Beyond Films, Here's How Disney Will Cash in on Lucas Deal
Special to CNBC.com
The surprise acquisition of Lucasfilm by Disney Tuesday will certainly shake up the film world, but the deal also looks set to have substantial ripple effects in other parts of the entertainment industry. (Read More: Disney to Buy Lucasfilm in Deal Worth Over $4 Billion)
Disney and Lucasfilm both have video game studios. Both have substantial licensing arms. And both have advanced technology divisions that lead the industry. The impact from those units, say experts, could make the deal's $4 billion price tag look like a bargain.
"Arguably, it's a cheap acquisition," says Wedbush analyst Michael Pachter. "I think as successful as Lucas has been in licensing toys and shirts and lunch boxes, Disney has made that into an art form and they'll be better at it."
With Disney's global retail reach, Pachter says he expects to see Star Wars (and Indiana Jones) merchandise become even more prevalent in the near- to mid-term. Additionally, he notes, Disney will be better able to exploit the Lucas properties in its broad media holdings, creating more licensing opportunities. (Read More: Iger, Lucas Weigh in on Disney's $4 Billion Lucasfilm Acquisition )
That's something Disney has said it intends to make a priority.
"In 2012 Lucasfilm's consumer products business is expected to generate total licensing revenue that is comparable to the roughly $215 million in consumer products revenue Marvel generated in 2009, the year in which we announced our acquisition," said Jay Rasulo, senior executive vice president and CFO of Disney. "With renewed film releases, and the support we can give the Star Wars property on our Disney-branded TV channels, we expect that business to grow substantially and profitably for many years to come." (Read More:After the Disney Deal, How Much Is Lucas Worth? )
In the video game sector, Disney and LucasArts (the Lucasfilm division that focuses on interactive entertainment) haven't been giant players lately. Disney's many efforts to become a top tier publisher in the past have fallen short of the bar set by publishers like Activision and Electronic Arts. LucasArts hit some highs in the last console generation, but has not developed a blockbuster hit in-house for many years.
Last year, Disney Interactive Studios (that company's gaming arm) laid off hundreds of employees as part of a shift away from console games to focus on social and mobile titles – and it has seen some notable success in that area, with hit apps such as "Where's My Water?"
The company indicated, in a conference call discussing the Lucasfilm deal, that it expects to continue that focus, even with the Star Wars license in house now.
"We're likely to focus more on social and mobile than we are on console," said Disney CEO Robert Iger. "We'll look opportunistically at console, most likely in licensing rather than publishing, but we think that given the nature of these characters and how well known they are, and the storytelling, that they lend themselves quite nicely, as they've already demonstrated to the other platforms."
That presents a potential hurdle, since most video game publishers are avoiding licensed content these days. New films from well-established franchises are sometimes the exception to that, but after EA's high-profile stumble with "Star Wars: The Old Republic" (which cost nearly $200 million to make, but has failed to establish a significant player base), there are questions about the brand's strength in the video game world.
Beyond its mobile gaming arm, though, Disney does have some very respected console developers on staff, including Warren Spector, who received the Lifetime Achievement award earlier this year at the Game Developer Choice Awards and oversaw the production of the upcoming "Epic Mickey 2: The Power of Two".
With the deal, Disney also picks up Industrial Light & Magic and Skywalker Sound—widely considered two of the best post-production facilities in Hollywood. Beyond the potential income from other studios utilizing their talents, they could also boost Disney's other film offerings—both live-action (such as films based on its Marvel Universe characters) and animated.
"Whatever we think of Pixar, I'm sure they would love those assets," says Pachter.
While Disney's announcement of a new Star Wars film in 2015 — and subsequent installments every two to three years afterward — captured the spotlight and piqued investor interest, even Disney acknowledges the earnings potential from other synergies found in the deal. And, it confesses, those potential earnings were not reflected in the valuation.
"Our Lucasfilm valuation is almost entirely driven by the Star Wars franchise, so any success from other franchises would provide upside to our base case," says Rasulo.
That conservative thinking makes sense, says Ric Marshall, chief analyst with GovernanceMetrics International. One thing you shouldn't expect to see from either side, though, is a lot of bold moves in the near future.
"This is a combination that is about combing proven entities," he says. "This is not about risk taking or creative ideas. This is taking two solid, established business, bringing them together and making smart business decisions around the combined company."