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By JoelCairo
March 9, 2004

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At first, I thought I'd comment point by point to your great post, but it seems convoluted to do so, so instead I'd like to offer a few points that help make me excited about Marvel's future. At its core, I think the concern of the Dark Side posting is that Marvel's best times are past, and that it is now perhaps approaching some leveling off of its potential, based on market realities.

I feel more certain about some of these comments than others, and will be interested in the board's responses.

First, and foremost, Marvel's strength, its moat, is its profitable ownership and creation of successful, audience-drawing content. Marvel is a creator and publisher of comic books. That's their core. That's where the 4700 characters they own got launched, refined, and polished. What a great way to test concepts for the silver screen or the boob tube! (or merchandise, toys, games, or whatever.) And, unlike many publishers, they control the content they publish -- they're not out there sinking big bucks into the next John Grisham auction. They have 15 million readers of their comic books a month, and sell 3.5 million per month. Think of the feedback that is available, on a monthly basis, from this on-going dialogue with their audience. So here's a proprietary, established, profit-making engine for establishment of (near) sure-fire movie, tv, video game, and merchandise licensing content. Who else has that?

Second, while movie saturation is a concern, is it a near-term concern? I don't think so. They released two films in 2002 and three last year. Its going to be 4-5 this year and next, and five or six the following year. I don't think the movie industry is so small that it cannot accommodate 5 or 6 films at least a year. And once they have a couple of dozen characters out there, they can spread out release of sequels to intervals of three or more years, if they wish, to keep characters fresh. Consider Star Wars and Harry Potter, two incredible media franchises. MVL may not have one of that nova-like brightness, but they sure have a lot. And those keep on producing.

Third, the core Marvel audience is renewable -- it is kids, and kids outgrow what they liked as kids -- until they become parents, and then introduce their next generation to the things they loved as kids. So I view Spiderman, for example, as a renewable resource. In ten years, there will be a new audience that has been created for it. I don't know if they still do it, but Disney used to take films out of circulation for a decade, so that they could be released to a new generation of kids (and parents) and have a significant market impact. Don't see why Marvel cannot do the same.

Fourth so I don't see that they HAVE to go all out to create new markets --- they're in a pretty big one, and I'd like to see someone argue that they are near a reasonable saturation share of it. Their audience renews itself, and, as the publishing arm shows, their products are an entertainment service that people buy over and over on a regular basis. Their biggest threat -- the one that Disney animation has succumbed to -- is for their content to become tired, predictable, and banal.

As regards audience expansion -- Marvel's publishing engine is the vehicle for audience expansion and testing of new concepts. So long as they use their proven publishing engine to test and refine concepts, they can explore audience expansion at low risk. Maybe they'll find that the expansion of the Marvel brand itself is limited by its 60 years of success with its core audience. If so, they can create a new brand for the expanded audience reach. In any case, I see new audience development as more gravy, not a survival scenario -- unless boys somehow stop liking Marvel comics.

Fifth, licensing is a hedge against duds. Until Marvel starts placing its own cash at risk in financing films, there seems to me little downside except in the area of growth and lost opportunity, but no negative impact to their cash or balance sheet. The impact of a film's box office on this company's bottom line is a complex thing. It begins with the original deal, how much is guaranteed, and how much potential overage there is. It has the rental, DVD/video resale, and television markets to back it up and rescue it if initial US box office is weak. And there's the international market as well.

Sixth, aren't we likely to see a MVL choice on cable someday?

Seventh, we haven't spoken about dividends. Once their debt is paid off, a company this cash rich should start thinking about sharing some of the wealth with the stock holders. I think they have the potential to be REIT-like in their dividend yields, and still fund new investment through FCF. It looks like they are producing north of $2 per share in FCF at the current time. What if that doubles? So long as the licensing model works, and they stay true to it, they should be able to return some of their mountains of FCF to the shareholders. If Marvel ever reached a steady-state of revenue and return, I'd be happy to partake of that barrel of cash. (Might we almost call them a potential media REIT?)

I think Pixar and Marvel are in the vanguard of a group of companies that are successfully crossing Disney's moat around the children's' media entertainment market. Both have plenty of ways to mess up and lose touch with their audience, but I do not think either of them are anywhere near close to reaching some natural market-based limit of growth or wealth.


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