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Marvel Enterprises (MVL)Stock (Media & Entertainment Industry, Toys & Games Industry)
 In 2008, with the release of the first installment in the Iron Man franchise, Marvel took a step in a new direction. The company had previously licensed movie rights to third party production companies, as in the case of the Spider-Man and X-Men trilogies. While those movies were huge hits (Spider-Man movies grossed over $1BN worldwide [2] and the X-Men trilogy grossed over $500MM[3]), Marvel's royalties from those releases were only in six figures as most of the windfall went to the studios producing those movies, Sony Pictures and Fox Studios.[4] In order to capture a bigger piece of the profit from its hit movies, Marvel will make its own films through its new movie production segment - which hit the ground running when its first release Iron Man grossed nearly $100MM its opening weekend.[5] Moving film production in-house is part of a larger strategy shift at Marvel, as the company is looking to combat poor creative management of its characters by third parties, such as the movie Elektra which grossed only $24MM domestically despite a $43MM budget.[6] However, in some businesses - toys, for instance - Marvel will continue to outsource production. Despite its recent successes in movies and video games, Marvel continues to face challenges in industries that require creative talent. These industries are risky not only because of the difficulty of producing quality content, but because of the fickle nature of consumers - what's considered brilliant one month is a bust in the next. A movie has significant production costs, and there is no guarantee that these costs will be recouped if the product is unpopular.
[edit] Business DescriptionMVL's primary assets are rights and properties associated with its various comic book characters. The company sells those rights to a variety of media and entertainment outlets and uses these characters in products of its own. The company reports in 4 different segments:
For more Financial Analysis, please see the financial analysis. [edit] Character Portfolio According to Marvel[21], its most popular characters are:
For a complete listing, please see Wikipedia, "List of Marvel Comics Characters" [edit] Financial AnalysisThe company holds a $525 million dollar credit facility with which to finance their film production, from which about $250 million is drawn. Interest coverage is a more than acceptable 20 times. Historical free cash flow margin is over 35%, although 2007 was cash flow negative due to ramp up of the film studio. Free cash flow margin should return to mid 20-s levels, assuming feature films are moderately successful. Note: Prior to FY 2008, the Film Production business segment did not generate revenues, and was a cost center as its films were all in production and had not yet been released.
Revenues are strongly affected by "hits" such as the release of movies or new extensions to the business. Revenues dipped in 2006 as there was no high-grossing movie on the level of the Spiderman franchises to lift the company's revenue growth. MVL's business has historically been high margin, as it licenses out its property to third parties to use. As a result, cost of revenues for the licensing business has historically been zero.[25][26] In addition, margins improved between 2006 when the company licensed out the right to make toys to Hasbro (HAS), dramatically improving the margin in the toy business as will be seen in the Segment analysis. In FY 2008, the company released "Ironman" to both critical acclaim and financial success,[27] grossing $98.6MM on its opening weekend.[28] This will help MVL's revenue growth in FY 2008, with the establishment of another reporting division.
The margin-ranking of the business is Licensing, Toys, and publication in last. This is because Licensing and Toys currently don't have very high cost of revenues given the rights-nature of their business, and just have overhead costs. Publication still requires content creation and distribution, and therefore is lower margin. The margins of the Movie production business are affected by "hits" and "flops," since a film that does poorly at the box office will not recoup the costs of production, while a successful film can turn a large profit. Finally, at the end of 2006, the company outsourced toy production to Hasbro, and is now paid a royalty for Hasbro's Marvel-related sales.[37] The deal with Hasbro (HAS) has dramatically improved margins while keeping sales similar, improving the cost structure given Hasbro's competency in making toys and selling them. Hasbro's international scale and marketing ability, as well as the fact that they already paid a fee to MVL for the rights to sell, give HAS the incentive to sell as many toys as possible (thus helping MVL further with per-unit royalties).
Marvel's appeal has traditionally been in domestic markets, where its characters have been a part of popular culture since the mid 1900's. However, the company has also been successful in promoting its characters abroad, primarily through movie blockbusters, and has grown the share of foreign revenues from 21% in 2005 to 30% in FY 2007.[40] [edit] Trends/Forces[edit] Historical licensing-based business model removes MVL from the front-lines of its businessIn MVL's FY 2007 Earnings, only $125.7MM[41] out of $485.8MM[42] in total revenues came from the publication business (approximately 1/4). At that time, publication was MVL's only "first-party" business in which it directly controlled all aspects of production. The Licensing and Toy businesses is a "third-party" business, where Marvel minimizes risk by outsourcing production costs but retains significant creative control over the content. The actual sales and quality of the end product are determined by the performance of the licensee. As such, MVL has placed its brand name in the hands of the licensee, since its name is affiliated with those product, and the brand equity can be affected by the success or failure of the licensee's products. The new Movie production business will reduce this licensee dependence by increasing the percentage of "first-party" revenues, but a large portion of the company's earnings will continue to come from these licensing deals - for example, Hasbro signed a deal in 2006 to produce toys with Marvel's characters. This also happens to be their primary growth strategy, increasing exposure to it's character properties by licensing them for movie and television adaptations. This creates opportunities to profit from toy and other licensed property sales, in addition to a cut of box office and home video receipts. The company has moved into the movie producing business, from a previous strategy of straight licensing. In this strategy, more of movie profits to flow to Marvel, but also places the risk of movie financing on the company. The first two self produced movies, Iron Man and Incredible Hulk, are due in 2008, and the company plans a release schedule of 2 films per year. [edit] The market expects new Movie Production business to grow revenuesMVL has seen revenue growth slow in the traditional licensing business, and while it has tried to engage in "creative" licensing of its intellectual property (e.g. a super-hero theme park in Dubai[43], the movie business appears poised to grow revenues much faster, since several recent releases have been successful at the box office. Since MVL's new movie business is an independent venture, and will not benefit from the studio support seen with Spider-Man and X-Men. However, Marvel made less than 10% of total gross receipts on these films, according to Lehman Brothers analysis, and by producing movies in-house the company will dramatically increase this percentage.[44] Of course, the company will also have to front the production costs for each movie before it earns a dime, and if the movie is not popular the company will lose money. Blockbuster movies that do well in the box office, however, often earn many times the cost of production, and Marvel's track record (Spider-Man and Iron Man among them) seems to stoke investor's optimism that Marvel will boost earnings with this new segment - its stock was trading at a P/E ratio of almost 20 in May 2008. Historically, movie arcs have a maximum length of approximately 3 movies until audiences tire of the character and it no longer can draw the same financial success. The company is attempting to use its B-list characters to increase potential upside and mitigate losses, since the financing for the movies is pledged against the intellectual property of future movie licenses. The pledged characters include Ant-Man, Black Panther, Captain America, Cloak & Dagger, Doctor Strange, Hawkeye, Nick Fury, Power Pack, Shang-Chi, and The Avengers.[45] However, it is not clear which movies will follow the upcoing releases of sequels to Iron Man and The Incredible Hulk. [edit] Saturation of super-hero type media a concernGiven that MVL's only character base is in its super-heroes (and associated villains), there is a concern over the number of movies in this genre that have been released or are in production from 2005-2010. The DC Comics Batman and Superman mega-franchises have recently had successful movie releases, and will likely continue to receive sequel treatment. Audiences can be fickle to their super-heroes, but more importantly these movies have captured the casual viewer who may not be a comic-book reader but is attracted to the films. Saturation of the market risks losing this mainstream audience's interest. Comic Book to Movie adaptations have benefited from a few box office blockbusters, but there have been flops as well, including Elektra (Budget: $43MM, Domestic Gross: $24M), and Catwoman (Budget: $100MM, Domestic Gross: $40MM).[46][47][48] Movie production has more associated risk than the licensing "third-party" businesses, but the upside is significant as a successful movie can gross in the hundreds of millions. [edit] CompetitionDue to Marvel's licensing business model based on its characters, it does not have very many comparable companies or direct competitors. The closest comparison could be made with rival DC Comics owned by Time Warner (TWX), which also has licensed its comic book characters, most notably, 'Superman and Batman. Marvel has nearly 70 years of character history and awareness built up around it's properties. This is an extremely valuable intangible asset that can be levered in almost limitless ways to provide revenues, and costs practically nothing to maintain. Everyone from 5 year old boys to 70 year old women know of Spider-Man, Incredible Hulk, X-Men, Captain America, etc. This is a big competitive advantage that cannot be easily reproduced by a competitor. [edit] LicensingIn the licensing space, Marvel characters are sold on various products generating overall revenue on the same scale with other large licensors. The largest licensor in the world is Walt Disney Company (DIS), with over $20BN in licensed sales relating to its many children-entertainment properties.[49]. Other competitors with similar scale to Marvel are:[50]
[edit] PublicationThe publication business was the underlying business for character creation that Marvel is capitalizing on today, and continues to compete against rival DC Comics, each with their own respective character portfolios. More minor publishers include Image Comics and Dark Horse Comics. [edit] Toys & Movie ProductionMarvel no longer directly competes in the Toy business, as it has licensed the right to manufacture to Hasbro. Previously, it did not directly compete in the Movie business, but has since moved to directly compete the space. Its primary super-hero genre competitor DC Comics is continuing to license the right to make movies however. [edit] Market ShareMentioned prior, Marvel is a major licensor, generating sales on the order to approximately $5BN worldwide. In the publication business, Marvel and DC Comics dominate, with approximately 80% of the total comic book market between them. Marvel owns between 35-50%, and DC Comics owns approximately 25-30%.[51] [edit] References
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