Every company has a story. Learn the playbooks that built the world’s greatest companies — and how you can apply them as a founder, operator, or investor.

Episode 6: Lucasfilm

Episode 6: Lucasfilm

Tue, 19 Jan 2016 17:00

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.

Listen to Episode

Copyright © Copyright 2022 ACQ, LLC

Read Episode Transcript

Our presenting sponsor for this episode is not a sponsor but another podcast that we love and want to recommend called the founders podcast. We have seen dozens of tweets that say something like my favorite podcast is acquired and founders so we knew there's a natural fit we know the host of founders well David sender. Hi David. Hey, man, hey David. Thank you for joining us. Thank you for having me. I like how the group is together and then they say it's like the best curriculum for founders and executives. It really is we use your show for research a lot. I listened to your episode of the story of a key on marita before we did our Sony episodes is incredible primer. You know, he's actually a good example of why people listen to founders and to acquired because all of his greatest entrepreneurs and investors they had deep historical knowledge about the work that came before them. So like the founder of Sony, who did he influence Steve jobs talked about him over and over again if you do the research and I think this is one of the reasons why. People love both of our shows and there's such good compliments is on acquired we focus on company histories you tell the histories of the individual people you're the people version of acquired and where the company version of founders. Listeners, the other fun thing to note is David will hit a topic from a bunch of different angles so I just listened to an episode on Edwin land from a biography that David did David it was the third fourth time you've done Polaroid. I've read five biographies of Edwin land and I think I've made eight episodes of them because in my opinion the greatest such a puner to ever do it my favorite entrepreneur personally is Steve jobs and if you go back and listen to like a 20 year old Steve jobs he's talking about Edwin lands my hero. So the reason I did that is because I want to find out like I have my heroes who were their heroes and the beauty of this is the people may die but the ideas never do. And so Edwin land had passed away way before the apex of apple but Steve was still able to use those ideas and now he's gone and we can use this ideas and so I think what acquires doing what founder trying to do as well is find the best ideas in history and push them down the generations make sure they're not lost history. I love that well listeners go check out the founders podcast after this episode you can search for it in any podcast player lots of companies that David covers that we have yet to dive into here on acquired. So for more indulgence on companies and founders go check it out. Who got the truth. Is it you is it you is it you got the truth now. Is it you is it you is it you. City down say it straight another story on the way. We got the truth welcome to episode six 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 we would love for you to rate us on iTunes. Do a lot of research on podcasts recently and kind of how how the iTunes search algorithm works and if you like it and you think other people would like it to love love love. And likewise as always if you have feedback hit us up on Twitter at or leave a comment on the website. Yes. So this week we are I'd say we're timely we're probably a month late. We we're talking about the Disney acquisition of Lucasfilm and all of Lucasfilm's franchises. Then I am your father wait that wasn't in the script cut. All right David over to you first for acquisition history and facts oh man Lucasfilm. Star Wars what can you say so 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 and David where did you watch Star Wars and I was going to say episode seven. We went we went over the holiday break to the theater in court of Madera that George Lucas himself helped renovate for the I believe for the prequels when they came out. It's a one screen theater in Marin and it was amazing. There's a great vanity fair article about this theater and and the work that Lucas has done on it. Super fun so nineteen early seventies Lucas Lucas found Lucasfilm and the first project that the company does is American graffiti which comes out in 1973 and then the next the next film that the company produces 1977 is a new hope. Well I guess it was called Star Wars time we know it as a new hope on this podcast is just called Star Wars David. Alright Ben and and and then since then over the years I mean pretty incredible what this company has 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 on 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. The company in the product itself I believe it started at Lucasfilm. Yeah so I guess I you know I guess they just took two shots at acquiring Lucasfilm. Yeah exactly. Do you know what else came out of Lucasfilm. That is that is no longer part of the company. Industrial Light and Magic. Yes that's part of the company. This came out of Industrial Light and Magic specifically. I have no idea. Photoshop. Adobe? Not Adobe. Photoshop. What did Adobe acquire Photoshop? Adobe acquired Photoshop. Yeah. Well there's another episode coming. Yeah I believe John I believe John Knowles was an employee of ILM and one summer. I believe as part of a movie project. Didn't read the full history online. 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 so those great organizations aside other things that Lucasfilm contains. Star Wars, Indiana Jones, ILM obviously Skywalker Sound which is Film and TV Sound Production. Quite large video game publishing and development arm which now post acquisition has been mostly outsourced to EA by Disney. Animation arm licensing and then the other company to come out of Lucasfilm was THX. The Sound consumer sound company. Named for 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. While he's there he's talking with Bob Eiger the CEO of Disney and mentions to him that 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 year later October 2012 Disney announces the acquisition $4.1 billion. Ooh, pretty penny. And Lucas gives quotes in interviews saying he would never dream to sell anyone else. Would have been pretty hard for him to sell to anybody else. Yeah. Yeah. It's interesting because I think we'll get a little bit into Bob Eiger but I mean there's fascinating history there. There's a 20 year old relationship where Bob Eiger was working at ABC and actually Green Lit 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 good will between Lucas and the trust that he and Eiger had that eventually kind of led them here. Yeah. Interestingly though and I didn't realize this until we started researching this episode Disney obviously spends $4.1 billion to acquire Lucasfilm and acquires a lot within that all the properties we just mentioned ILM and Skywalker Sound and whatnot that hadn't been spun out. But the distribution rights to the original Star Wars movies were held by Fox and still are. 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 there's movies or stuff. Raise your hand if in anticipation of the Force Awakens you... Purchase. I don't purchase the Star Wars collection. It was the behinds in the air. Both of us. I went to watch it on iTunes and the only way that I could do it was like some massive three pack collectors edition really expensive digital download. I mean they... I sprung for the six pack on Amazon. Oh nice. So that when I bought that through Apple on the Apple TV is that through Fox? Am I going to Fox? Watching? We watched 4, 5 and 6 again. Actually this isn't fully true. I watched the D-specialized editions but also I'm not going to get into that problem. But yeah that's crazy. So Fox was actually capitalizing on Fox. Yeah so Fox? I got to imagine Fox made a significant amount of money in the lead up to the Force Awakens. That doesn't include... Do you know if that includes merch from those original characters? Like if you're selling... If they're selling an episode for Han Solo toy. Yeah that's a good question. I think this is on the Wikipedia article about the acquisition but... David's giving me homework. Yeah giving us all homework. I believe I read in there that at least for episode four. I think there's a special deal for episode four 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 cat'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 they're the ecosystem thinking and how everything goes and everything. We should link to this online and Twitter. We'll put them in the show notes. Awesome. Yeah and on Twitter. It's amazing. Like anybody who's ever been pitched to company and wondered what's the lock in, what are the network effects? 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. If you look at Disney's revenues right now, one half are from cable subsidiaries from affiliate money that they get when you're here. Which probably 90% is ESPN. Yeah 50% like a little over 50%. ESPN is a quarter of Disney's revenue and if you look every year, the court cutting money is going away. Like that feature 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. He gave a lot of autonomy to all the individual groups. So the way that Pixar was left alone, the way that Lucasfilm was left to do his 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 the road in the future. Yeah, you're raising a couple interesting themes that I've been noodling on about this. So one, I would, my category, so 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 sort of reverse infection thing like the Apple to Next. Like can the productiness, the productness that makes Disney and, or that makes Pixar and Lucasfilm what they are and I guess you could throw Marvel in there too. We might have to do a complete trilogy here at some point and do Marvel. Yeah, the... Interestingly, just almost about the same price that Disney paid for Marvel as they did for Lucasfilm. Yeah, we have to do an episode on that. So at the end of the day, I think it's product that they get this product but the ultimate thing that will prove it, this spree of acquisitions and this business strategy was successful as can Disney reacquire that muscle to build their own incredible content of all types henceforth? Yeah, and you know, I think I basically think the same thing. My frame on it that I was going to say 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 Mickey's and Minnie's and Tigermann's. 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'm 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 leads to more leverage over those suppliers 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, you know, 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, content and franchises at the center and then the parks and the rides and television and music and merchandising and publications, you know, comic books and everything flowing through that system and so to me Star Wars is like just a great, juice is probably the wrong word but like a great card to put on that track. Yeah, I like that way thinking about it too. All right, next section, Techno themes. What would have happened otherwise? Yeah. Which we almost skipped but I think could be interesting here. Yes, I'm not sure David and I totally agree. What would have happened otherwise? So Lucas sat on this for I don't know how long. From 40 years. Yeah, but from not he started saying in 97 no plans to make the sequel trilogy, you know, I've made the original set 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 and he's also been saying glad he didn't. How are the duck and not only that saying that he wouldn't but saying that he wouldn't license into anyone else either and you know, I think that maybe that's just like that will wear out over time and this thing has too much value not to go back and re milk 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 watch 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. I don't think it would have been Disney or no one but I it's hard to imagine this falling into place with a company other than Disney. Can you imagine Fox owning Star Wars? Well the one you would have I mean this is that's just as crazy as five years ago saying can you imagine Disney owning Star Wars. Yeah but I mean like there was Disney and Lucasfilm have always had a tight relationship. I mean there's the Star Towers ride there's the Indiana Jones rides you know. Is it possible that 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 I.M. 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 if you think about acquisitions as a form of investing which they should be. It's just one that you know most companies tend to be pretty bad at. You know at the core of investing is about identifying it's about identifying mispriced assets. And so if you if you're Disney Bob Eiger 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 that Lucasfilm had. I think you know if the force awakens is any indication and you know you 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 spin off movies that they've already announced and everything coming down the pipe. I don't know I mean this is a part where I'm going to say there's a spoiler alert. So there'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 that. So sad. Well you know the I saw in doing research for this I think the second Star Wars spin off movie that Disney's going to make is a Han Solo Chronicle. Yeah the first being Rogue One and the second being the first of the Chronicles following Han Solo. Man. So that's this kind of amazing I mean we've got five films queued up before 2020. I mean let's let's review the finances so far from the force awakens. So already it's made 1.78 billion on that's incredible. Yeah. Recording this on January 14th that's including domestic and international not including any more. Less than one month. Yeah. Just box office receipts on a $200 million 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. 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. The number of lights say Kylo Ren lightsabers with cross guards and crossbow it's a cross guard so stupid you're just going to cut yourself it doesn't vote while when they're hot these. What it comes it's useful in the one of the battle scenes. I think it does more harm it's like we can we can have a whole different podcast about this. That could be our next podcast. All right. So we're trying to get to 4.1 billion right we're already 1.78 of the way there minus the 200 they spend on it. I mean it's not quite like that but if you want to pencil it out if you compare that to all of the the prequels the first one which it's hard even speaking of these when really they don't exist but the first prequel made a billion dollars the second 848 million the second 649 billion. So total the prequel trilogy made 2.5 billion on on theater tickets and like we could see that alone from the force awakens. Easily. Before we get any distribution outside of theaters and so we're already looking at that the economists quotes that they they imagine that 5 billion and Star Wars license products will be sold in 2016. And I don't you know judging by your experience at Disney World and the the Star Wars toasters and like everything we're seeing everywhere. Disney has the most incredible licensing team in the world. And they're taking full advantage of Star Wars is is they got an Instagram bargain on their hands. Yeah. Well. Maybe not quite in Siriam. So let's move on to tech themes because I think this is a good a good segue. You know as I was thinking about this you know 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 7 that would have been appropriate but not as timely. And the companies we've done so far for a show that's ostensibly about technology acquisitions we've done Pixar Instagram Twitch Bungie 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 the technology company but also a media company. And what's interesting for me you know this highlights a couple things which we've mentioned before on this 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 that they've since changed but they used to have a section on there called something like what we believe or like what we've learned over 40 years of venture capital or something like that and and one of the phrases was technology is the best amplifier of a business. Hmm very rings true of programs recent technology is a lever. Yeah exactly exactly and and if you think about technology as a lever for it always has been for Lucasfilm. Oh my gosh I L.M. like that they were doing things that were actually unheard of. Yeah yeah. 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 I think one of the coolest parts about episode seven or coolest you know sort of things that business things that happen around it is 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 I 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. So there's there's a tremendous amount of earned media there but they had a tremendous amount of earned media and of course they had a they had a marketing budget for the film and I believe it was about a hundred million dollars but it was on the low end for big tent pole movie releases and actually there are a few interviews with Bob Iger about this or stories just 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 like traditional marketing on the Force Awakens. Yeah it's really interesting I mean I saw there's definitely some some paid media where or or leveraging of internal assets where I mean at sports center the day before the movie came out there was a 15 minute segment the middle of sports center on 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 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 is like only Disney or something like that and I mean that read it was just they they they they they knew where people were and they took full advantage of their ability to spread content by really. Yep. Second theme for me whichever I just talked about is is just illustrating the power of the flywheel probably more so here than then technology being an amplifier because at the core Lucas film probably less so than then Pixar and and and Twitch is is is a technology business I mean it is but but the power of the flywheel both within Lucas film 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 thing 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 logo at the beginning of Star Wars I mean we didn't have 20th century Fox we didn't get the fanfare and like God did my heart sink but I'll take it as a compromise for we didn't get the castle and it was it was I of course I couldn't stop thinking about this during the movie of how good Disney is at at just like 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 the shiny example so far of 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 fired to today you know you look at what's out from the day it was acquired today that is the theme of the modern acquisition that goes well and I think it's a major theme of this show because all the episodes we've done you know they've all the successful deals have all been the style of acquisition picks our Instagram Twitch bungee to an extent as we heard Ed talk about you know they had their own office they were knocked down the walls you know they kept their culture and then 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 right yeah absolutely absolutely I just never want to see a world where a Luke Skywalker faces off against no go right like we better not see combining of universes I think we'll have to go back and revise this episode if that happens yeah I never got that man versus Superman all right on that note any other themes you want to add been I don't think so great what's your grade I'm gonna give it an a not an a plus even though financially I think spectacular but I think the thing that we will see in the future 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 status looking at the top 25 movies from last year and like 21 or 22 of them were rebooted yeah very like starwriters and reboot but unoriginal story lines 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 same thing happening in entertainment today that's happening elsewhere and it's you you in movies you know they're gonna spend one to two hundred million dollars producing what's gonna be for sure a big hit and all the experimentation has moved to television so that's the whole kind of like start up scrappy we're gonna try one little thing small investment if it works will double down like 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 fly we'll look like after 2025 yeah I was gonna go down the same path I'm gonna give it a minus for but for 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 gonna 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 but fundamentally there's not a it is just content there's not a mode there you know maybe there is a not in I.L.M. in their technology to the extent that that's differentiated but the mode is Disney and what's interesting is Pixar I think was different you know their their mode was people which is slightly arguably more ephemeral 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 maybe they can apply that to Lucasfilm but I don't think Lucasfilm itself is gonna be that gift that keeps on giving what are you talking about Indiana Jones is gonna be like yeah but that's just one way just one more existing content franchise yeah like will Lucasfilm the division of Disney come up with an entirely new franchise and will they go spend a hundred 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 mean financially probably Lucasfilm in the medium term is gonna be a better acquisition than Pixar and but in the long long term in terms of like extending Disney's competitive advantage and and motor around their around motor around their flywheel to mix two metaphors I feel like I feel like Pixar is gonna add longevity and Lucasfilm is like a it's like a like a turbo boost yeah yeah I like that well that's I got me too on that note happy 2016 everybody may the force be with you