How Marvel Makes Movies

[the reel chris]

Interesting article written for finance idiots like myself which describes what it takes for them to make a movie, and what they can and can't do with respect to their liscenced properties. Credit to The Motley Fool website.

Follow-up, including interview with Quesada, tomorrow.

Tim Beyers
February 27, 2007

When I visited Marvel Entertainment's (NYSE: MVL) high-rise, though modestly appointed, headquarters in New York earlier this month, the walls were what struck me the most. They were covered in bright character renditions as well as current and classic editions of comics I remember collecting as a youth.

And it made me nervous. After all, this is a company that, in days past, I might have given a limb to write for. But now, as a Fool, it was my job to study the mechanics of the business itself. So that's what I did. What you have before you is the result -- part one of a two-part miniseries exploring the primary elements of Marvel's business, beginning with movies and licensing.

What does it take to make one of Mighty Marvel's magnificent flicks? Read on, dear Fool.

Action!
As complex as Marvel's film financing deal is, the process of creating a hit like Ghost Rider, which is setting box office records now, begins normally enough. The first step is to hire a screenwriter.

For licensed properties -- such as the blockbuster Spider-Man franchise, which has been produced in concert with Sony's (NYSE: SNE) Columbia Pictures, or the Fantastic Four films, which are being made by News Corp's (NYSE: NWS) 20th Century Fox -- Marvel has partnered with studio executives to shepherd the process.

With self-produced films such as 2008's Iron Man, Marvel has total creative control and pays all production costs until the terms set forth by its investors are satisfied. Principally, that means securing a completion bond, which guarantees some form of reimbursement to investors if a financed film fails to be completed.

There are several steps to securing a completion bond. According to Marvel's most recent annual report, the list includes:

1. Approved production, cash flow, and delivery schedules.
2. An approved budget.
3. An approved script.
4. Hiring key members of the production crew, including the director and producer.

That's why John Turitzin, a Marvel executive vice president who also is a key member of the office of the chief executive, told me in an interview, "Iron Man is the entire life for our people in Hollywood right now." (Iron Man, starring Gwyneth Paltrow and Robert Downey Jr. and directed by Jon Favreau, is to begin filming on March 12th.)

What investors should know is how this process impacts Marvel's earnings and cash flow. For that, allow me to refer you to the fourth-quarter and full-year earnings reports made yesterday. Take a look at the cash flow statement in the press release. Under "changes in operating assets and liabilities," you'll find $15.1 million spent for film production. That's essentially what has been spent to get Iron Man under way.

Turitzin says that when filming begins, Marvel should be able to draw from the facility in order to reimburse itself for out-of-pocket costs. From there on, vice president Matt Finick, who also sat in on the interview, says that Marvel should be able to pull funds as production costs come due -- almost like a credit card.

Paying for the camera
That's a pretty good deal. But it also means that, now more than ever, investors need to cuddle up with Marvel's cash flows. Not that earnings aren't important -- they are. But Marvel won't be able to keep producing movies if cash flow suffers.

Fortunately, that's not the case. For 2006, I estimate that the comic book king produced $61.7 million in owner earnings -- more than enough to cover the up-front cost of Iron Man. And that's in a down year when licensing was hurt by a thin movie slate.

With Ghost Rider, Spider-Man 3, and Fantastic Four 2: Rise of the Silver Surfer -- which, by the way, looks fun -- scheduled for 2007, Marvel should earn at least $66 million in owner earnings (OE), so long as it maintains the same OE margin that it had last year. And that, in turn, should be more than enough to start production of The Incredible Hulk while handling other operating needs.

But I expect even better results. Marvel's offices are anything but decadent. And the office motto -- "less meetings, more productivity" -- was displayed prominently above the drawing board in the tiny conference room where I interviewed Turitzin and Finick. All signs point to a firm that's being cautious with its cash.

Meanwhile, Marvel is using other means to buoy margins and cash flow to reduce its risk in making feature films. Two of the more prominent deals involve Hasbro (NYSE: HAS), which Finick says handles most operating costs in toy licensing, and Lions Gate (NYSE: LGF), which cuts costs in direct-to-DVD animated productions and includes a profit-sharing component.

Out on a cliffhanger
If there's a problem, it's in what Marvel can, and can't, produce on its own. Turitzin says most of the company's licensing deals go back many years, when the company needed money to exit bankruptcy. Consequently, it gave some studios very generous terms.

How generous? Some studios retain rights to entire families of characters. Fox, for example, has the rights to the X-Men family. That means if Marvel wants to make a film featuring one of its more obscure mutants -- perhaps the winged Angel or metallic muscleman Colossus -- it has to do the deal with Fox.

The same goes for Spidey. Just about any character deemed to be a part of the Spider-Man universe is a Sony property for the purposes of filmmaking.

But how bad is this really? Marvel has more than 4,000 characters, and some of its most high-profile -- including the superhero team The Avengers, of which Captain America, Iron Man, The Hulk, and Thor have all been a part -- are strictly owned by Marvel.

What's more, there's a newfound synergy between those making movies and those who make the characters. More on that pulse-pounding story in tomorrow's follow-up, which includes my interview with Marvel editor-in-chief Joe Quesada. Excelsior!

 

[blind_fury]

Cool article!

"Fortunately, that's not the case. For 2006, I estimate that the comic book king produced $61.7 million in owner earnings -- more than enough to cover the up-front cost of Iron Man. And that's in a down year when licensing was hurt by a thin movie slate.

With Ghost Rider, Spider-Man 3, and Fantastic Four 2: Rise of the Silver Surfer -- which, by the way, looks fun -- scheduled for 2007, Marvel should earn at least $66 million in owner earnings (OE), so long as it maintains the same OE margin that it had last year. And that, in turn, should be more than enough to start production of The Incredible Hulk while handling other operating needs."

If Marvel can make $66 million from X3, they are going to earn at least $200 million from Ghost Rider, Spider-man 3 and FF2. And they can expect even more money in 2008 from Iron Man and Incredible Hulk in 2008. At least $300 million.

Bring on the Captain America, Thor, and Dr. Strange movies!!!

 

[engen]

excellent info. just the kind of article i've been looking for concerning how marvel deals with films...can't wait to read t he second part.

 

[the reel chris]

Thanks guys. I've been keeping my eye on that site but they're late in posting the next segment... I'm on it

 

[the reel chris]

OK, the first article was about the movies, this second article is about Marvel's literature operations and not so much why I posted this thread in the first place. But here it is.

Marvel's R&D Machine

http://www.fool.com/investing/general/2007/03/01/marvels-rd-machine.aspx


Tim Beyers
March 1, 2007
As much as Marvel Entertainment's (NYSE: MVL) movie business impresses me, its publishing business impresses me more. And that's not just because of my wild-eyed fascination with comics. Marvel editor-in-chief Joe Quesada, who gave me an hour-long tour of his operation, convinced me.
How? When I asked him how the work of making readable comics fit with the firm's flashier movie business, he said plainly, "We're the R&D for the company."
Not your typical R&D
Brilliant response. And it made me wonder why in the heck I hadn't thought of that. Now, with the advantage of time, I know. Tech guys like me have always viewed R&D as an expense that has no hope of an immediate return.
Not so with Marvel's publishing group, which is responsible for the care and feeding of some 4,000 characters. Have a look at how the business has improved with time:
Metric
2006
2005
2004
Sales
$108.5
$92.4
$86.0
Year-Over-Year Growth
17.4%
7.4%
17.3%
Operating Margin
40.6%
39.4%
43.4%
Source: Marvel press releases and SEC filings

That's higher sales matched with relatively stable margins, which is exactly the combination we Foolish investors seek. And, again, it's nothing like a classically unprofitable R&D operation.
Not that any of us should be surprised. Marvel controls close to 40% of the dollar value of the comics market. That's important, because comics still draw a wide readership. Consider the 2006 Comic-Con International, which drew an estimated 100,000 attendees to San Diego over four days.
Why the crowd? Maybe it's because comics have entered the popular culture in unexpected ways. For example, hit TV show The O.C. prominently features comics through one of its star characters, who also happens to be a talented comic book artist.
Or maybe, as Quesada told me, it's because Marvel's books are best when they reflect the real world. That's what happened with its Civil War mini-series, in which an accident that kills hundreds raises questions over whether superheroes ought to register their powers with the federal government. Popular characters align on different sides of the issue, hence the title of the series.
Where synergy meets strategy
And these themes take shape well in advance, Quesada says. Marvel is already mapping out the major plotlines for its characters for 2008. Writers are a huge part of the process. Marvel brings its top creators to its N.Y. headquarters at least twice annually to discuss ideas.
Does that also feed the movie slate? No, says Quesada. "We've never had a situation where Marvel Studios has said they want us to come up with a storyline that would work for a movie."
But there's more to that than creative control, Quesada says. It's also good for business. Marvel's publishing unit has a burgeoning trade paperback business in which previously published comics are collected into a book ahead of a major film release. Ghost Rider had one made in 2005, for example. So did Fantastic Four.
That way, Quesada says, readers can catch up with the history of the characters before seeing the films being made by Sony (NYSE: SNE) and News Corp.'s (NYSE: NWS) 20th Century Fox. Marvel, meanwhile, enjoys heady margins on the best work of its creators.
That's a far cry from the early 1990s, when Marvel vice president Matt Finick says that the per-book volumes were 10 times higher than they are today. But that was also a bubble. Comics I still own from those days don't carry much value from collectors because there are so many available.
Old isn't new again
In the end, that's a good thing. Marvel under Quesada and publisher Dan Buckley, who Quesada calls a genius, seems to have figured out how to create a consistently profitable publishing division that is feeding movie ideas to its West Coast studio, which is currently in the throes of producing Iron Man and The Incredible Hulk.
But I'll still lament the past. On my way out of Marvel, I passed what used to be the famed bullpen, where geniuses like Lee, Kirby, Ditko, Romita, Byrne, Claremont, and too many others to mention used to write, draw, and ink the stories of Marvel's mighty cast. Once filled with pens and drawing tables, that area is now a cubicled sea of computers ready to render what fills today's comics.
And that, too, is probably a good thing for investors wondering if this stock can still save their portfolios. So long as Marvel doesn't lose its edge -- or its spirit.

 

[blind_fury]

Does anyone know when the movie rights for Spider-man and X-men expire and Marvel gets them back?

 

[Still A ThorFan]

Marvel usually hits the wall in the screen writing process.

 

[Rage]

Marvel was desperate when they made those licensing deals...those rights could be out of their hands for decades...who knows for sure? I'd like to know.

Rage

 

[Noir]

Does anyone know when the movie rights for Spider-man and X-men expire and Marvel gets them back?

...Not for a long time.