Why Disney Is Still Paying For 2016's Star Wars Movie ‘Rogue One’

Rogue One: A Star Wars Story is one of the most pivotal movies ever made by Disney. Premiering in 2016, it was the media giant's first Star Wars spinoff film and generated a staggering $1.1 billion at the box office proving the earning potential for a wider universe of movies and shows. Surprisingly, Disney is still paying it off.

A direct prequel to 1977's Star Wars, Rogue One follows a group of resistance fighters who band together in a bid to steal plans for the Death Star, the planet-sized space station which looms large in the follow up film. Rogue One stars Felicity Jones and Diego Luna as rebel leaders who were joined by many of the actors from the original movie.

Anthony Daniels and James Earl Jones returned to voice the iconic characters C-3PO and Darth Vader respectively. Digital likenesses of the late Carrie Fisher and Peter Cushing were also used, with the latter leading to legal action against the Disney production company behind Rogue One. It was sued by Tyburn Film Productions which claims it entered an agreement with Cushing that prevented the reproduction of his appearance through special effects without its consent.

Disney opposes the claim as it entered into an agreement with the executors of Cushing's estate, which saw permission to use his image granted in return for a fee. Disney attempted to have the claim thrown out but this was rejected by a judge, leading to it appealing that decision. However, this was dismissed last month with the judge ruling that the case should go to trial in the UK where the movie was made. The filming location shines a spotlight on its spending.

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The cost of making movies 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. However, as we have often reported, productions filmed in the UK are exceptions to this and Rogue One was one of them.

The movie was shot at Pinewood Studios and on location in Jordan, the Maldives and across the UK where one of its futuristic metro stations was used as a chase scene in an enemy base.

Studios filming in the UK benefit from its Audio-Visual Expenditure Credit which gives them a cash reimbursement of up to 25.5% of the money they spend in the country.

To qualify for the reimbursement, movies must pass a points test based on factors such as how many members of the production team are from the UK and how much of the post-production work is done in the UK. Furthermore, at least 10% of the core costs of the production need to relate to activities in the UK and in order to demonstrate this to the government, studios set up a separate Film Production Company (FPC) there for each picture.

The terms of the reimbursement process state that each FPC must be "responsible for pre-production, principal photography and post-production of the film; and for delivery of the completed film" as well as paying for "rights, goods and services in relation to the film." Studios can't even hide costs in other companies as the terms also state "there can only be one FPC in relation to a film."

The funding mechanism differs slightly from film to film but generally they all follow a similar model which begins at the very start of production.

A Hollywood studio buys a script from a screenwriter and green lights a movie about it. If the studio decides to make the movie in the UK it then sets up a subsidiary company there which acquires the script from its US-based parent.

Acquiring the script gives the UK company the rights to the make a movie about it and the Hollywood studio usually pays it a small production services fee. As per the rules, the UK company must be responsible for everything from pre-production and principal photography to post-production, delivery of the finished film and payment of goods and services in relation to it. Then comes some financial wizardry.

If the UK company makes a profit, the financial benefit from the UK government comes in the form of a reduction to its tax bill. However, if it makes a loss, it receives a cash reimbursement so studios fund the companies in a way which engineers this.

As shown in the diagram below, the studio buys the rights to the film from the UK company but only gives it approximately 74.5% of the projected production 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 UK company 100% of the production budget for the movie and this sets the scene for the cash reimbursement.

Loans are not counted as revenue because they need to be repaid. The UK company therefore makes a loss equivalent to around 25.5% of the movie's budget. That is when the UK 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, the UK government covers 25.5% of a film's costs, thereby reducing the studio's net spending. It takes some detective work to get to the bottom of it.

The UK companies usually have code names so that they don’t raise attention with fans when filing for permits to film on location. Through industry research the company names can be tallied with names of the productions they are responsible for with Disney's subsidiary Lunak Heavy Industries (UK) being the one behind Rogue One.

It is named after an alien which has only been seen once in a sketch in The Art of Rogue One: A Star Wars Story. The cute creature has dark brown fur, large eyes and pointy ears. It was set to serve in the Rebel Alliance but didn't make the final cut for the film.

Nevertheless, Lunak's legacy lives on through the name of the production company which has to file annual financial statements. They reveal everything from the total costs of the movie right down to the headcount, salaries and even the social security payments for staff.

However, marketing costs are not shown on the financial statements, as they tend to be covered directly by by the studio. Likewise, revenue from theater ticket sales, merchandise and home entertainment, including streaming subscriptions, also goes directly to the studio.

The financial statements are just for the company which makes the movie and they are filed in stages. This starts during pre-production and goes on long after the premiere to give the company time to ensure it has collected all of its bills and received the money for them. As it said in the Lunak Heavy Industries 2018 financial statements, "the company was involved in paying the ongoing production costs in relation to the film."

It can take a great deal of time for the FPC to ensure that all invoices have been paid and only then can the company be closed. For example, Pym Particles Productions UK, named after the technology which enables Disney's Ant-Man character to shrink, was only shut down in March this year, nine years after the release of its movie about the diminutive hero.

This means that the costs of a production can still rise years after release, though not usually by anywhere near as much as when it is being made. As Lunak Heavy Industries is a defendant in the image rights lawsuit it hasn't been shut down and is still booking costs on its financial statements eight years after Rogue One was released.

Disney does not discuss the costs of specific productions and did not respond to an opportunity to comment. However, the latest filings for Lunak Heavy Industries reveal that in the year to December 31, 2023 it spent $2.8 million (£2.2 million) bringing the movie's total costs to $325.8 million (£238.7 million). The financial statements reveal that "the final cost was higher than the agreed budget" but it doesn't stop there.

As shown in the graph below, the company also banked a $56.2 million (£40.7 million) reimbursement from the UK government bringing Disney's net spending on Rogue One down to $269.6 million.

The cash that the studio pays for the rights to the movie is shown as the revenue in the UK company's financial statements and, crucially, its expenses are the film's total costs. The biggest component of the production costs 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.

These maneuvers leave the UK company with a small net profit which is usually equivalent to the production services fee from the studio. It isn't a profit in the conventional sense as it isn't generated by external revenue. The UK company is entirely owned by the Hollywood studio so the profit is simply some of its money which remains in its right hand rather than the left.

The blockbuster returns for movies come from ticket sales with theaters typically retaining around 50% of the takings. The remainder is paid directly to the studio and if this offsets its net spending, the picture makes a profit at the box office. It is the magic formula that made Rogue One a force to be reckoned with.