Lucas Cuts Deal With Fox for Next ‘Star Wars’

In a deal expected to become the most lucrative ever for an individual film director-producer, George Lucas has granted 20th Century Fox distribution rights for his next three “Star Wars” films in theaters and on video beginning in 1999.

Lucas could reap a profit of $1 billion from the deal, under which Fox will distribute three “prequels”--films whose story lines predate the original “Star Wars.” The first prequel, tentatively called “Episode I,” is expected to be released in May 1999.

Lucas owns all rights via a unique and lucrative deal he made with Fox after the success of the original “Star Wars” in 1977.

The first three “Star Wars” films--including “Star Wars,” “The Empire Strikes Back” (1980) and “Return of the Jedi” (1983)--have grossed well over $1 billion at the U.S. box office in their original releases and re-releases last year. More than 50 million videos have been shipped--adding nearly $500 million in retail revenue--and an estimated $4 billion in other “Star Wars” merchandise (collectibles, T-shirts, etc.) has been sold.

Lucas owns the entire franchise except for the original film, which Fox financed for about $10 million. Though executives from Fox and Lucas’ San Rafael, Calif.-based Lucasfilm Ltd. declined to elaborate on most specifics of the deal, one source hinted that in exchange for a much-lower-than-usual (likely less than 10%) distribution fee on the films plus the rights to debut “Episode I” on its Fox TV network, Fox gave Lucas the rights to the original “Star Wars,” making his empire complete.

No matter how favorable the terms are to Lucas, Fox executives said they couldn’t be happier.

“This is one of the most historic days in the history of this company,” said Peter Chernin, president and chief operating officer of News Corp., parent of Fox. “You drive on to this lot and the first big thing you see is a mural of ‘Star Wars.’ It’s the movie franchise.”

Lucas had long agreed to give Fox first dibs on the prequels. “Everyone else in town was definitely interested and were calling us, but we have this long-standing relationship we’re very happy with,” said Gordon Radley, president of Lucasfilm. One reason Fox was certain to jump no matter what the deal was: It was unthinkable for the studio to let “Star Wars,” one of the studio’s biggest-ever hits, go elsewhere.

“The relationship between the two companies was such that they said they’d come to see us first. When they said that, we said we’d find a way to say yes,” said Bill Mechanic, chairman and chief executive of Fox Filmed Entertainment. “There were a lot of wolves baying at the door but . . . they wouldn’t talk to anyone else.”

Mechanic conceded, “We’re not making our usual fees. But the truth is we have no risk. So, it’s a pretty good business risk for us. . . . Until ‘Titanic,’ [Star Wars] was our most successful movie. . . . Now, we’re the only company that has three blockbusters you can count on.”

Fox isn’t the first company to gamble on the success of Lucas’ coming three films. Last fall, Hasbro Inc. and Galoob Toys Inc. signed unprecedented licensing agreements for the three prequels. The deals, which gave Lucasfilm not only millions of dollars but stock in both companies, are said to be the most lucrative licensing agreements ever tied to a single entertainment property.

The previous year, PepsiCo struck a deal with Lucasfilm to promote at least the first prequel. Pepsi officials have estimated their support will exceed $2 billion through at least 1999.

Chernin, who called the agreement “more than just a movie deal,” said the studio stood to gain not only profit, but prestige and bargaining power with “every constituency we do business with. . . . Whether that’s the ability to deal with agents or video retailers, that’s big for this company.”

Chernin continued: “Another huge economic benefit is that the movie business is so high-risk these days, particularly with event tent-pole movies [films expected to be huge blockbusters]. We now know that we are going to have three of the great tent-pole movies of the next 15 years. That gives us an enormous luxury in terms of our ability to manage risk.”

By getting ownership, Lucas also took on the financial responsibility and risk of making new “Star Wars” films. It is assumed that Lucas will pay for the marketing of the prequels, though Radley declined to comment on that possibility.

Lucas’ ownership of the second and third “Star Wars” films and all subsequent films is unique in Hollywood. Even influential filmmakers such as Steven Spielberg have not been able to wield such clout.

If the next three films are as successful as the first three, Lucas stands to clear $1 billion on this new deal. In an interview with The Times last year, former MCA/Universal studio head Tom Pollock, who had negotiated Lucas’ deal for him two decades ago, said the agreement “essentially took a billion dollars away from the studio and transferred it to George.”