Disney uses the force

The Galactic Empire has been taken over by Mickey Mouse and he is not letting the power of the force let a single dollar escape his gloves.

In October 2013, The Walt Disney Company (NYSE:DIS) bought Lucas Films for $4 billion, adding the iconic Star Wars and Indiana Jones titles to its umbrella of premium entertainment assets. The first major release from this deal is about to hit cinemas in December.

The newest Star Wars film, called The Force Awakens, is predicted to earn just under $2 billion at the box office. This would make it the third biggest movie of all time behind Avatar and Titanic. It’s rumoured to have only cost the company $460 million to produce (including marketing, distribution etc). Merchandise for the movie is predicted to generate $3–5 billion in retail sales in the first year.

The figures are quite impressive but Disney don’t get to keep all of that.

Box office takings are shared between theatres, distributors and studios. As Disney are the producer and distributor, and considering the power of the Star Wars brand, it is expected they will get higher than the traditional 50% of the total box office but probably not too much.

Disney are also licensors rather than product manufacturers. They let third parties such as Lego and Hasbro (NASDAQ:HAS) use their characters in exchange for a percentage of total sales (rumoured to be 5–10%). The Star Wars brand has sold about $20 billion in merchandise since the film's initial release in 1977 showing how lucrative merchandise can be.

Disney has frequently seen merchandise sales topping the box office.

The hit animated movie Frozen, whilst at the same time annoying parents everywhere with its catchy songs, generated $1.3 billion at the box office but generated $5 billion in merchandise in the two years since its release. Whilst Pixar movies Toy Story and Cars generated about $10 billion in merchandise sales but earned only $1 billion and $462 million respectively at the box office.

Merchandise is also more profitable. Profit margins for the Consumer Products/Licensing division average around 30% compared to the studio entertainment division which is much lower at about 10%. The three quarters of 2015 reported so far give the consumer product division a profit margin of over 40%.

Disney is set to make a huge return on its $4 billion investment in Lucasfilms and could easily recoup over a quarter of the purchase price in profit from a single movie. This does not even include the extra profits it will receive for future movies and merchandise or the amount of new guests that will make their way to the company's parks and hotels when Star Wars themed lands eventually open inside Disneyland and Walt Disney World.

In Australia we are not lucky enough to have companies with Disney's vast library of intellectual property and brands. It's an example of how the power of quality intangible assets.

In the meantime, Wesfarmers (ASX:WES)-owned Target and Woolworths (ASX:WOW)-owned Big W will be hoping that the mania sweeping Star Wars fans will provide a good boost to their toy sales for the year. Village Roadshow (ASX: VRL)  and Amalgamated Holdings (ASX:AHD), owner of the Event Cinemas chain, will also be hoping it continues when the movie is released. There is plenty of $10 popcorn to be consumed and who better to eat it than a bunch of storm troopers and jedi impersonators. May the force be with them.

Staff members may own securities mentioned in this article.

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