Spider-Man Saves the Day -- but Not for Sony

Assemble The Avengers; Spidey alone can't save Sony (NYSE: SNE  ) . Despite earning $140 million at the U.S. box office and $342 million worldwide, The Amazing Spider-Man wasn't the lift Sony investors were looking for. The stock is down another 1% today and 26% year to date.

You'd think Wall Street would be more excited. Sony Pictures is on par with the music and mobile segments as a contributor to operating profit despite accounting for 10% or less of revenue in any given year. Hits such as The Amazing Spider-Man are an important source of earnings growth.

So why the sell-off? Apple (Nasdaq: AAPL  ) may have something to do with it. Persistent rumors that the Mac maker will introduce its own flatscreen TV have forced executives to take nonsensical measures, including a plan that would prevent retailers from setting their own prices for Sony's flatscreens.

In mobile, Sony faces an ongoing fight with OmniVision (Nasdaq: OVTI  ) over supplying imaging sensors for smartphone cameras. There's no telling who wins this bout, but the stakes are huge. Consumers are increasingly turning to their handsets to take snapshots.

In the U.K., research by Mintel Technology shows the market for standalone digital cameras is worth one-third less than it was five years ago. And more than 3 million consumers say they won't replace their cameras when they break -- choosing instead to rely on their phones. Digital imaging products such as cameras account for about 16% of revenue in Sony's largest division.

In every market it participates in, Sony faces aggressive competitors out to take its lunch money.

The art of the deal
To this point, Sony has avoided trouble by making smart deals such as its (ahem) "partnership" with Marvel, struck in the late '90s when the comic-book company was battling bankruptcy.

There are many particulars to the arrangement, but the net of it was that in exchange for bankrolling new flicks featuring any character related to the Spider-Man universe of comic books, the studio would pay Marvel a small producer fee and share in merchandising revenue derived from the movies. The "Spider-Man JV," the merchandising came to be known in Marvel's filings.

And it was a huge win for Sony. Operating profit in the Pictures division nearly doubled after the release of 2002's Spider-Man, going on to reach similar totals in the fiscal years following the release of Spider-Man 2 and Spider-Man 3. Marvel, jealously watching the windfall from afar, would in 2005 announce plans to open its own studio to cash in other characters, as Sony had with Spidey.

A web of cash ... for Uncle Walt
But then, in 2009, following a massive box office for Iron Man the year prior, Walt Disney (NYSE: DIS  ) spent $4 billion to acquire Marvel Entertainment and its budding studio. Smart move. The House of Mouse can expect to see hundreds of millions in profits and cash flow from Marvel's The Avengers, which is still in theaters and on track to generate about $1.5 billion in global box-office receipts.

Spider-Man will bring in a smaller but still generous windfall, and it's all thanks to -- Whoop! Whoop! Irony alert! Irony alert! -- Sony. You'll find the reason why spelled out plainly on page 12 of Disney's latest 10-K annual report:

During the fourth quarter of fiscal 2011, the Company completed a two-way transaction to simplify our relationship with Sony Pictures. In this transaction, the Company purchased Sony Pictures participation in Spider-Man merchandising, while at the same time, Sony Pictures purchased from the Company our participation in Spider-Man films. This transaction will allow the Company to control and fully benefit from all Spider-Man merchandising activity, while Sony Pictures will continue to produce and distribute Spider-Man films.

Who gets the better deal here? Disney, without a doubt, if only because it can now stock stores with Spidey merchandise without having to share a dime of profit. And that's important: Marvel brands were responsible for $6 billion in retail merchandise sales last year, according to License! Global magazine.

Spidey is key to that haul. We know from old filings that Spider-Man merchandising accounted for more than $436 million in revenue, collectively, from 2004 to 2007. Half of that went to then-independent Marvel, representing 13% of the company's overall proceeds for that period and 24% of licensing proceeds.

With great power comes great profits
The message? Disney, a master licensor in its own right, just gave away the equivalent of an iron pit (i.e., meager Spidey box-office participation) for the rights to a gold mine (i.e., exclusive Spidey merchandising rights). It's just another reason for investors to put the House of Mouse on their buy-to-hold-forever list. Need more ideas? These three Dow stocks, like Disney, pay sustainable dividends and are well positioned for the long haul. See why our senior analysts say to buy now -- their research is 100% free for a limited time.

Fool contributor Tim Beyers is a member of the Motley Fool Rule Breakers stock-picking team and the Motley Fool Supernova Odyssey I mission. He owned shares of Apple, OmniVision Technologies, and Walt Disney at the time of publication. Check out Tim's Web home, portfolio holdings, and Foolish writings, or connect with him on Google+ or Twitter, where he goes by @milehighfool. You can also get his insights delivered directly to your RSS reader.

The Motley Fool owns shares of Apple and Walt Disney and sold shares of Sony short. Motley Fool newsletter services have recommended buying shares of Apple and Walt Disney and creating a bull call spread position in Apple. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.


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