Sanford Bernstein stock analyst Todd Juenger might have made the silliest statement I’ve heard in years. It had to do with Walt Disney’s (NYSE:DIS) $4.2 billion acquisition of Marvel Studios. Apparently, he said in a recent report, “We agree it was a good deal, but disagree that The Avengers makes that conclusion self-evident.”
He’s right. The Avengers success does not make that conclusion self-evident. It was self-evident the day the deal got made.
Mr. Juenger estimates a $1.29 billion profit for Disney on $3.7 billion in Avengers revenue. That’s a 33% net margin, which is mind-blowing, especially when compared to other movies — and, for that matter, other businesses. He points out that Marvel would have to release two films annually for a $517 million average gross to break even (although it’s not clear over what time period he refers to), and now that number is only reduced to $437 million.
Mr. Juenger misses the big picture. He seems focused on one or two films per year. Marvel, however, is about much more than films. Marvel will generate tens of billions for Disney over decades. What made Marvel one of the kings of comic books was its endless supply of intellectual property in the form of thousands of characters. Those characters have tangible value, as evidenced by the fact that Marvel initially got incredibly cheap money (over half a billion dollars in credit) from Merrill Lynch using only a given set of characters as collateral.
Marvel’s content strategy obviously is going to be the same as its comic book strategy — introduce lots of heroes and start pairing them up. Never mind all the sequels to each film for each individual character, or even Avengers sequels. Expect to see Hulk and Thor together in a movie of their own. Or Iron Man and Black Widow. Or Hawkeye and Captain America. The combinations are endless. Plus, Marvel will develop other properties with other characters, and follow that same strategy.
Movies will be the flagship product, but there will be television shows (primarily animated), direct to video, and at some point in the future, they’ll just reboot each of the characters and start all over again. This literally will go on for decades. And audiences will keep paying.
That is, they’ll keep paying if Marvel doesn’t make the one mistake that normally makes Hollywood production a terrible sucker’s investment: quality control.
Why has Marvel succeeded to date? Because the movies are generally three- and four-star efforts. That’s because studio chief Kevin Feige knows about good storytelling and hires good storytellers to tell Marvel’s good stories. If Mr. Feige leaves his job (Kevin, please, don’t ever consider it), or if Marvel’s corporate culture devolves away from content integrity into Hollywood’s sub-optimal-risk-management-multi-layered-bureaucracy-driven-by-fear mind-set, then they’re toast.
I do not expect that to happen. Disney’s purchase of Marvel (and Pixar) will drive the company’s revenues for a very, very long time. Ten years from now, everyone will wonder how Disney got Marvel so cheap.
As of this writing, Lawrence Meyers did not hold a position in any of the aforementioned securities. He is president of PDL Capital, Inc., which brokers secure high-yield investments to the general public and private equity. You can read his stock market commentary at SeekingAlpha.com. He also has written two books and blogs about public policy, journalistic integrity, popular culture and world affairs.