Marvel Enterprises
Marvel - the Next Disney?

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By Phileo
November 21, 2003

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My initial concerns about Marvel came from analyzing the 03Q3 report.

MVL will have pretty high net income in FY2003, but the net income is expected to decline in 2004. What made this worse is that as I investigated the company finances and the licensing business more and more, I had more and more doubts about FY2005. My assumption was that the majority of revenues for a given year would come from the movie release and the associated revenues from licensing merchandises associated with the movie characters. This came from an initial interpretation of the investor presentation back in Jul/03.

The movie lineup for 2004 and 2005 was outlined in this post. Since the movie lineup for 2005 would not be able to top 2004, then it stands to reason that the associated merchandise sales (driven by movie releases) for 2005 would not exceed 2004. Most of the people on this board agreed with this consensus.

So if licensing revenues from merchandises in FY2005 will not exceed FY2004, and FY2005 movie revenues will not exceed FY2004 movie revenues, then how would FY2005 exceed FY2004 in sales and net income? At least that was the context of issues with which I was concerned.

I was ready to announce and advertise my intention to sell MVL on Jul/04 even as MVL announced their Analyst Day Webcast.

So today, I listened to part of that Webcast. It's 4.5 hrs long, but well worth a couple evenings of listening for those who are interested in what the future holds for MVL.

MVL also provided some slides to enable the investor to follow along in their Webcast:


    As I flipped thru their slides, and listened to a snippet of that Webcast here and there, I began to see their vision unfolding before my mind. There's a lot of information presented in the Webcast and in the slides, but the main theme of the above power point slides is that MVL is in the business of building franchises.

    In order to dissect what that statement means, I had to properly understand what franchises are and how they are built. Thank goodness for Google.

    Quote from this website:

    "Franchising is a method of distributing products or services...Technically, the contract binding the two parties is the "franchise," but that term is often used to mean the actual business that the franchisee operates."

    "According to the United States Federal Trade Commission Rule on Franchising (1979), a franchise relationship exists when the following three (3) elements co-exist in the business relationship:

    The company doing the franchising:
    1. Grants a limited right to use their tradename, servicemark, logo or other advertising symbol,
    2. Sells the rights to use "systems" or "methods", associated with operating the "core" business, and,
    3. Receives a payment in return for granting these rights (#1 and #2)."
    Franchisees essentially "clone" the franchiser's business and agree to follow pre-set royalty, licensing and trademark "rules" in its operation. Surfing thru these Quizno's Franchises gave me a good feel for what it is.

    So, with the Quizno's franchise as context, then as more Quizno's franchisees sign up, more and more "clones" of the franchiser's business appear across different geographic regions. As the brand of services, and/or products (i.e. Quizno's name and brand of subs sandwiches) becomes more mainstream and more popular with consumers, both the franchisee wins (by winning more business) and the franchiser wins (creates demand for more franchises).

    So how does this tie in with MVL? The vision that MVL has is to build franchises around its treasure chest of 4700 characters, one character at a time.

    Take SpiderMan for example. I originally modeled it as a synergy effect between the comic books, movies, and toys, etc. However, MVL is actually presenting SpiderMan as a franchise around which viral marketing, network effects, and franchisees are built. The comic book division spins off new story lines and new forms of SpiderMan comics (graphic novels, books, limited series, etc.). This generates interest and a fan base.

    Next come the movie production and development and release. A well-produced and developed movie essentially provides free Marketing for the franchise Marvel character. Not only does the interest and fan base explode N-Fold, but now the free marketing from the movie generates interest from toy manufacturers, clothing apparel designer & manufacturers, Video Game producers, Electronic gadget producers, Food/Beverage/Candy manufacturers, stationery producers, sporting goods mfrs., etc. These are the "franchisees" for the SpiderMan brand, and all become interested in making their own line of products with the SpiderMan brand. MVL also capitalizes on this interest by releasing the DVD.

    Further expand this by moving the marketing/merchandising engine across geographic regions (Europe, Japan, Australia) and demographic regions (middle aged male, teenage male, pre-teens, etc.). Further reinforce the SpiderMan franchise by selecting a licensing partner to make the sequel movie to SpiderMan. Now you've got additional franchisees in the form of cable companies interested in producing SpiderMan cartoons, syndication agreements, etc. And successful franchisees create the additional free marketing and demand for that brand. MVL mentioned that numerous wireless phone companies were interested in signing up to license the MVL property for use in cell phones, and cell phone games, etc.

    Lather. Rinse. Repeat with each franchise (FF4, Hulk, Punisher, IronMan, DareDevil, Blade, Wolverine, Capt. America, Silver Surfer, Dr. Strange, Sub-Mariner, Ghost Rider, Iron Fist, ... character #4700) until the dough rolls in. It's like Quizno's all across the country, but that's ONLY ONE ... FRANCHISE. FF4 could be the Quizno's, Hulk could be the McDonald's, Punisher could be the 7-11, etc. You get the idea.

    The franchisees (licensing partner for each of the 14 major categories of consumer products that MVL has identified) generate MVL's revenue stream for that one franchise even well after the movie has been released to DVD. And each franchise has its own set of franchisees.

    Obviously some franchises will do better than others. To a 6 yr old kid, clearly a Man-Thing lunchbox is not as appealing as a loud green Hulk lunch box. But not every franchise needs to be a home run. MVL has already identified 10 franchises with SpiderMan/Hulk potential. The movie releases provide a hint as to which franchises have the most potential. My guess is that the majority of efforts will be spent in the next 3-5 yrs. developing and monetizing the potential of those 10 franchises identified by MVL.

    And that is the key difference in my mind between MVL and Pixar.
    Pixar is in the business of producing computer-animated feature-length theatrical motion pictures that are intended to be timeless and popular across generations. This kind of business involves lots of up front investments into technology, property, and equipment.
    MVL is in the business of building franchises. This kind of business involves little up front investments of capital.

    At the end of the Webcast, MVL was even bold enough to compare itself to Disney - a business valued today at $46Billion. MVL claimed it had more wider demographic appeal than Disney, and that the value of its treasure chest of 4700 characters was greater than the value of Disney's IP. MVL also claimed its properties were newer and fresher than those of Disney, and producing movies based on MVL properties offered studios lower risk because of established fan base and established comic book history.

    Well, it's nice to claim how you're better than DIS in certain aspects, but who are we kidding here? MVL might be able to double or triple its current MktCap by executing on its vision of building franchises, but even the world's biggest and most popular franchise - McDonald's - is worth only $31B. And most franchisers (Quizno's, MailBoxes Etc.,) need to invest in capital.

    What that means is that MVL would need to spend money in order to make the kind of money DIS makes, i.e. expand into new businesses like producing movies based on MVL properties.

    I understand the earlier debate about whether MVL should have bought Artisan, i.e. move into the movie production business. Why should MVL tamper with its lucrative licensing revenue model by moving into a new line of business?

    Well, after listening to this Webcast, the answer is that it is a necessary evil to invest in capital, technology, and raise funds in order to grow the business and grow revenues and earnings. All the Intel's and Microsoft's of this world got there by investing in capital, spending on equipment and technology.

    Buying a movie studio like Artisan doesn't need to be done right away however; there's plenty of milk that still needs to be pumped out from the treasure chest of 4700 characters. MVL can afford to grow its business for the next year or two without having to invest in capital, and it intends to do so.

    So in conclusion, I said before I would re-evaluate MVL on Jul/04 to determine whether to continue holding or dump. I will still do the re-evaluation, but this new presentation of MVL's vision has given me the confidence that MVL could convince me to hold beyond Jul/04 should they successfully execute on their vision.


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