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"Deadpool" Shows How Complicated Character Rights Issues Are

By Motley Fool Staff - Feb 26, 2016 at 10:07PM

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In just two weeks, the R-rated “Deadpool” generated nearly $500 million worldwide, but thanks to old licensing deals, this is one superhero film that probably will not be contributing much to Disney’s bottom line.

Character copyright and ownership issues are perhaps nowhere more prevalent than in the world of superheroes.

In this clip from the Industry Focus podcast, Sean O'Reilly and Vincent Shen dive into the tangled, complicated world of which companies owns which characters' rights. Listen in to hear how much Disney (DIS -0.71%) might be getting from Deadpool's box office success, how steeply Marvel undersold so many of its characters in the '90s, and how much the success of one movie affects Twenty-First Century Fox's (FOXA) (FOX) bottom line.

A transcript follows the video.

This podcast was recorded on Feb. 23, 2016. 

Sean O'Reilly: So, Deadpool revisited. Just an update, it has (laughs) ... this movie made so much money ... dominated the box office since its February 12th release. Domestically, $235 million, foreign $255 million. That's $500 million on a $58 million budget film -- not including marketing, of course. But ...

Vincent Shen: After just a two-week run!

O'Reilly: This is cuckoo bananas profits. And it's not even, like, a major character, or whatever you want to say. Took the top spot again this past weekend, as predicted. The competition wasn't quite there. It was Risen and The Witch, which ...

Shen: Kung Fu Panda was No. 2 in terms of actual dollar amounts.

O'Reilly: Oh, that's good.

Shen: The new releases like Risen and The Witch, they came in like third and fourth. But, they actually did well on their own, smaller releases, as they were. But Deadpool, kind of like we called, there wasn't that much competition coming up this past weekend, and it continues to dominate really well. Last week, we'd talked about how Deadpool logged the best opening weekend ever for 20th Century Fox. Now, that has extended. This unlikely superhero, really, has--

O'Reilly: He's an anti-hero, Vince.

Shen: Exactly. He's become the best-performing X-Men movie for the studio ever, at least in terms of the U.S. box office. And that's out of 8 films at this point, and they have a ninth one coming out with X-Men: Apocalypse.

O'Reilly: Right. So, the reason we're bringing this up again, and what the question pertains to is, after discussing its impact on Twenty-First Century Fox last week, there was a question received from Brian W. It basically amounts to, "Since this is a Marvel character, and Disney owns Marvel, does Disney see any of the profits from this movie? What's the deal there?" And actually, this situation exists also with the X-Men franchise, as I recall. So, what does this mean for the shareholders of both of these companies? How does that shake out?

Shen: Sure. We talked a bit about 20th Century Fox's studio -- obviously, part of Twenty-First Century Fox. I know it can get a little confusing sometimes.

O'Reilly: Oh, did they change the names? Oh wow.

Shen: Brian, if you're listening, thanks again for the question. I kind of wish we had just covered this last week, as well. But it's good, because I needed to get some of the research done, and I actually had a follow up to the response I sent him, actually. 

I think a lot of moviegoers were surprised, and maybe a little bit relieved, too, to find out that the company that's known for Disney, Frozen, Wall-E, Disney princesses, and then you get this very heavy rated-R flick, it doesn't really sit as well within that range of films from Disney. But, obviously, it was put out by 20th Century Fox. What is Disney's role in all this? And otherwise, in doing the research, trying to find out the background of how they share profits, who gets rights to what, we learned that basically, Marvel has a lot of these kinds of agreements. It can get pretty convoluted. So, Marvel, before it was purchased by Disney in 2009 for like $4 billion, they had their three operating segments, essentially. They had their publishing, the more traditional--

O'Reilly: Comic books.

Shen: Exactly. And then, they had their licensing business -- which is what we're going to touch on -- and then they had their film production. But keep in mind, they didn't even start producing their own films until 2006. They took out this huge credit facility in order to fund those efforts. But before that, they generated the revenue by allowing other major studios to license their character intellectual property, essentially, and then to produce films.

Another example that we'd looked at previously was Sony (SONY -1.49%) and Spiderman, where Sony acquired those rights in, I think, 1999, and they ended up producing five Spider-man movies. Those, I think, really paved the way for some of these bigger superhero films. They did super well at the box office, basically two different reboots, one with Tobey Maguire, one with Andrew Garfield.

And in that agreement, Marvel and eventually Disney, after the acquisition, kept the rights to things like the TV shows, merchandising, and other platforms and outlets. But the company still benefited from a lot of the surging popularity for the character itself that accompanied each movie, naturally. And, the thing is, Sony and Disney signed a deal in February of last year, as if things weren't complicated enough, where they are changing their relationship a little bit, because the most recent movie that Sony put out, I think it was The Amazing Spider-man 2, didn't do as well in the box office as they'd hoped, they canceled a third installment in what was supposed to be that trilogy.

So now, the new agreement, interestingly enough, has Sony basically saying, "OK, Disney, you can use Spider-man in your upcoming movies, tie-ins with the Avengers. We'll still also be able to portray the character in our own stand-alone films. But that way we'll both benefit from the tied-in marketing and just, I guess, reboot, of this character, again, in another trilogy."

O'Reilly: Right. That sounds really convoluted. (laughs) It sounds really messy, but OK.

Shen: And, in that agreement, they both actually get to keep the profits from each film. I don't really think they share in that. It's just more of a mutually beneficial situation. Now, the difference here, rolling back to Deadpool, is that 20th Century Fox, just to give some background, acquired X-Men rights way back in 1993. I thought Disney actually had a similar arrangement with Spider-man, but after following up and doing some more reading and getting some input from one of our writers, Tim Beyers, he was able to find this court legal filing, essentially, that shed some more light on the actual relationship between Fox and Marvel and what this means for the movies. So, (laughs) you're going to laugh at this number, I know you will. Fox acquired the X-Men live action and animated rights from Marvel for $2.6 million. ... So, and--

O'Reilly: Wh--hold on!

Shen: (laughs) 

O'Reilly: ... They got the rights to these two ...

Shen: Keep in mind, this was way back in 1993, before all the--

O'Reilly: That doesn't make it right.

Shen: --before the potential--

O'Reilly: It doesn't make it right. (laughs) 

Shen: --showed itself, I think.

O'Reilly: The X-Men cartoon alone from the '90s!

Shen: They also get -- let me finish -- a percentage of the gross box office receipts. But those, generally -

O'Reilly: (groans)

Shen: --seem to be small based on ...

O'Reilly: You can't even get a house in D.C.--

Shen: (laughs) 

O'Reilly: I mean, granted, D.C. is really stinking expensive compared to the rest of the country. But you see what I'm saying.

Shen: Yes, of course.

O'Reilly: You're talking about a house north of Dupont Circle, for the rights to ... alright! Whatever!

Shen: This is over 20 years ago.

O'Reilly: All right, I'll deal.

Shen: Keep that in mind. So, they purchased those rights for $2.6 million, and in terms of the percentage of what the gross box office recipes actually came out to be, in that legal filing, from 2001, actually, the original X-Men film generated about $160 million in profits for Fox. Not bad at all. Marvel earned just about $6 million in back-end contingent compensations -- about 2% of worldwide ticket sales.

So, we're thinking, maybe, that 2% is what the fees actually were agreed to. So, assuming it hasn't changed, it could happen, we don't have the details. But assuming it hasn't changed since that time, based on that almost $500 million that Deadpool has generated in total worldwide ticket sales, Disney would only be getting around $10 million from that, so a pretty small nominal amount. And the thing is, supporting the idea that Marvel maybe undersold a lot of its characters, like, the licensing rights earlier on, before they realized how these huge blockbuster franchises can go ... Disney, since acquiring Marvel, has been pretty active in reacquiring rights, including, I think Black Panther was part of that, and also Scarlett Johansson's character ...

O'Reilly: Black Widow.

Shen: Yes, exactly. So, I think they've reevaluated some of those agreements, seen the value that they're losing out on, and now they're trying to fix that. But, for Brian and other listeners, to give you that background, Disney has different agreements with these studios, and in some cases, they're much better than others.

O'Reilly: Right, OK. Cool. So, how big of a deal do you think this is, before we move on, for the shareholders of each company? We saw that Twenty-First Century Fox's share price is up 3% after Deadpool's box office results and everything.

Shen: We talked about how, their studio segment is essentially their second-largest one. It's important, and the thing is, a huge success like this film, or Star Wars: The Force Awakens, we've seen the impact that can have on quarterly results, for sure, and the long tail that it's likely to have with the franchise. But it's still one film in a business that we talked about, Hollywood can be really choppy. Who knows? Hopefully, the second Deadpool is awesome. I really liked the first one. But there's no guarantee of that. So, it's bigger impact for Fox, certainly. For Disney, I'm sure they get that lift in general from having another Marvel character become a huge blockbuster success. But obviously, it's not going to be as nice a lift for them.

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