Tuesday, May 10, 2005

“Our Spider Sense is Tingling”

In a recent press release Marvel Enterprises, creators of such characters as Spiderman and X-Men, has decided to begin producing major motion pictures. This decision is a radical departure from their current business practice of licensing its characters to established film studios. On the heels of this news, Marvel’s stock was up 1.7% on 2.5 million shares. Although earnings were released on the same day, it seems as if Wall Street approves of this new venture. But is this decision a good idea for Marvel? Should a comic book company get into the movie business? Gather around True Believers and lets find out.

Marvel’s core strategy revolves around the following notion, taken from their 10-K: “A key driver of operating results is the successful release of major entertainment programming, such as movies, published materials and television shows, based on the Company’s characters, which fuels demands for all products based on the featured characters.” Marvel believes that by bringing the movie making in-house, they can capture 100% of the revenue generated by their characters. Additionally, they will now have complete artistic control over their creations and decide which characters star in feature films.

Marvel secured this deal with a $525 million non-recourse credit facility from Merrill Lynch. Under the terms of the deal, Marvel will produce films based off its library of 5,000 characters and its partner, Paramount Pictures, will distribute them. Should the movies made by Marvel fail at the box office, Marvel does not have to repay its credit line. Instead, Merrill Lynch will gain movie distribution rights to 10 of Marvel’s characters. So essentially Marvel has no financial risk, though they could lose access to their most precious asset, the rights to its characters.

It’s easy to see why Marvel has made this decision. Two of the top 15 grossing movies of all time are based off a Marvel character, Spider-Man. The two movies combined have grossed over $1.5 billion dollars. According to an article written by Melissa Marr of the Wall Street Journal, Marvel participated in only about 5% of the box office take of Spider-Man. Losing 95% of the revenue on your own creation would lead any company to re-think its strategy. Merchandising is also critical to Marvel’s success. Currently Marvel receives 50% of the revenue off merchandise, the new deal will allow them to capture 100%.

Industry reaction to this announcement has been mixed. Steven Mallas seems to be cautiously optimistic on the matter. His argument centers on the fact that the terms of the financing are very favorable for Marvel. Basically they have little financial risk and capture the upside of their movies. Melissa Marr (referenced above) frowns at Marvel’s decision. Her opinion is due to concerns that Marvel has already given up their most valuable characters leaving them with little to work with. The movie rights to Marvel’s main characters such as Spider-Man, The X-Men, The Fantastic Four, Silver Surfer, The Punisher, and Iron Man have already been licensed to existing movie studios.

Marvel’s rationale seems to make sense since they are losing significant revenue off their own creations. By making movies internally, Marvel is looking to capture all revenue synergies related to its characters.

We see several problems with this new strategy.

To begin with, Marvel has never made a feature film in their history. Making movies is outside the scope of Marvel’s core competencies, which are developing characters and publishing comic books. This will be a trial and error process that is likely to result in more than a few box-office flops. Comic book art and film special effects are radically different concepts.

Secondly, Marvel has only one recognizable mainstream character left in its arsenal, Captain America. Marvel plans to release Captain America as its first major film. Unfortunately for Marvel, a character based on American ideals may not generate tremendous appeal overseas in this day and age. Spider-Man and its sequel netted nearly half of their box office revenue abroad. It is more than likely Captain America will not generate similar returns.

Third, and most important, Marvel has nothing left in the tank. Of the 5,000 characters available, the superstars are used up. We looked at the top 100 comics of 2004 for potential Marvel movies. What we found was that virtually all of the top characters made by Marvel have already been licensed. Only The Avengers, a team of Marvel superheroes, remains for a potential film. We also looked through the Marvel character database for potential box office draws and you won’t believe what we found! There is the amazing Jubilee, as student adventurer who can create fireworks with her hands. We smell a July 4th weekend release date. Also in the database is the mystical Dazzler, who can turn sound into light. Very handy superpower if you are in a noisy, dark place. Last but not least is Maggot who “has a telepathic rapport with two slugs”. If that’s not box office gold, we don’t know what is.

Going into movie production is the wrong path for Marvel. Their hope is that these new movies will generate growth in comic book and merchandise sales for their characters. But they have no real characters left. In fact, Marvel hasn’t produced an original revenue generating character in nearly 20 years. Their last major creation, The Punisher, debuted in 1986!

Marvel needs to focus on new character creation rather than turning out movies on its second tier characters. If this venture fails, Marvel loses the movie rights to the last few popular characters they have, leaving them with Maggot and Dazzler. Marvel was built on the creation of new, exciting, and original characters. They need to revive their creative capabilities before entering into the volatile movie business.


Michael Antonelli & Steve Dormanen


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