Disney saved more than $500 million on ‚Star Wars‘ by filming in the U.K. ©2023 Lucasfilm Ltd. & TM. … [+]
Disney saved $570.4 million on the cost of making its Star Wars saga thanks to an ingenious and perfectly legal maneuver which led to seven of the productions generating a $1.04 billion profit at the box office according to new research.
Disney rocked the entertainment industry in October 2012 when it announced that it had agreed to pay $4 billion for Lucasfilm, which owns the rights to the sci-fi series as well as Indiana Jones and sword and sorcery story Willow. The blockbuster payment was actually only the entry ticket as Disney also needed to breathe new life into all three franchises and that didn’t come cheap.
Willow was the only one which was largely virgin territory as it had been left moribund since it debuted on the big screen in 1988. In contrast, the fourth instalment of Indiana Jones in 2008 was so badly panned by critics that it took a lot to whip up interest in the ageing adventurer again. There was also a disturbance in the force for Star Wars as its prequels in the early 2000s failed to become as beloved as the original trilogy several decades earlier.
Disney decided to reunite the original cast of Carrie Fisher, Mark Hamill and Harrison Ford with newcomers Daisy Ridley and John Boyega in a movie directed by J. J. Abrams who was riding high after rebooting the Star Trek series. It had all the hallmarks of an epic before the cameras even started rolling.
Under Disney, Mark Hamill returned to ‚Star Wars‘ after more than three decades © 2022 Lucasfilm … [+]
Disney knew it wasn’t likely that the profits from that movie alone would cover the cost of buying Lucasfilm but it would be easier to pull it off if it released a string of films. This led to it copying the format that had been so successful for its Marvel Cinematic Universe (MCU) series of super hero movies. Disney didn’t just plan a new trilogy of Star Wars movies but also interconnected spinoffs based on some of its most memorable characters.’
However, although many Marvel characters had starred in their own animated shows and comics for decades, this wasn’t the case with Star Wars. It made the spinoffs risky prospects even though Disney needed them to build a Star Wars universe and increase its hopes of making a profit on its investment.
To mitigate this risk, Disney also needed what is known in the movie industry as a tentpole, a big-budget movie which makes enough income to compensate a studio for its less profitable productions. Disney’s new instalments in the main Star Wars series fit that description as they seemed to be the safest bets.
Disney still didn’t leave anything to chance and, as this report revealed, no expense was spared on Star Wars: The Force Awakens, which kicked off Disney’s new sci-fi series. Its colossal $641.3 million (£452 million) cost coupled with the spending required for a string of sequels and spinoffs left Disney with the prospect of a bill running into billions of Dollars. Disney’s chief executive Bob Iger used every trick in his spell book to minimize this and it had a magic touch.
Instead of filming its new Star Wars movies in the United States, where most of the MCU movies had been made, Iger signed a deal to bring Disney’s Star Wars productions to the historic Pinewood Studios in the United Kingdom. It was one of the best deals of his career.
That’s because studios filming in the U.K. benefit from the government’s Audio-Visual Expenditure Credit which gives them a cash reimbursement of up to 25.5% of the money they spend in the country. It is paid from U.K. taxpayers‘ money and comes come with a catch.
To qualify for the reimbursement, productions must pass a points test based on factors such as how many members of the crew are from the U.K. and how much of the post-production work is done there. Furthermore, at least 10% of the core costs of the production need to relate to activities in the U.K. and in order to demonstrate this to the government, studios usually set up a separate production company there for each picture. It lifts the curtain on precisely how much it costs to make movies and streaming shows.
The companies usually have code names so that they don’t raise attention with fans when filing permits to film on location. Tallying the company names with the productions they are responsible for requires deep industry knowledge which my colleague and I have built up over nearly 15 years. We are the only reporters worldwide who specialize in covering the financial statements of U.K. film production companies for national media and we have reported on them for more than 10 leading titles including The Times of London, The Guardian, The Daily Telegraph, The Independent and the London Evening Standard.
The cost of making movies in the U.S. is usually a closely-guarded secret as studios tend to combine their spending on individual pictures in their overall expenses and don’t itemize the budgets of each one. Like most studios, Disney doesn’t typically comment on the cost of individual movies or streaming shows and in this case it didn’t need to.
That’s because the production companies have to file annual financial statements which shine a spotlight on the world of film finances as they reveal the total production costs, the headcount, salaries and even the employees‘ social security payments.
Crucially, the financial statements also show how much of their costs were reimbursed and the total banked by Disney for Star Wars has never before been revealed. Until now. Analysis of more than 50 sets of filings reveals that the seven Star Wars productions made in the U.K. received a total of $570.4 million (£430.7 million) with the biggest single sum being the $129.3 million (£101.2 million) paid for the first and second seasons of spinoff show Andor.
The combined production budget of Disney’s U.K. ‚Star Wars‘ productions
The funding process differs slightly from production to production but generally they all follow a similar model which begins at the very start.
A Hollywood studio buys a script from a screenwriter and green lights a show or movie about it. If the studio decides to make it in the U.K. it then sets up a subsidiary production company there which acquires the script from its U.S.-based parent.
Acquiring the script gives the U.K. company the rights to the make a show or movie about it and the Hollywood studio pays it a small production services fee. The terms of the reimbursement state that each company must be „responsible for pre-production, principal photography and post-production“ as well as delivery of the completed show or movie. Then comes some financial wizardry.
If the U.K. company makes a profit, the financial benefit from the U.K. government comes in the form of a reduction to its tax bill. However, if it makes a loss, it receives a cash reimbursement in the form of a tax credit so studios fund the companies in a way which engineers this.
As shown in the diagram below, the studio buys the rights to the production from the U.K. company but only gives it approximately 74.5% of the projected cost. The remaining 25.5% is provided by the studio in the form of a loan. The loan and the revenue from the sale of the rights gives the U.K. company 100% of the production budget and this sets the scene for the cash reimbursement.
How the U.K.’s film tax credit works
Loans are not counted as revenue because they need to be repaid. The U.K. company therefore makes a loss equivalent to around 25.5% of the budget. That is when the U.K. government steps in as it reimburses this loss. As the amount of the reimbursement is equivalent to the loan that the company owes its parent, the cash can be passed to the Hollywood studio as repayment. Thanks to these twists and turns, U.K. taxpayers have covered 18% of the $3.2 billion (£2.4 billion) costs of seven Disney Star Wars productions thereby reducing the studio’s net spending on them.
The maneuvers leave the U.K. production companies with a very small net profit or loss which isn’t equivalent to a conventional bottom line as it isn’t generated by external revenue. The U.K. companies are entirely owned by the Hollywood studio so their bottom line simply refers to money which remains in its right hand rather than its left or is owed by one to the other.
It is important to stress that this profit is booked by the production company which bears the costs of making the movie but does not receive the revenue from theater ticket sales which typically comes to around 50% of the total. Likewise, revenue from merchandise and home entertainment, including streaming subscriptions, also goes directly to the studio. Conversely, marketing costs are not shown on the financial statements, as they tend to be covered directly by the studio.
The financial statements are just for the company which makes the show or movie and the cash that the studio pays it for the rights is shown as the revenue. Crucially, the company’s expenses are equivalent to the total production costs. The biggest component of them is usually shown on the financial statements under the category of cost of sales whilst the administrative expenses largely represent fees to auditors as well as a loss or gain from currency conversions.
If the studio’s share of theater takings doesn’t cover the net spending by the production company then the show or movie makes a loss in its theatrical run. If the share of the takings exceeds the net spending then the production makes a profit, which is precisely what happened with all of Disney’s Star Wars shows and movies except for 2018 spinoff Solo, as this report revealed.
The combined profit at the box office for the seven productions comes to $1.04 billion but would have declined to $465.8 million had it not been for the reimbursement. It didn’t just pay off for Disney.
The latest data from the British Film Institute (BFI) shows that in 2019, every $1.31 (£1) of reimbursement handed to studios generated $10.88 (£8.30) of additional Gross Value Added (GVA) benefit for the U.K. economy. It led to a total of $10.1 billion (£7.7 billion) in GVA being generated by the fiscal incentives for film in 2019.
Released in December 2021, the BFI’s triennial Screen Business report showed that between 2017 and 2019, the fiscal incentives to studios generated a record $17.7 billion (£13.5 billion) of return on investment to the UK economy and created more jobs than ever before. Filming in the U.K. also drives spending on services such as security, equipment hire, transport and catering.
In 2019, this spend led to the creation of 37,685 jobs in London and 7,775 throughout the rest of the U.K. The report added that when the wider impacts of the film content value chain are taken into consideration, 49,845 jobs were created in London in 2019 and 19,085 throughout the rest of the U.K.
‚Star Wars‘ productions such as ‚Andor‘ were filmed in the U.K. ©2022 Lucasfilm Ltd. & TM. All … [+]
Despite Hollywood being gripped by strikes for more than six months in 2023, the U.K. economy still got a magic touch from the fiscal incentives. Foreign studios contributed around 77% of the $1.8 billion (£1.4 billion) spent on making films in the U.K. in 2023 according to the BFI. There is more to come as Disney announced in August last year that it plans to invest $5 billion over the next five years in films, television and streaming shows made in the U.K. and Europe.
Disney isn’t just one of the biggest spenders but also one of the biggest beneficiaries. In addition to making seven Star Wars productions in the U.K. the studio also chose it as the location to film 13 live action remakes of its animated films as well as 17 Marvel movies and shows. More are on the way as the upcoming reboot of the Fantastic Four recently wrapped filming in the U.K. too. Each one of them gets up to 25.5% of its costs covered and that will continue to happen as long as the U.K. legislation remains in place.
This is why the decision to shoot in the U.K. is one of the greatest business decisions of Iger’s career. Indeed, the U.K. benefits are so lucrative that in October last year it spurred California’s governor Gavin Newsom to more than double the state’s film and tax incentives in order to tempt more movie studios to film there. In a bid to attract them Newsom proposed to expand the annual tax credit pool from $330 million from to $750 million in the January budget.
Even though the U.K. reimbursement boosted Disney’s bottom line by nearly $600 million it still wasn’t enough to give the studio enough profit at the box office from its Star Wars films to cover the cost of buying Lucasfilm as this report revealed. It will get another shot in 2026 when Star Wars returns to theaters with the release of The Mandalorian & Grogu which follows up the hit streaming series it is named after.
Last year it was reported that British film producer Simon Kinberg has also been hired by Lucasfilm to develop the next trilogy of films in the Star Wars saga. If he films them in his home country then breakeven might not be far, far away.
