-owned property but i mean the the amount of like um memes that started from it of like people taking pictures of weird star wars products and then posting them on instagram and twitter and like there was that hashtag it was like only disney or something like that and i mean that red it was just they they they knew where people were and they took full advantage of their ability to spread content virally yep um second theme for me uh whichever i just talked about is is just the illustrating the power of the flywheel probably more so here than uh than technology being an amplifier because at the

core lucasfilm probably less so than than pixar and and and twitch um is Twitch is a technology business. I mean, it is. But the power of the flywheel, both within Lucasfilm and within Disney, is incredible here. Yeah. It's interesting. I was thinking, you know, a lot of times we talk about themes. We talk about the technology themes and other ones the acquisition themes this almost feels like a facebook style acquisition where disney is acquiring a portfolio of you know third-party brands that they really

are learning from but not not roping in in the wrong way they're leveraging the disney assets and the things that disney does best merchandising and a lot of this media distribution but they're not well actually here's the here's the best litmus test of all there was no disney uh logo logo at the beginning of star wars i mean we didn't have 20th century fox we didn't get the fanfare and God did my heart sink. But I'll take it as a compromise for we didn't get the castle. And it was of course I couldn't stop thinking about this during the movie of how good Disney

is at just letting this thing be what it is, contributing its own assets where they make sense and learning from it in a very slow, hands-off way. And the trend there is i mean that facebook is is the shining example so far of of um companies that know how to do really good kind of siloed acquisitions where you don't mess it up too much and like look at instagram from the

day it was acquired to today you know you look at whatsapp from the day it was acquired to today that is the theme of the modern acquisition that goes well and i think it's a major theme of this show um you know look at all the episodes we've done uh you know they've all the successful deals have all been this style of acquisition pixar instagram twitch bungee to an extent as we heard ed talk about you know they had their own office uh they were knocked down the walls um you know they kept their culture and then the the acquisition we did that hasn't gone so well is the one that didn't take this approach in siri yeah and i think to distill it down to a more catchy thing than that long version i articulated before

i think it's amplify quickly integrate slowly yeah because there's no question that disney is integrating pixar lucasfilm marvel look at the rides yeah absolutely absolutely i just never want to see a world where luke skywalker faces off against iron man right like we we better not see combining of universes i think we'll have to go back and revise this episode if that happens from the cdn yeah i never got batman versus superman all right on that note any other themes you want to add, Ben? I don't think so. Great.

What's your grade? I'm going to give it an A and not an A+, even though financially I think spectacular, but I think the thing that we will see in the future is, is Disney able to produce content like this without gigantic acquisitions from now on? Because there's only so many pieces of gigantic content houses that they can pick up. There was some stat, I was looking at the top 25 movies from last year and and like 21 or 22 of them were rebooted yeah they're very i guess star wars isn't a reboot but unoriginal storylines

unoriginal assets and you compare that with like 1985 and it was like three of the top 25 were sequels and you know we're seeing the the same thing happening in entertainment today that's happening elsewhere. And it's, you, in movies, you know, they're going to spend $100 to $200 million producing what's going to be for sure a big hit. And all the experimentation has moved to television. So that's the whole kind of like startup scrappy, we're going to try one little thing, small investment.

If it works, we'll double down. What does that look like for feature film content in the future? And when Disney runs out of Star Wars movies to make and runs out of Star Wars-like franchises to buy, how do they continue? And what does that flywheel look like after 2025? Yep. I was going to go down the same path.

I'm going to give it an A-, but for this reason, thinking about Lucasfilm versus Pixar, Lucasfilm is a depreciating asset. It was a mispriced one that disney correctly identified and they're going to be able to get a ton of juice out of it by feeding it through their flywheel and that'll go on and on and on for a long time um but fundamentally there's not a uh it is just content there's not a moat there you know um maybe there is an ilm um in their technology to the extent that that's differentiated. But the moat is Disney. And what's interesting is Pixar, I think, was different.

Their moat was people, which is slightly, arguably, more ephemeral than an organizational or a process or a technology mode. But Pixar for Disney, I think, has been an appreciating asset because the process that it brought, the ability to continually generate new, relevant, successful content um maybe they can apply that to lucasfilm um but i don't think lucasfilm itself is going to be that gift that keeps on giving what are you talking about indiana jones is going to be like yeah but that's just one way yeah just one more uh existing content franchise yeah like will lucasfilm the division of disney come up with an entirely new franchise and will they go spend 100 million dollars to make that movie that is the new lucasfilm franchise unlikely the question is will they be able to do it successfully within

walt disney studios yep and here's the question right i? I mean, financially, probably Lucasfilm in the medium term is going to be a better acquisition than Pixar. But in the long, long term, in terms of extending Disney's competitive advantage and moat around their flywheel to mix two metaphors. I feel like Pixar is going to add longevity, and Lucasfilm is like a turbo boost. Yeah. Yeah, I like that. Well, that's all I got. Me too. On that note, happy 2016, everybody. May the force be with you. Who got the truth? Is it you? Is it you? Is it you? Who got the truth now? We want to thank our longtime friend of the show, Vanta, the leading trust management platform.

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