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December 14, 2015updated 28 Mar 2017 4:21pm

Star Wars: the film that’s really a toy

By John Oates

Whether you’re a Star Wars fan or not you won’t have been able to avoid the hype surrounding the imminent release of Episode VII: The Force Awakens.

Whatever you think about them the franchise has changed the way we think about films and created a new business model for funding them.

When the first Star Wars film came out, forty years ago, films made money in cinemas.
No film had ever sold significant amounts of merchandising, there were no VHS versions for home consumption and even money from TV rights was pretty limited.

Mego Corporation, the largest toy manufacturer at the time, didn’t think much of Star Wars’ chances. In the worst decision since Decca Records rejected the Beatles Mego said ‘no thanks’ to making and selling Star Wars toys.

Instead a company called Kenner agreed to make the toys for George Lucas and Fox. Kenner agreed to pay five per cent royalty and a minimum of $100,000.
Within a year it had sold toys grossing $100m.

Famously the company was unable to keep up with the massive demand and ran out of toys in the run up to the crucial Christmas season.

Instead of actual toys it offered a package including an ‘early bird’ certificate reserving a toy and some stickers.

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Even these IOUs, another new kind of business, sold like the proverbial hot cakes.
George Lucas took full control of merchandising from the second film onwards which allowed him to reinvent the film making business and keep himself independent of the Hollywood system.

He also took the special effects department from the first film and created another new business – Industrial Light and Magic which went on to provide special effects for dozens of other films.

The toys have brought in over $20bn compared to just over $4bn from the films.
The lesson for business is that what seems like a sideline can sometimes exceed your main business, or at least fundamentally change how that business works.

There are dozens of other examples from the world of technology – Olympus was a microscope manufacturer which started making cameras.

Mobile phone companies had little idea that customers would use text messaging to ‘talk’ to each other.

It was seen as a niche service and to start with was used mainly by networks to communicate with customers – voicemail and billing alerts for instance.

But within a few years subscribers were sending more texts than they were making calls. Which was fantastic, if unexpected, news for the mobile networks because sending a short text message is far easier and cheaper than the complexities of connecting real-time, good quality voice calls.

But a bit like the Star Wars toys it started life as an add-on to the main event.
Nokia famously started life making rubber boots and other supplies for forestry firms.
Amazon Web Services began as a result of improving’s internal server structure. Someone thought it might make sense to sell those services to external businesses.

Profits so far remain a fraction of the rest of Amazon’s business, but they’re growing fast and have higher margins.

Of course there are dangers to straying into new businesses. But sometimes it can be an even bigger risk to sit still.

No-one could have guessed the success of the first Star Wars film. But neither would they have guessed the impact of the new businesses it created would have on the development of the film industry.

So whatever you think of the films George Lucas provides a great example of a flexible business which is still reinventing itself forty years after it started.

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