The Marvel Movie Doomsday Theory (scratch mix)
(Commentary) Two weeks ago I speculated on the possible end of the current superhero movie fad and what it might mean for the direct market, hoping to draw further information out of my readership. I wasn't disappointed; the subject became grist for the mill among webloggers and message-board posters, providing me with the means to put together a more fully-complete picture.

Here's the theory in a nutshell. Marvel Comics is $151 million dollars in debt, according to the company's 2002 Q4 press release. Most of its income is dependent either on monies from Hollywood's adaptations of the company's characters or licensing fees from toys and promotional items related to same; publishing drew in just 22% of their income for 2002. Last year the Marvel was able to pay $37 million in debt off of the previous figure of $188 million. Even assuming that they can keep paying down their debt at the current rate, it is my contention that Marvel could find itself in potentially fatal trouble should the superhero movie fad turn into a bust in the next two years or so. Because so much of the comic-book shops serviced by the Direct Market are dependent on Marvel product for upwards of half to a third of their income, such a bust could also have disastrous implications for the rest of the comic-book industry as well.

My theory also predicted that the implications of this chain of events would be more severe if Marvel's intellectual-property portfolio was currently being use as collateral in a loan. The last I had heard, Marvel had been forced to use its IP assets to secure a line of credit from Citibank in November of 2001. Upon further investigation, however, this has turned out to no longer be accurate. In this thread on Comicon.com's message board, Rick Veitch quoted from a February 2, 2002 entry of his Splash weblog, which reported that Marvel had secured another loan (this time from HSBC Bank USA) to pay off its Citibank debt:

"In December, Marvel had announced 'that it has arranged for a new senior credit facility with HSBC Bank USA (HSBC). The facility has two separate components, the first of which is a $20 million revolving letter of credit facility renewable annually for 3 years, and the second is a three-year term loan for up to $60 million. The interest rate for the facility is at a margin above LIBOR, consistent with current market conditions. The proceeds from the term loan are available only to purchase Marvel's 12% Senior Notes due 2009. The HSBC loan arrangement provides limits on the price that can be paid for the purchase of the Senior Notes and establishes January 31, 2002 as the absolute last date by which the Senior Notes can be purchased by the Company with the proceeds of the term loan.'...

"All of the Perlmutter deal was ratified at yesterday's meeting, further cementing his control of the company. Still unclear is if Perlmutter or the HSBC now holds the company's copyrights and trademarks in hock against any default."

As it turns out, HSBC did in fact wind up securing the IP assets as collateral, according to the 8-K form Marvel filed with the Securities and Exchange Commission -- see "Pledge and Security Agreement", Section 1, Subsection (g), items (ii) & (iii), about halfway down the document. This debt in turn was paid off on December 12, 2002, leaving Marvel once again in control of its own intellectual properties.

I'm not sure this invalidates the theory per se, but it does take the edge off of it; if and when the movie bust occurs, the hit Marvel takes would play out over a much longer period than it would have if there were a loan being covered by the company's IP. I still think that an eventual end to the movie fad is likely (there's too many films coming down to the pike to think otherwise); the only question is when, and how much damage it does.

Speaking of which -- my theory also generated discussion in other weblogs, including a swift response from Franklin Harris, who was skeptical of the question's premises:

"My question, however, is, 'Is there really a superhero movie glut?' Yes, there are a lot of comic-book movies out there, but most moviegoers don't view them as such. Do most moviegoers even know Blade is based on a comic-book character? Rather, I think we're dealing with many different markets: a Spider-Man market, an X-Men market, a Hulk market, etc. These markets, in turn, overlap with the markets for sci-fi, horror and action movies. And, yes, there is a small market for "comic book" movies, too. But it isn't the dominant market even now."

I suppose the case can be made for a differentiation between strict costumed-adventurer films and ancilliary projects like Hulk, which owes as much to Frankenstein as it does to the superhero genre; drawing a distinction between every such project, however, is pushing it. Does Harris really think that audiences will see Spider-Man and X-Men as being truly distinct from one another? I think that even something like the upcoming League of Extraordinary Gentlemen (my current pick for First Major Turkey of the genre's current incarnation) will probably wind up being seen as a superhero movie by the viewing public -- while theater-goers may not know C.C. Beck from Rob Liefeld, they're undoubtedly familiar enough with the basic conventions of the form to know it when they see it. If it acts like a superhero team, it's a superhero team, Victorian trimmings or not. Likewise, while its possibile to dress the Fantastic Four up as science-fiction and de-emphasize the superheroey aspects, the fact remains that this was already tried with the X-Men movie, which was nonetheless pegged as a superhero film from the get-go. In short, the answer to Franklin's question remains "not yet, but give it a year." When fed a rather narrowly-confined set of storytelling schema which repeat over and over again, eventually you'll find yourself bored with the results, regardless of the label slapped on the various projects. When this occurs, we'll be in the midst of a glut.

Put it this way: the past two decades saw two such fads rise and then fizzle out -- the "Rambo" movie and the mad-slasher flick. In each case, a series of well-made (or at least competently made) films was eventually undermined by an endless string of films that were either mediocre or outright awful. The "Rambo" film craze was extinguished rather quickly (thank you Chuck Norris, thank you David Carradine), at least in comparison to the initial mad-slasher sensation, which lingered for more than a decade before its first fallow period. Filmmakers working the mad-slasher genre were able to revive it twice by re-inventing the formula, first with surrealism and special effects (Nightmare on Elm Street, the Chuckie films), then with knowing ironic detachment (Scream, I Know What You Did Last Summer, Halloween: H20). In each case, however, the fads eventually ended as the innovations exhausted themselves.

You could find any number of genres which have followed the same trajectory: westerns, disaster films, "Indiana Jones"-style adventures, sword-and-sorcery films. These genres have each had wildly different sell-by dates, and most have enjoyed periodic resurgences as the flavor of the previous wave fell from memory -- it's a long way from Ahhnold's Conan films to The Lord of the Rings -- but the boom/bust cycle has been a fairly constant feature throughout. It's simply how Hollywood works. When you find a film the public seems to like, you make a dozen films just like it and ride the concept into the ground until the next one comes along. Add in the fact that Marvel isn't the only company licensing superhero projects (latest up: Catwoman), and the likelihood of this boom being ground into a bust looks even more likely.

This leads us to NeilAlien, who took Harris' observations and expanded upon them. Neil broke his objections down into six distinct points. He's since retracted the sixth, but let's take a look at the remaining five (and perhaps a quick peek at the remnants of the final point as well).

"#1. Not Convinced that Marvel Comics is dangerously dependent on movie money."

Neil's main point here is that in addition to movie money, Marvel is also earning revenues from comics and toy money as well. This is sort of true, but not as much as Neil hopes. Unfortunately, comics account for just over one-fifth of Marvel's 2002 income, which might be enough to pay for the publishing concern, but is probably inadequate to even servicing the interest on Marvel's debts, let alone paying them off. The toy business is more profitable, but with one exception it's far more dependent on the movies than Neil implies; fully two-thirds of Marvel's $155 million in net toy sales for 2002 came from products associated with the Spider-Man movie; I've seen enough X-Men toys in grocery-store discount bins to feel comfortable in assuming that income from such toys has dropped significantly and won't be a major source of revenue until the next film comes out. It's the movies that sell the toys, and a cessation of superhero films would cut enormously into toy sales. Seen any Captain America toys on store shelves? No? To the extent Marvel isn't dependent on revenues from a successful movie franchise, it's dependent on toy sales and licensing fees that are also dependent on a successful movie franchise.

(The one exception to this is Marvel's Lord of the Rings franchise, but even here the same rules are in play. This December sees the release of the third film in the trilogy, The Return of the King, and there may be a brief, final flurry of consumer interest generated by the release of the film on DVD. After that, you can expect to see revenues from this license drop precipitously -- call it a year and a half from now. Note also that Marvel has signaled its intentions to cut back on direct toy manufacture in favor of licensing out the work to other companies, in part as a signal to Wall Street that the company is working to reducing its overhead in favor of generating more of its income by farming out its intellectual property to sub-contractors. It's a smart move; it allows the company to take in mildly less income from toy sales in exchange for the licensees assuming all the financial risks of production. The downside is that as Marvel moves out of the manufacturing game, there'll be no reason for other companies to give them the license to hot properties like LotR.)

"#2. Not Convinced that Marvel Comics is dangerously dependent on a superhero movie glut."

This was answered in my reply to Franklin Harris, and requires little in the way of further elaboration. One point I would like to note, however, is that many of the actual non-superhero characters currently under option are characters so palpably derived from other sources that the only reason to license them in the first place is to grab a little of the heat from Marvel's current success. Think Werewolf By Night, Deathlok and The Punisher -- you could change a few nouns and verbs in any of these three characters and make these movies without paying Marvel a penny. What's Avi going to do? The whole premise behind Deathlok has already been mined to death by such films as the Terminator series, while the other two are barely-disguised ripoffs of previous concepts. Should a glut dim Marvel's polish, there's no reason on Earth why any one of these projects couldn't be shelved in favor of a vague soundalike. Marvel's only real licensing strength lies in superheroes.

"#3. Not Convinced that Marvel Comics is dangerously dependent on a film enterprise that is bound to fail."

Here's how Neil begins:

"It's just that Journalista doesn't like them, and thinks they will fail because it strongly wants them to fail. Was anyone else starting to get the feeling that if Daredevil had made $300 million, Journalista would have adjusted its monocle, pointed skyward and said, "I reiterate my prediction that Daredevil will not make $400 million!" Daredevil is a success."

Ummm, no it's not, Neil -- if Daredevil had earned $300 million in box-office, it would've been seen as a success, but $100 million is another matter. According to Box Office Mojo, Daredevil cost $78 million to produce and roughly $45 million in promotional costs, for an estimated grand total of $123 million in total expenditures. As of this writing, the latest figures indicate just over $96 million in box-office receipts. So far, Daredevil is in the hole to the tune of $27 million. Does this sound like success to you?

Rather than extrapolating further on this point myself, allow me to let the box-office geeks over at Fametracker give you the bad news (link courtesy of Jason Pitzl-Waters):

"At this point Daredevil is struggling to cross the $100M mark and despite announcements from Fox about sequels and spin-offs, I'm pretty sure that once the dust settles, this will be considered a failure and no more of these horrible movies will happen. Why? Well, the evil Don Simpson (I won't say "late" because despite his apparent demise, true evil never dies) used to say that a movie doesn't become profitable until it makes three times its cost. Now considering he didn't make movies for any reason other than money, I think he can be trusted on this one point. So, let's do the math: Daredevil cost $80M to make and Fox spent at least $10-20M pushing it. That puts us at $100M. By "The Simpson Rules" this now needs to make $300M to make a profit. As it's struggling to pull $100M domestic, it will have to do monster business overseas to warrant a sequel, as even an English major like myself knows that you don't risk losing a dollar just to get that dollar back. You want to at least triple your return. No one is going to risk another $100M just to get that $100M back. And since I don't see many "Daredevil" t-shirts, merchandising isn't reaping a Batman-like windfall (merchandising on the first two Batman films actually outgrossed the box office)."

Further down in the thread, another pseudonymous poster notes that the figures we're bandying about are gross, not net. The thread participants then proceed to disagree on exactly how much of that $100 million goes to the theaters rather than Fox, but basic point remains: Daredevil isn't even close to being a profitable film yet.

Neil concludes his point by attempting to compare superhero films to action films generally, but this strikes me as misleading -- this is like comparing love stories to romantic comedies set in Antarctica. One is a basic tenet of human storytelling, while the other is a baroque variation on the theme. Action films will continue to be made despite the occasional Steven Seagal flop because "action" has been central to the stories we tell since prehistoric times. This dynamic simply doesn't translate to more rarified genres.

"#4. Not Convinced that Marvel's intellectual property is dangerously in hock."

As I noted above, it isn't. Neil is correct, and I concede the point.

"#5. Not Convinced that a Marvel bankruptcy means the end of Marvel Comics and the end of the direct market."

Let's turn our heads respectfully, and not take the obvious crack at Neil's main refutation of this point being a Bill Jemas quote.

As I also noted above, however, the fact that Marvel's IP isn't being used as collateral doesn't necessarily mean that the danger goes away. Should the superhero movie boom end too soon for Marvel to pay off its debt, the company will have a little more time to make arrangements than they would if one major loan had the company's IP catalog as collateral. The end result, however, could still find the company in bankruptcy court, and without the prospect of immediate revenues from further movie and licensing deals -- and with the added baggage of a previous bankruptcy trailing behind the company -- I strongly suspect Marvel's next go-round would be a lot more arduous. Would Marvel survive a second pass through Chapter 7? Would Marvel have difficulties convincing a judge to allow them into Chapter 7 this time, rather than Chapter 11? The comics industry doesn't have much more room to contract before the economics of the market cease being profitable enough to sustain even the meager success it currently enjoys. At this point the hiccups resulting from a second Marvel bankruptcy wouldn't need to be very big in order to do lasting damage to the Direct Market.

As I said, Neil withdrew his final objection, but he then went on to extrapolate on it a tad nonetheless, so let's give it the once-over as well.

"#6. Not Convinced Marvel comic books and movies are connected this way."

If Neil is referring to a long-term connection between movie sales and comics sales, I'm actually in agreement; there's no serious evidence to support the notion that superhero comic-book sales have been impacted for more than a month or two by the movies released within the last few years. Even excusing the horrible movies that followed Tim Burton's first two Batman movies, the fact remains that Batman comics didn't turn popular with the general public even after the first two films. Sam Raimi's Spider-Man was wildly successful, yet even Marvel's biggest selling Spider-title, Ultimate Spider-Man, sells just over 100,000 copies through the Direct Market. If there's been a bump in newsstand sales, Marvel's being stingy with the numbers -- and given the company's need to throw every conceivable bit of good news out there to its stockholders, I find the company's silence on the subject significant. In any event, I'm not sure at this point how Marvel's publishing division matters to the argument, since it earns too little to replace film licensing as a means to pay down debt; again, Neil has withdrawn the argument, so I probably shouldn't even be speculating.

As I noted two weeks ago, I could well be wrong about some or all of this. The other major publishers could pick up the slack quickly enough to minimize the damage. Marvel could actually keep the boom times going long enough to pay down its remaining debt, after which a superhero movie bust wouldn't matter. For the sake of the industry, I certainly hope so. Nonetheless, given the near-unanimous Pollyanna-esque crowing over Marvel's movie success I've been reading in the fan press for over a year now, the fact that there is a potential downside to the current state of affairs seems to me to merit further examination. Yes, the added visibility that the movies shine on the medium is nice, but the downside is that it leaves us vulnerable to market forces larger than those with which we're used to working, forces that could in theory have an adverse effect on the health of the Direct Market. It may not be worth panicking over yet, but it's certainly worth mentioning.
Posted @ 3:05 AM by Dirk Deppey | Back to ¡Journalista! | Back to Archives

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