Marvel's New Movie Financing Concept (MVL)

There was an interesting column in the Washington Post yesterday-- Big Deals Are Sequels to Tradition In Hollywood, by Steven Pearlstein -- which made me think a little more about Marvel Entertainment (MVL) and their slate of self-produced movies that are starting to bubble up through the development process.

Marvel recovered from its dark days by rebuilding its licensing on the heels of the success of X-Men and Spiderman movies. But as the recovery settled in, they became very frustrated with the relatively small piece of the action they received on these blockbuster movies, usually single-digit royalties.

So they decided to get into the game themselves. In 2008, they will release their first self-produced and self-financed film, using a credit line that is guaranteed not by the corporate balance sheet but by Marvel's most valuable property: the characters themselves.

According to Avi Arad, who runs the Hollywood business (obsessively, by all accounts) for Marvel, the first Marvel-produced film is expected to be Iron Man, or possibly the Hulk 2 (it's unclear whether the first one out of the gate will be one of the films that uses this new financing line, but my guess is that's pretty likely).

This will coincide with other films by their partners, as they're only exposing between 10 and 15 of their characters to this self-produced film slate (and to the bank). Sony will release Spiderman III next year and we'd have to assume that they'll start work on something else in the Spiderman universe immediately following that, given the cash cow that Spidey has become. And Wolverine is expected to get his own film in 2008 or so, again with production by a major studio.

I'm in favor of this new strategy, even though it's certainly risky to get out of the royalty business and start producing your own products. But after reading this Pearlstein article, I feel even more strongly that this is a more surefire way for them profit from eager movie industry investors.

Marvel is getting a reasonably good deal on this financing, in my opinion. They are basically putting up their b-list stars as collateral in order to get the money to make films about them. If the films succeed, great- they owe only the interest payments on the financing, in addition to distribution payments to Paramount. If the films fail and they can't otherwise repay the loans, they lose only the film rights to those character, who have already become damaged goods in Hollywood's eyes.

This is a fairly large, corporate version of the things Pearlstein talks about in some detail, including exploiting folks' interest in investing in movies and the thirst for new investment vehicles in general. In turn, using that interest to get relatively good terms on a financing deal that is, by all accounts, a risky endeavor with a significant chance of failure.

While I believe that this is a good risk to take, it really rides on the creative direction of the company, moreso than any of their previous endeavors. If Marvel makes some bad films, all bets are off.

I don't think that is likely to happen. The most disappointing films from Marvel's recent past, like the Hulk and Elektra, were not subject to Marvel's creative control and didn't tell stories in the Stan Lee way. With a comic book fan and detail oriented guy like Avi Arad running these films, I expect them to be very true to the characters and much more appealing as films, though there are no guarantees in this business.

And that's why I still hold my Marvel shares, though I wish I had piled on a little more last fall when we got down to $13 or so. I will be looking for more entry points if any disappointment or sell-on-the-news behavior hits the street when X-Men 3 opens next weekend.

MVL 1-yr chart