How Star Wars is really making money

I sat down with journalist Manuel Koch to talk about hollywood studio revenues and how Star Wars is really raking it in. We did the interview in German for his news outlet and the below is a translated transcript of our conversation.

Box office numbers are tricky and often misleading for the industry outsider. Half of the revenues the film is generating remains with the exhibitor, the movie theatre operator. Before the producer will receive any money from the exploitation of the film the distributor has to be paid and so on and so on. That means that the net receipts for the producer or rights holder are much, much lower than what we read in the papers.
The original interview in German: Kinokassen klingeln: So verdient Star Wars Geld

Manuel Koch: Welcome to Wirtschaft TV straight from Berlin. Our guest today is Tobias Jaeger. He is an investment banker in the film and entertainment industry. Nice to have you!

Tobias Jaeger: Thanks for having me.

Manuel Koch: “May the Force be with You” is our topic today, the “The Force Awakens” is the latest installment of the Star Wars franchise and has made over a billion dollars to date. Did the film break any other records?

Tobias Jaeger: Yes, the film is an absolute record breaker. Not only has it broken the record for the fastest billion at the box office but it has also pushed away “Titanic” from the throne of being the most successful movie of all times. But you have to take a close look at the box office numbers. This film, however, has it all: most screens booked, biggest IMAX release ever, but the most remarkable is that these are the numbers before the movie has hit China. It hasn’t even started in China yet. It’s absolutely staggering how this film went through the roof.

Manuel Koch interviewing Tobias Jaeger from AXIOM Venture Capital

Manuel Koch: The film has also had the best opening weekend of all times. It made roughly $500 million in the first four days after its release. What does that mean economically?

Tobias Jaeger: Box office numbers are tricky and often misleading for the industry outsider. In the film and television industry, you differentiate between independent and studios. There are about 5–6 studios in the world that can make such a film all by themselves. Doing it themselves means making a huge upfront investment into the project. So when you look at the records the film is breaking after the release you have to keep in mind the huge investment that was made up front. The box office can be a misleading indicator of the commercial success of the film. Half of the revenues the film is generating remains with the exhibitor, the movie theatre operator. In the case of this film, it means it has been a good one for the exhibitors. Before the producer will receive any money from the exploitation of the film the distributor has to be paid and so on and so on. That means that the net receipts for the producer or rights holder are much, much lower than what we read in the papers. The studios profit from the fact that they own most of the value chain — with the exception of the exhibition.

A couple of years ago Disney had to pay $4 billion for the whole shebang and they are definitely still in a phase of recoupment of their investment.

Manuel Koch: So a lot of the record-breaking revenues have to be shared? Disney was the producer of the film. How come Disney stock is now not going through the roof?

Tobias Jaeger: There are several reasons for that. Foremost, most informed investors remember the huge price tag Disney paid for the Star Wars franchise. They had to pay for all the rights to the Star Wars name and then some. A couple of years ago Disney had to pay $4 billion for the whole shebang and they are definitely still in a phase of recoupment of their investment. So this obviously puts a lot of pressure on the company and while it’s a hit driven business, not all releases live up to that expectation.

Tobias Jaeger from AXIOM Venture Capital explaining the financial models of Hollywood studios

Manuel Koch: So how about the merchandising? It seems that has become even more meaningful than the film itself?

Tobias Jaeger: Yes, that’s right. Merchandising is of the utmost importance when you think of a property like Star Wars. When you look at it now and see that it has made a billion bucks at the box office you can safely assume it’s just the start of the money flow. It will be released on Blu-ray and DVD, on digital, it will be on one of the SVOD, the subscription video on demand and TVOD, transactional video on demand or DTO, download to own. Just the film alone has several great revenue streams. They will be likely smaller than the theatrical revenues but there is a long tail. That is, of course, great but also tricky for the studios. Their huge investment is upfront but the revenues are flowing in over time. There is a rule of thumb that after 7 years there is a small uptick again when, for example, the new installment of the franchise is released and people re-watch the previous ones or a new generation of viewers is discovering the film again. But coming back to the question, yes merchandising is a huge driver of revenues. I brought an example here from Toy Story, done by Pixar, which Disney also bought for $7.4 billion dollars in 2006. Back then Toy Story 3 made about $500-$600 million dollars in home entertainment and about $1 billion at the box office. When you look at the licensing revenues, though, like all the merchandising, the bedsheets, the underwear, the toys, you name it, you can see it’s a clear multiple of the box office and home entertainment together. It’s pretty safe to assume that all the revenues from Toy Story 3 have been a huge contribution to the recoupment of the purchase price of Pixar for Disney.

These acquisitions are always pricey but if managed right, like I think Bob Iger is doing, they can be very rewarding, as you can see from the example of Star Wars.

Manuel Koch: So how can investors directly participate in such a success?

Tobias Jaeger: The shares of these companies are freely available, of course, so anyone can go out and buy Disney shares but you have to pay attention to the corporate structures of these entertainment companies. Disney owns some great companies but the performance varies. Disney, for example, has been on a shopping spree over the last years and they bought a lot. After Pixar, they also bought Marvel with its 8000 characters. These acquisitions are always pricey but if managed right, like I think Bob Iger is doing, they can be very rewarding, as you can see from the example of Star Wars. Investing in single properties is also possible but a lot more complex. If an investor is interested in just investing into the merchandising, there are of course also publicly traded companies that work primarily in that field.

Manuel Koch: Tobias Jaeger, film and entertainment investment banker, thank you for being here and sharing these insights with us. I hope we could fuel your interest for the movies and the entertainment industry. Have fun watching — whether on the couch or at the movies. Until next time at Wirtschaft TV.


The interview was originially recorded on January 11, 2016.

About Manuel Koch

Manuel Koch from German business and consumer news network Inside Wirtschaft

Manuel Koch is a German TV Host, Stock Market Expert (New York Stock Exchange, German Stock Exchange Frankfurt), Media Coach, and CEO at Inside Wirtschaft. He produces content for his clients like Handelsblatt, Hapag-Lloyd or the Vienna Stock Exchange.

About Tobias Jaeger

Tobias Jaeger, Managing Partner of entertainment investment bank AXIOM Venture Capital

Tobias started his first own firm during his studies at Maastricht University in the Netherlands and has lived, worked, visited, and studied in over 43 countries on 4 continents. His global ambitions and travels are matched by fellow members of the Sandbox Network and the TEDx organization. Tobias loves to connect people from around the World to make great things happen. Previously he has done so at Business Associates Europe, SAP AG, StrategosPoker, Aramark, and entrepreneur academy. Today he is leading AXIOM Venture Capital, a boutique investment bank focussed on the media & entertainment industry.

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