Looking at this LEGO Star Wars collection, I realized that the ideas of LEGO and Star Wars were incepted into my brain long ago and I passed the ideas on to my son.
Unsurprisingly, this outcome was not random. The minds behind LEGO (the Danish Christiansen family) and Star Wars (George Lucas) created products that were aimed at children but still appealing to older age groups.
Launched in 1999, LEGO Star Wars has been very lucrative and the collaboration will likely thrive for decades to come.
To understand why, let’s look at:
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Star Wars and the Greatest Hollywood Deal Ever
- Lego: Great Product with Great Marketing
- The Rise of LEGO Star Wars
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Star Wars and the Greatest Hollywood Deal Ever
In 1973, George Lucas pitched the idea of a “space western” film series to Fox. The studio offered Lucas $500k to make the film. He countered with a directing fee of $150K — a 70% cut on the base pay — in exchange for certain film rights.
That film series was Star Wars and the fruits of the negotiation laid the foundation for one of the greatest film franchises ever and Lucas’ ~$10B fortune. Many consider it the greatest deal in Hollywood history (or, technically, the worst deal ever for Fox).
The lead-up to Lucas making Star Wars is a classic “bet on yourself” story and began in 1967: that year, Lucas graduated from the University of Southern California (USC) and co-founded a production firm called American Zoetrope with his buddy Francis Ford Coppola (yes, that one). In 1971, Lucas released his first film THX 1138, a dystopian sci-fi film that was an extension of a film school project.
The reception for THX 1138 was meh and the flop put American Zoetrope into debt.
As a financial lifeline, Lucas urged Coppola to direct a film for Paramount called The Godfather (yes, that one). The 1972 classic mafia film was a commercial and critical smash hit.
It was now Coppola’s turn to give Lucas advice.
While the pair created American Zoetrope to pursue unique projects shunned by the traditional Hollywood system, the success of The Godfather showed that it was possible to create mainstream blockbusters with artistic merit.
Lucas launched his own production company (LucasFilms) and pitched two projects to various Hollywood studios:
- American Graffiti: a coming-of-age tale based on Lucas’ youth in 1960s California.
- Star Wars: A 9-part space western adventure.
Inspired by serialized space westerns like Buck Rogers and Flash Gordon — as well as Frank Herbert’s Dune book series — Lucas was set on creating a multi-film epic for his space western idea. However, science fiction was a shaky genre at the time. Why? Ed Wood’s 1959 film Plan 9 From Outer Space was considered the worst film ever and turned studios off of sci-fi projects for years.
Although Universal initially rejected the idea of a space epic, they did agree to distribute Lucas' American Graffiti. The movie was released in 1973 and went on to become one of the top-performing films in Hollywood history (it made $115 million on a budget of $750k).
With this success, Lucas had significant leverage to pursue his sci-fi western.
Tom Pollock — Lucas’ attorney at the time and later chairman of Universal Pictures — told Deadline about the Star Wars negotiation. It’s a long excerpt but worth reading to understand the interesting deal structure:
[Universal passed on Star Wars] before American Graffiti came out. Jeff Berg, who was George’s agent, took the treatment to Alan Ladd Jr at Fox and Laddie said “yes, I’ll make this”, and they negotiated the outline of the deal.
George got $50,000 to write, another $50,000 to produce, and $50,000 to direct. There were no contracts yet, but that was the deal. So American Graffiti came out and it was a huge hit. It was made for $750,000 and made over $100 million.
Jeff says, “George, I can get you a lot more than $150,000. We can get $500,000, maybe a million.” George said, “Look, I’m going to have a lot of money now from American Graffiti. What I really want from the deal we’re making at Fox is, I see this movie in multi-parts.”
George and I have had a disagreement over whether it was six or nine parts, but this is the way that he always saw it. It was always envisioned as this serial.
What he said was — and you have to remember that George has an innate suspicion of Hollywood studios — “the worst thing that can happen to me is that I couldn’t make the sequel, or I couldn’t do the rest of the series if the first one worked. So you have to make sure that I have the ability to do that.”
That part fell on me. So instead of taking more money or other things, he used the success of Graffiti for that. I want to emphasize that none of this was because he knew that Star Wars was going to be so successful. It was all about, “I don’t want to not have the ability to make the movies I want to make,” and have it get lost in what today is called development hell.
So in the negotiations…we came to an agreement that George would retain the sequel rights. Not all the rest of the stuff [like merchandising rights] that came later, mind you; just the sequel rights. And Fox would get a first opportunity and last refusal right to make the movie. […]
So we closed the deal, and Star Wars got made and it’s a humungous hit; the biggest movie of all time. When we made the sequel deal...for The Empire Strikes Back, George made the decision to self-finance the film. Lucasfilm made a lot of money on Star Wars and would reinvest the money in the movie. The deal that was offered to Fox was, you get distribution rights theatrically and video around the world for seven years, and we retain everything else. And [we asked for the] merchandising back.
So, let me summarize the deal:
- Lucas took a $350k pay cut to direct Star Wars (from $500k to $150k).
- In exchange, Fox gave him the sequel rights.
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Star Wars crushed it in theatres: the film came out in 1977 and made $775m on a budget of $11m (it knocked off Jaws to become the top-grossing film ever).
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However, Fox still had the merchandising rights: this was not considered an important revenue stream in the 1970s but 40m+ Star Wars toys were sold in 1978 (worth ~$100m).
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Lucas negotiated back the merchandising rights in exchange for Fox being the distribution partner for Empire Strikes Back. Flush from Star Wars, Lucas self-financed the sequel so Fox had no choice because he could walk away. In exchange for giving Lucas the merchandising rights, Fox was able to distribute the sequel.
With the sequel and merchandising rights in hand, Lucas printed money in the following decades, as Star Wars became a massive pop culture phenomenon. Lucas went on to make five more franchise films, including the much-maligned prequels.
These films were intended to introduce the Star Wars universe to a new generation of kids (The Phantom Menace was released in 1999 and told from the vantage point of an 8-year-old Anakin Skywalker).
Combined, the two trilogies have made a total of $4.3B.
However, the box office haul is only a fraction of the Star Wars empire. After the first film, Lucas owned 100% of the franchise and turned that IP into so so much money:
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$30B worth of merch/toys
- $4B of video games
- $2B of DVDs, VHS, TV
- $2B of books and comics
By the end of the 2000s, Lucas was planning to complete the final three films of his “9-part” space epic. It would be a decade-long commitment, though. Nearing his 70s, Lucas was ready to move on and — in full control of the Star Wars IP — sold LucasFilms to Disney for $4B in 2012.
The deal consisted of 50% cash and 50% stock. The latter portion amounted to 37m shares at a price of ~$50, which equated to ~2% of Disney’s market cap at the time. Lucas became Disney’s 2nd largest individual shareholder behind only Laurene Powell Jobs, who owned 4% of Disney. She received the shares when Steve Jobs passed away in 2011 (that stake was down from 7% of Disney, which is what the entertainment conglomerate gave up to acquire Jobs’ Pixar in 2006 for $7.4B).
No one in the mid-1970s expected toys to become worth ~70% of a deca-billion dollar film franchise. But it makes sense when you consider that Lucas actually made the original Star Wars for kids.
As noted in a U Nottingham paper by Peter Krämer, Lucas was initially quiet about his intention to target children during promotion for Star Wars because he didn’t want to alienate teen and adult moviegoers. After Star Wars smash opening, Lucas stated, "I decided I wanted to make a children's movie [and] to go the Disney route [because] a whole generation was growing up without fairytales.”
He packaged the fairy tale within Joseph Campbell’s well-known Hero’s Journey storytelling template and made obvious kid-friendly decisions for the 1977 film:
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R2-D2 and C3PO: Krämer writes that the “tiny R2D2 clearly serves as a stand-in for a young child, albeit a very precocious one, while C3PO may be seen either as a bickering older sibling or even as a fussy yet caring mother figure.” The robots are the focus of the film’s first 15 minutes. Many advised Lucas against this framing but he powered through (Lucas also borrowed the idea of telling the story through the eyes of lower-rung characters from Akira Kurosawa’s 1958 film Hidden Fortress).
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Parent-Children Viewing: As with classic fairy tales, Lucas wanted parents to take on the role of storytellers when watching the film with their child. This is why all of the Star Wars films begin with scrolling text (“…In a galaxy far far away…”) because the expectation is that parents will read and explain the narrative to their kids.
Now, let’s get to the LEGO story.
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Lego: Great Product with Great Marketing
The LEGO Group is currently the world’s largest toy company with annual sales reaching ~$10B (surpassing Mattel at $6B and Hasbro at $5B). The privately-held firm is probably the world’s largest education company if bucketed in that category (25% of LEGO is owned by the LEGO Foundation — which focuses on education as part of its mission — and the company launched an education arm in 1980).
The start of LEGO dates back to 1932.
Founded by Danish carpenter Ole Kirk Christiansen, the company has its roots in wooden-building construction (churches, homes) and carpentry (furniture, cabinets).
The pivot to toys was born out of necessity: as the Great Depression impacted Europe in the early-1930s, Ole Kirk was searching for a new business line to help float a faltering carpentry business.
Danish parents needed distractions for their children and Ole Kirk filled the void with wooden toys such as pull-along ducks, yo-yos and train sets. His business was renamed to LEGO, which is a mash-up of two Danish words — “leg godt” (which translates to “play well”).
Over the next three decades, a confluence of events propelled LEGO to the forefront of the toy industry per The LEGO Story by Jens Andersen:
World War II: Denmark was occupied by Nazi Germany from 1940 to 1943. During this period, there was an import ban on toys and other products. LEGO became the country’s largest toy producer and parents bought the products to keep their children busy (towards the end of the occupation, LEGO even used its operations to smuggle weapons from England to aid the country’s anti-Nazi resistance).
Education Revolution: In the 1930s and 1940s, there was a growing interest in child development. The movement built on the work of Germany’s Friedrich Frobel (who launched the first kindergartens in the 19th century) and Swiss psychologist Jean Piaget (who proposed that children learn through play). Ole Kirk and his sons were interested in applying the concept of “learning through play” to their business.
Plastics Goes Mainstream: After WWII, plastic products swept through Europe. LEGO’s wooden toys — while very high quality — were not versatile enough for the next phase of child entertainment. Plastic was the answer for global expansion (Andersen writes that “unlike wood, plastic didn’t have to be seasoned, steamed, oven-dried, milled, polished, painted, varnished, and finally assembled with screws, nails, and labels. And while a piece of wood had to pass through many different human hands and undergo numerous processes, plastic seemed designed for simple, rapid mass production by a machine operated by a single person”).
Ole Kirk realized that in order for LEGO to stay competitive with other toy makers, the company had to fully embrace plastics. Against the wishes of his sons — who were becoming more involved in the business — Ole Kirk used half of LEGO's sales in 1947 to purchase a plastics manufacturing machine. It was the right bet. By 1951, over 50% of LEGO's sales were based on plastic toys, including miniature animals, vehicles, sailor figures and "peace" pistols.
While Ole Kirk made the correct call, LEGO was still at the fickle whim of the toy hype cycle. Ole Kirk’s third son Gotfred wanted to find one type of toy that LEGO could put all its might behind and was inspired by a product from the UK. Since the 1930s, English toymaker Hilary Fisher Page had been selling a system of “self-locking building bricks” called Kiddicraft. The toy industry is notorious for rip-offs and LEGO readily admits that its bricks were based on ideas from Page and Kiddicraft.
LEGO ramped up its plastic brick business in the early-1950s and advertising around the product positioned the toy as a “system of play”. In post-WWII Europe — when so many countries were literally rebuilding their war-torn cities — these building toys became very popular. Unlike a traditional toy, a “system of play” could be more than just a fad and also used by multiple generations. Parents could build with their children and their children could share the toys with their friends and siblings.
However, there was a major problem with LEGO’s first run of plastic bricks: they were completely unstable and would always fall apart.
Why? Because the Kiddicraft brick was hollow and when you stacked too many hollow bricks on top of each other, they couldn’t hold together after a certain height.
In January 1958, Gotfred travelled to Germany to speak with the country’s head of LEGO sales. German customers were complaining about the instability of LEGO bricks. Gotfred began sketching out ideas to make the LEGO bricks interlocking and more stable.
In less than a week, he filed a patent for a “toy building brick” with 2x4 studs on top and 3 tubes on the bottom. When two of these 2x4 bricks were combined, they had “clutch power” and the connection was very strong. However, it was also easy to take the bricks apart.
This combination was perfect for children.