David Gardner: I think if I am a listener just joining in and hearing about Marvel (NYSE: MVL ) , maybe I probably heard about Spider-Man, but I wasn't maybe aware that the company has the revenue streams we are talking about, video games and toys. Can you just, for a new listener, somebody who is an investment mind, can you just trace out for us briefly the pie for revenues? Where is the money actually coming to Marvel?
Peter Cuneo: Sure. Well, most of the money for Marvel comes from our licensing programs ... licensing around major motion pictures that have a broad demographic appeal. These films are usually PG or PG-13, and the movie-related licensing, as well as our non-movie or what we call classic character licensing, is the biggest single source of revenue, and we are constantly announcing new, important partners for new areas through licensing that we haven't competed in. ... For example, this week Marvel is announcing a major publishing deal with four publishers around the world, all of whom are involved in the publishing for children all the way through adults, for illustrated books as well as textual books. These are all-age, nonfiction compendiums, preschool novelty formats, mass market books, adult novelizations, and this is a big, new push for Marvel. ... Of course revenues should be substantial, but it is actually more important from a strategic point of view. This is another form of media, or print media, that Marvel really hasn't participated in in the past, so we are now opening a whole new channel of revenue for Marvel. And this is happening constantly.
David Gardner: What percentage of the business day are comic books, so-called?
Peter Cuneo: From a profitability point of view, about 20%, 15-20% of our earnings come from the comic book business. The comic book business of course is very important to us. Not only is it highly profitable. We have about a 35% profit margin on our comic book business and growing very nicely if you look at our track record. But also this is our R&D function. This is where we try out new characters, where we ... rework, re-cosmetize, if you will, other older characters, and try to see what kind of story lines work and so on. The nice thing about the comic book business is, and we publish over 60 titles every month, is we can experiment here and really actually lose very little or no money.
David Gardner: In the past on this show, we have talked about the Marvel, really the big house that you have with thousands of characters wandering around the house. It is 4,700 characters, I think, that you have in-house, your intellectual property. We have actually been criticized by our own listeners in the past by kind of mouthing that you have; well, they have Spider-Man, but well, they have these other few thousand. I guess what I need to ask is how many of those characters, the characters that you have that you know about, either in the past or that are being R&D'd right now, do you think could actually generate serious interest from Hollywood over the next 10 years?
Peter Cuneo: Well, the best way to look at our characters is not as 4,700 separate characters but rather as family groups. So for example, Spider-Man; we have been telling Spider-Man stories for 40 years. There are, let's say, 100 villains, 100 friends, and so on. So for the sake of discussion, let's say that the Spider-Man family group is about 200 characters. There are 300 X-Men alone. If we counted up all the characters from Hulk, you might have another hundred or two hundred. So the best way to look at this 4,700 characters is not individual characters but as character groups.
We think that we probably have 10 or 12 character groups that are what you might call a list. These are character groups that with the very first film, we can generate a lot of revenue with licensed products and so on.
But we also, as you know, are constantly trying to develop our characters that are a little lesser known like Daredevil, like Elektra, Blade, Men In Black; all were very obscure comic books before they became popular. So you don't necessarily have to deal purely with the A-list, but if you are dealing below that, you have to have a little patience to build those characters over time.
David Gardner: You have talked about licensing. What percentage of the box office does Marvel get on a movie like Elektra, and then I want you to talk about the Fantastic Four, a big July event for the company and I assume that is an A-list.
Peter Cuneo: That is correct. Well first on Elektra. In general, we are not allowed to discuss for legal reasons the exact terms of our movie deals, but on a gross participation film, which is what we have in most of our deals, that is we are getting a share of the revenues from the box office, from DVD, from VHS, from the sale to HBO or Showtime or wherever, from international syndication, pay-per-view. All of those revenue streams Marvel gets a percentage of. The market runs 2 to 7 percent on those deals, so it varies from deal to deal, and Marvel is generally at the top of the market or close to it.
David Gardner: And that is on revenues, Peter?
Peter Cuneo: That is correct. So the profitability.
David Gardner: One of those situations where they run the math and it turns out it wasn't profitable at all and you don't get paid anything for Spider-Man.
Peter Cuneo: That is correct. That is correct. Well, I guarantee you, Sony (NYSE: SNE ) made a lot of money on Spider-Man 1, and is making a lot of money on Spider-Man 2. But no, we don't share in the profits. It is purely revenue off the top. It is what we call gross participation dollar one. Now we want, of course, our studio partners to make a profit. Otherwise there won't be sequels.
David Gardner: How much creative input does Marvel get on a movie? Let's talk about, not Elektra, although I am interested in that one, but Fantastic Four. I mean, these are your characters, but they are being brought out on a big stage by somebody else. How much creative input do you have?
Peter Cuneo: Well, we have a lot of input and control. We are involved in the script, we are involved in choosing the director, we are involved in the major casting decisions. We are on the set every day. We review dailies. We have a Marvel producer, executive producer on the set working with the director every day so that the integrity of our characters is, of course, protected.
David Gardner: Do you want to make any predictions, any kind of prediction, about Fantastic Four this summer?
Peter Cuneo: No, I won't do that at this point, but I will simply say this is one of our A-list groups. The Fantastic Four has a wide demographic appeal. It is a family film. It is a drama and a comedy. We have had tremendous reaction from licensees and from retailers so that we are very optimistic about our toy lines and our other consumer product lines. We are also getting some outstanding promotional partners. I am not free to discuss who specifically, but you would know who they are, and we are very, very optimistic. Fantastic Four, you know, has the second highest Q-score in all of the Marvel library. Only Spider-Man has a higher Q-score. A Q-score is a measure of the popularity of a particular character or a celebrity.
David Gardner: Name recognition and buzz.
Peter Cuneo: Absolutely.
David Gardner: So we are going to, I assume I am going to have my Fantastic Four Happy Meal somewhere, right?
Peter Cuneo: Or something close to it, yes. That is correct. We will have a lot of promotional partners. I am just not at liberty to announce who they are at this particular point in time, but we are very, very pleased with the support that we are getting over Fantastic Four.
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David Gardner is co-founder of The Motley Fool and is the advisor of Motley Fool Rule Breakers. The Motley Fool isinvestors writing for investors.