By Lisa Richwine
LOS ANGELES (Reuters) - "Star Wars" was the force behind Walt Disney's $4 billion purchase of producer George Lucas's Lucasfilm entertainment holdings. Not so far, far away is Lucas' Industrial Light and Magic, his award-winning special effects shop that will likely save Disney millions of dollars in costs for its big-budget movies.
ILM, started by Lucas in 1975 when he couldn't find a special effects house he liked for "Star Wars," has provided computer-generated dinosaurs, space ships and action characters for a roster of films that includes "Avatar," "Mission Impossible" and the "Harry Potter" series.
As much as one-third of the cost of films with budgets of $200 million and more are for special effects, according to Janney Montgomery Scott analyst Tony Wible, who estimates ILM last year generated at least $100 million in revenue. Disney uses ILM's computer animators for its "Pirates of the Caribbean" series of films and Marvel-inspired characters for films like "The Avengers."
ILM is among the companies producing special effects for the Disney film "The Lone Ranger," a 2013 release estimated to cost more than $200 million to produce.
By bringing ILM in-house, Disney can shave as much as $20 million a year from its films' special effects budgets, a welcome savings at a time when all major studios are trying to rein in production spending, Wible said.
"It's one of the underappreciated aspects of this deal," he said, along with Skywalker Sound, a Lucas sound production company that will also become part of the Disney empire.
Disney executives, in a conference call with Wall Street analysts, scarcely mentioned ILM in explaining the company's valuation of Lucasfilm, instead describing its estimate of the company's rights to its consumer products and the declining value of DVD sales.
Chief Executive Bob Iger praised ILM's work for Disney and other studios. "Our current thinking is that we would let it remain as-is. They do great work," Iger said.
A Disney spokesman said the company could not comment further about ILM or the rest of the acquisition until it is cleared by regulators.
The effects house is headquartered in San Francisco at the Letterman Digital Arts Center, a Lucasfilm campus where a statue of Yoda perches atop an outdoor fountain. The effects company employs about 1,000 people between that location and sites in Singapore and Vancouver.
The studio provides effects for as many as 18 projects per year, working with all the major Hollywood studios that compete with Disney. That outside work beyond "Star Wars" will give Disney another revenue source from ILM.
"We can handle quite a slate of films," Lucasfilm spokesman Miles Perkins said of ILM. "We look forward to continuing that."
ILM also generates money by supplying effects for commercials by big-name brands Coca-Cola, Budweiser and others.
For Disney's Iger, who prides his company as being among Hollywood's most forward thinking on new technology, the Lucasfilm buy might also provide another front for the media giant. Its computer-wielding artists could work with Disney's Imagineering unit, which creates many of the technologies the company uses at its theme parks.
Lucasfilm engineers created THX, which was designed to help theaters create the best sound for movies through a system that the Lucas company certifies meets its technical standards. THX, which was spun off from Lucasfilms in 2001, also certifies home entertainment systems, consumer electronic products and automobile sound systems.
Hollywood studios have a generally poor record owning effects companies, said Scott Ross, a former general manager of ILM and one of the founders of effects company Digital Domain.
Disney bought Dream Quest Images in 1996 and shuttered it five years later. Warner Bros. also has shut or sold off effects companies it acquired. Only Sony Corp has found success with its Imageworks effects unit.
Studios usually discover that running an effects business is costly and foreign competitors can do the job cheaper, Ross said. "They come to the conclusion that running a visual effects company is not a profitable business," Ross said.
Iger, in announcing the deal to Wall Street analysts, praised ILM's work and said he had no immediate plans to change it. "It's been a decent business for Lucasfilm and one we have every intention of staying in," he said.
(Reporting By Lisa Richwine and Ronald Grover; Editing by Steve Orlofsky)
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