Acquired - Lucasfilm

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2:31Welcome 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, we would love for you to rate us on iTunes.

2:58doing 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 too would love love love for your flavor or do you 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 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. Ben, I am your father. Wait, that wasn't in the script. Cut. Alright. David, over to you first for acquisition history and facts. Oh man, Lucasfilm. Star Wars. What more can you say? So George Lucas, obviously founded Lucasfilm. 1971.

3:58in 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 gonna say, episode seven, we went over the holiday break to the theater in Corda Madera that George Lucas himself helped renovate for the... I believe for the prequels when they came out.

4:27It's a one-screen theater in Marin and it was amazing. 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 found Lucasfilm and the first project that the company does is American Graffiti which comes out in 1973.

4:53And then 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. And then since then, over the years, I've been pretty incredible.

5:16What 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 and 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.

5:46company in the product itself. I believe it started at Lucasfilm. Yeah, so I guess, 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.

6:16Photoshop. Did Adobe acquire Photoshop? Adobe acquired Photoshop. Yeah. Well, there's another episode coming. Yeah, too. I believe John, I believe John Knowles was an employee of ILM and one summer. I believe it was part of a movie project. I didn't read the full history online. I needed this piece of software, so we wrote it and then sold it to Adobe.

6:45Crazy yeah pretty incredible company. I think we know what's coming next for Disney among So those great organizations aside other things that the Lucasfilm contains Star Wars Indiana Jones ILM obviously Skywalkers 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 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

7:42Star 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 while he's there, he's talking with Bob Eiger, the CEO of Disney, and mentions to him...

8:10that he's thinking about retiring and maybe selling Lucas film. 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'd never dreamed of selling it to anyone else. Would have been pretty hard for him to sell it to anybody else. Yeah, yeah.

8:39It's interesting because I think that 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 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 between Lucas and the trust that he and He and Iger had that that eventually kind of led them here. Yeah Interestingly though, and I didn't realize this till we started researching this episode Disney obviously spends $1.4.1 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

9:32distribution rights to the original Star Wars movies were held by Fox, and still are. 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 in anticipation of the Force Awakens. You purchased.

10:01The the Star Wars collection. It was my hands in the air. Both of us that well, 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. I don't know. Nice. 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.

10:29Fully true. I had 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 capitalized. 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 that 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, 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.

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13:06Well, 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 cats like 1.4 billion or something 1.3 somewhere in there insane cash cow in frozen you know Disney learned from that acquisition without Messing with Pixar too much and that is a Bob Iger thing

14:05I mean, I think that when Bob Bagger 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 in the show notes. Awesome. Yeah, and on Twitter.

14:24It's amazing. Like, anybody who's ever been pitched to company and wondered, ooh, 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. I mean, if you look at Disney's web news right now, one half are from cable subsidiaries.

14:51from affiliate money that they get when you know which probably 90% is ESPN yeah 50% 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 link 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

15:45sustainably 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 doodling on about this So one I would it might my category so you said product 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. Can the productiness, the productiness that makes Disney and, or that makes Pixar and Lucasfilm what they are, and I guess you get through Marvel in there too. We might have to do a complete trilogy here at some point, do Marvel.

16:39Yeah, 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 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 I'm basically think the same thing. My 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 it's beautiful. There's Mickey's and Minnie's and ticker bells. Turns out the man was a good illustrator. Yeah. All throughout it but it's this amazing.

17:36document 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 and leads to more leverage over those suppliers which enable 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

18:25The 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.

18:50and 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.

19:19What 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, 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 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'll wear out of her 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 was acquiring as part of its new strategy going forward that there was a relationship and trust there from 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

20:26The 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 would have been Disney or no one, but it's hard to imagine this falling into place with a company other than Disney. Could you imagine Fox owning Star Wars? Well, this is just as crazy as five years ago saying, can you imagine Disney owning Star Wars? Yeah, but I mean, 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.

21:27Well, 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 film. Yeah, and like it's just not a company that produced films anymore. Is it defuncts? 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...

21:56You 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.

22:25call it 4.1 billion, but was that mispriced relative to the opportunity that Lucasfilm had? I think if the Force Awakens is any indication and I think that the not-so-secret secret in that I am just beyond excited about is we're not going to have to wait too long to see Star Wars land.

22:52All 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 gonna say there's a spoiler alert. There's a couple of 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 back. So sad. Well, you know, I saw him doing research for this. I think the second Star Wars spin-off 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 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

23:47It's made 1.78 billion on that's incredible. Yeah, recording this on January 14th That's including domestic and international not including anymore less than one month 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 and the number of lights say Kylo Ren lightsabers with with cross guards having a crossbow it's a cross guard is so stupid you're just gonna cut yourself it doesn't vote while when they're hot money come it's useful in the one of the battle scenes

24:44I think it does more harm. We can 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 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...

25:09the prequels. The first one, which it's hardly been speaking of these when really they don't exist, but the first prequel made a billion dollars, the second, eight, 48 million, the second, six, 49 billion. So total, the prequel trilogy made 2.5 billion on theater tickets. And we could see that alone from the Force Awakens.

25:34Easily before we get any distribution outside of theaters and so we're already looking at that the economist quotes that they they imagine that five 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 and the the Star Wars toasters and Like everything we're seeing everywhere you know Disney has the most incredible licensing team in the world. Yeah, and They're taking full advantage of Star Wars. They got an Instagram bargain on their hands. Yeah, well, maybe not quite Instagram. All right, listeners. Now is a great time to thank our longtime friend of the show, ServiceNow. If you are running a large enterprise, AI agents are likely spread across every team and deploying them is no longer the hard part.

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27:52So if you're trying to turn AI ambition into real business outcomes and make it work safely, securely at scale, go check out servicenow.com slash acquired and tell them that Ben and David sent you. Well, 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 seven. That would have been appropriate.

28:23Not 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, Bungie, Siri, and now Lucasfilm. You could argue that that's five media companies and one technology company in Siri being the technology company and everything else being. Yes, the technology company, but also a media company.

28:53and 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 to 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 what we've learned over 40 years of venture capital or something like that. And one of the phrases was technology is the best amplifier of a business. Very rings true of programs recent technology is a lever. Yeah, exactly, exactly. And if you think about technology as a lever,

29:48for it always has been for Lucasfilm. Oh my gosh, ILM. Like they were doing things that were actually unheard of. Yeah, yeah. So both 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 happened 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 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

30:42So there's there's a tremendous amount of earned the other but the 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 a hundred million dollars But it was on the low end for big tent pole movie releases and actually there's a few interviews with Bob I grew about this Or stories just one in the Wall Street Journal and I think one unfortunate 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?

31:15Yeah, it's really interesting. I mean, I saw there's definitely some some paid media where we're 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 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. I mean, the red, it was just, they knew where people were and they took full advantage of their ability to spread content viral. Yep. Second theme for me, whichever I just talked about, is just illustrating the power of the flywheel. Probably more so here than technology being an amplifier because at the core, Lucasfilm probably less so than Pixar and Twitch.

32:13is a technology business. I mean, it is, but the power of the fly we all, 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 thing that Disney does best merchandising 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

33:07Logo 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 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 today. You look at WhatsApp 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. Look at all the episodes we've done. They've all the successful

34:04deals have all been this 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 um you know they kept their culture and and then that 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 Iron Man, right? Like we better not see combining of universes.

35:00I think we'll have to go back and revise this episode if that happens. I've never got that man 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 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 and like 21 or 22 of them were rebooted Yeah, I guess Star Wars isn't a reboot but unoriginal story lines unoriginal assets

36:05and 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 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 startup scrappy we're going to 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?

36:58I was gonna go down the same path. I'm gonna give it a minus, 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 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...

37:28It is just content. There's not a mode there. Maybe there is an ILM 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. Their mode was people, which is slightly arguably more ephemeral than an organizational or a process or a technology mode.

37:57But 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 going to be that gift that keeps on giving. What are you talking about? Neanna Jones is going to be like...

38:26Yeah, 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 mode around their around mode 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

39:25Yeah. 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? All right listeners. Now is a great time to talk about one of our favorite companies, Statsig.

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