The Hollywood Economist

The Midas Formula

How to create a billion-dollar movie franchise.

The huge success of yet another Star Wars re-tread shows that George Lucas has not lost his touch. Aside from his six Star Wars episodes, Lucas has shaped the new Hollywood through Industrial Light & Magic, the state-of-the-art illusion factory that he founded in 1975. By Lucas’ reckoning, eight out of the 10 most profitable movies in history have been outsourced to ILM. He also created THX, his own brand of digital surround sound for both multiplexes and home theaters. Along with Steven Spielberg, Lucas deserves much of the credit for turning the cinematic experience into a visual and sonic amusement park for youth, but he did not invent what has now become the big studios’ Midas formula. That innovator was Walt Disney.

Disney put all the elements together back in 1937, when he made Snow White and the Seven Dwarfs. The picture was labeled a folly by the moguls who ruled old Hollywood because it was aimed at only a small part of the American audience, children. As history shows, Snow White became the first film in history to gross $100 million, demonstrating, among other things, the propensity of children to see the same cartoon over and over again. The movie was also the first to have an official soundtrack, including such songs as “Some Day My Prince Will Come,” that became a hit record. More important, Snow White had multiple licensable characters (the dwarves, the wicked witch) who took on long lives of their own, first as toys and later as theme-park exhibits. So, here was Hollywood’s future: Its profits would come not from squeezing down the costs of producing films but from creating films with licensable properties that could generate profits in other media over long periods of time.

The advent of computer-based technology has simply provided new ways of mining this El Dorado. The franchises that have raked in over a billion dollars from all markets (including world DVD, television, and toy licensing)—The Lord of the Rings, Harry Potter, Spider-Man, Finding Nemo, Star Wars, Shrek, The Lion King, Toy Story, and Pirates of the Caribbean—share most, if not all, of the nine common elements of the Midas formula:

1) They are based on children’s fare—stories, comic books, serials, cartoons, or, as in the case of Pirates of the Caribbean, a theme-park ride.

2) They feature a child or adolescent protagonist (at least in the establishing episode of the franchise).

3) They have a fairy-talelike plot in which a weak or ineffectual youth is transformed into a powerful and purposeful hero.

4) They contain only chaste, if not strictly platonic, relationships between the sexes, with no suggestive nudity, sexual foreplay, provocative language, or even hints of consummated passion. (This ensures the movie gets the PG-13 or better rating necessary for merchandising tie-ins and for placing ads on children’s TV programming.)

5) They include characters for toy and game licensing.

6) They depict only stylized conflict—though it may be dazzling, large-scale, and noisy in ways that are sufficiently nonrealistic and bloodless (again allowing for a rating no more restrictive than PG-13).

7) They end happily, with the hero prevailing over powerful villains and supernatural forces (and thus lend themselves to sequels).

8) They use conventional or digital animation to artificially create action sequences, supernatural forces, and elaborate settings.

9) They cast actors who are not ranking stars—at least in the sense that they do not command gross-revenue shares. (For his role in Spider-Man, Tobey Maguire received only $4 million and a share of “net profits,” which do not divert from the revenues flowing into the studios’ coffers.)

The success of the DVD has propelled the Midas-formula sequels to dazzlingly high earnings. A studio with a successful franchise now assumes it will sell over 30 million units per sequel, harvesting for itself between $450 million and $600 million. (When Shrek 2 sold a mere 30 million copies this year—and had 7 million in returns—it wiped out a good portion of DreamWorks Animation’s quarterly earnings.) The studios, looking at a half-billion dollars or so in the DVD take alone, often decide to produce multiple sequels at the same time, as New Line did with The Lord of the Rings and Disney is currently doing with Pirates of the Caribbean.

While this is an enormously high-stakes game—Disney’s double helping of Pirates of the Caribbean is budgeted at over a quarter of a billion dollars—even a single successful licensing franchise can put a studio in the black. A top Paramount executive pointed out to me, after Paramount gambled on the Lara Croft: Tomb Raider series and lost, that if Paramount had made Spider-Man instead of Sony Pictures, Paramount would be leading the studio pack instead of dwelling in last place. So, the studios, no matter how steep the losses when these movies bomb, must gamble to stay in the game. (Paramount’s consolation prize with Lara Croft was that it reduced most of the cost through  German tax shelters and other gimmicks.)

Why doesn’t every studio have a Midas-formula franchise? Much of the territory is already staked out. Disney controls the sequel rights to six animated Pixar films (even if Pixar decides to partner with another studio) and Pirates of Caribbean; Time Warner has both Harry Potter and Lord of the Rings; Sony owns Spider-Man; DreamWorks has Shrek; and, finally, there’s the indefatigable George Lucas and his Star Wars. The space at the playground is limited by available slots at the multiplexes on holiday weekends, by established long-term merchandising tie-ins, and by scarce shelf space at Wal-Mart and other stores. Succeeding at this game is anything but child’s play.