RSM251

Case Assignment 1

Marvel Enterprises, Inc.

Lucia Jung
1000439965
RSM251 L0201
Monday, February 2, 2015

Lucia Jung
1000439965

Case Assignment 1 Marvel Enterprises, Inc.

Following the companys declaration of bankruptcy in the late 1990s, Marvel had since
developed a new operation strategy integrating its extensive licensing, toys, and publishing divisions
to better align with its financial standing. Focusing on its core business elements, the new strategy
allowed Marvel to successfully recover and grow to have a market value of over $2 billion by 2003.
With significant values in sales and income as well as its brand awareness and equity achieved by
2004, it was time for executives to critically examine the companys future, reevaluate its current
marketing and operation strategies, and explore potential growth opportunities.

ISSUE STATEMENT
Marvels current strategy is, in a word, outdated. Rather than seizing growth opportunities
available within their various divisions, especially those related to motion pictures, Marvel Universe
characters, and publishing, the company has become too dependent on their licensing activities and
popularity of well-known core characters (e.g. Spider-Man). The company has reached a point where this
strategy is no longer compatible with its market position and long-term objectives.


SITUATION ANALYSIS
Stemming from its recovery period after filing for bankruptcy, Marvels strategy mainly focused
on reducing overall expenditures, implementing growth-sustaining measures, and minimizing risk,
while also building the company back up. In order to do so, the company emphasized the importance
and revenue-generating roles of three divisions: comic-book publishing, toys, and licensing.

Marvel Universe, Characters, & Comic-Book Publishing
Marvels existing character and character family bank makes up what the company calls the
Marvel Universe, and is showcased in their comic-books in the form of periodicals and graphic novels.

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With popular characters having hundreds of associations and different story lines, there exists a
variety of series targeted at different consumer groups. Mainly targeted at males from 13 to 23 years
old as well as adults in their mid 30s, comic-books have a vary limited customer base, making it
difficult to expand and develop this market1. Traditional distribution methods did not improve this
situation, as direct market, mass market, and subscription channels were either causing Marvel comic-
books to experience extreme competition on the shelves in the form of DC Comics and smaller
independent publishers, or channel locations were not easily accessible. While this market is
considered stable at $300 million in annual sales and Marvel had a sizeable 40% dollar market share,
publishing is not strong enough to extend and strengthen the Marvel brand, especially considering the
existence of media and entertainment products. 2

In keeping with their strategy of minimizing risk, Marvel is very cautious about running with
new characters and storylines (if the margin is under 30%). That is, they invest in developing
characters and publishing the comic-books, but inferring from the case, they may not be investing
enough to market them and build awareness, resulting in a lower margin than that of existing core
superhero publications. Marvels over-dependence on the winners may be generating enough
revenues to cover these costs and contribute a great amount to the companys overall profits, but there
is also risk involved in this decision since consumer tastes may change and the public may lose interest
in any of the popular characters, implying major changes in revenue as well.

Marvels Toy Division
The Marvel toy business has grown to become a top designer of action figures and childrens
toys. Mainly targeted at boys from 4 to 12 years old and an older customer base for collectors, the toy
division is a significant contributor to profits, and creates opportunities for sales of associated

1 Appendix Exhibit A- Target Segments, Competitors, and Distribution Channels for Marvel Company Divisions
2 Appendix Exhibit B- Comic-Book Industry Market Shares
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consumer products. The companys decision to invest in this industry and in developing products for
the market is justified by the $20 billion in sales that the industry generated in 2003. Through their
licensing agreement with TBW (excepting Spider-Man), Marvel has a fairly advantageous position, as it
has tight control over quality aspects of the products and does not face the manufacturing and
inventory risks. It is worth questioning this strategy, however, because the company is already
responsible for the development, design, and marketing aspects of the toy business, which incur
implicit costs, and yet Marvel is unwilling to independently manufacture its own products for fear of
bearing explicit costs. Considering revenues for popular character toys (more than 10% of net
revenues in 2001), such as the Spider-Man Web Blaster, and the increase in sales during major movie
releases, the toy business may be an extremely beneficial investment opportunity.

In any case, Marvels toys gain much better exposure than its comic-books through the
distribution channels due to the specialty toy retailers and mass merchandisers like Wal-Mart and
Toys R Us. Because they are easily accessible and available to a wide range of consumer groups, the
Marvel brand toys can market the characters and the associated media products, and are also likely to
gain more influence on consumer behaviour through increased brand awareness. This strategy also
had its consequences, since mass retailers provided shelf space for Marvels competitors in the toy
industry (i.e. Bandai, Hasbro, Mattel). This calls for Marvel to strengthen its competitive advantages
and find ways of obtaining more shelf space in its distribution channels.

Marvels Licensing Division and Media Exposure
Using licensing as the main operating tool to expand the company, Marvel has monetized its
existing content library consisting of major blockbuster characters like The Hulk and Spider-Man, as
well as many lesser-known character families like The Ghost Rider, and The Fantastic Four.3 Through
licensing, the characters and the Marvel brand have been available for use in various media products

3 Appendix Exhibit C- Production Costs and Revenues of Marvel Movies Released, Revenue-Sharing Arrangement for Marvel
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and consumer products, making this division the most profitable among all of Marvels divisions,
generating $139 million in operating income.

With motion pictures being a major component of Marvels licensing division, the companys
studio has invested human capital and incurred implicit costs in increasing this particular licensing
activity. To minimize risk and reduce expenditures, Marvel has built partnerships with various studios
that produce the film adaptations of its popular storylines, avoiding any studio or production costs, as
well as any marketing and advertising costs. In other words, Marvels close involvement with the
development of the films is not reflective of their very limited capital investment. Despite total box
office results for blockbuster films like Spider-Man and X-Men II covering all studio productions costs
and generating significant profits, Marvel continues to engage only in licensing its brand and
characters without any control over the film release and marketing strategies. Their revenue-sharing
agreements with their studio partners are surprisingly unfavourable, and often generated negligible
amounts in profits.4 However, overall, Marvel films dominated the market generating more than 70%
of the revenue ($1.2 billion out of $1.7 billion), while the remaining percentage could be traced to its
competitors, DC Comics (and Warner Brothers) and Pixar.

Marvels licensing activities for other media and consumer products are alternative sources of
revenue, and it is assumed that they tend to appeal to very specific consumer groups or subgroups
(e.g. consumers who enjoy purchasing and playing video games, consumers who have access to special
theme parks/shopping malls/other venues). While this provides the company with a plethora of
opportunities to build brand awareness and general sales of licensed products, the minimum payment
to Marvel by licensees are dependent on the customer awareness of the characters and storylines that
are being marketed. This addresses the previous issue of dependence on core characters, and the risks

4 Appendix Exhibit D- Motion Picture Revenue-Sharing Agreements Marvels Share

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involved in terms of loss of revenue, as well as the issue of Marvels brand equity and loyalty versus
the characters brand equity and loyalty.

ANALYSIS OF ALTERNATIVES & DECISION CRITERIA
Decision Criteria
Implementing any alternative strategies for Marvel requires consideration of several major
factors that will drive the decision-making process. First, the new strategy must allow for sustained
growth: after emerging from bankruptcy and recovering to a certain degree, the company can now
focus its attention on long-term development and future profitability in all divisions. Second, any
alternatives should consider the extent of Marvels capital investments and work to identify all
profitable activities that will maintain or exceed profitability under the current licensing strategy.
Furthermore, any new strategies should increase Marvels brand equity and loyalty and be more
effective than placing too much focus on popular blockbuster characters, promoting increased
awareness of the companys other smaller, lesser-known characters.

Based on these criteria, Marvel has a variety of strategy options to implement:

1. The current market strategy
They can continue licensing operations while maintaining control over the design and quality of
toys and consumer products, and build brand equity and awareness of their original popular
characters through the media at the cost of having low revenue shares from production studio profits.
While this method is certainly not an unprofitable one, their lack of capital investment and risk-
avoiding behaviour is preventing the company from tapping into potentially profitable sources of
revenue in the form of motion pictures (Spider-Man grossing $820 million worldwide, Marvel
receiving $25 million only in profits), independent toy production, and expansion of the Marvel
Universe. There is also a disconnect between the objectives of the current market strategy

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minimizing expenditures and risk, and financial stability and the goals of a more stable Marvel that
seeks growth opportunities and large-scale projects to increase profitability.

2. Expanding the Marvel Universe- Introduction of new heroes and investment in marketing lesser-
known heroes
Under the previous market strategy, Marvel chose to cancel any comic-book publications
featuring new characters if they had less than a 30% margin. Judging from Publishings explanation,
the company did not invest in aggressive marketing or advertising for these new products, nor did it
attempt to build any brand awareness through licensing activities, choosing instead to watch it for a
period of time. This strategy places much more emphasis on the existing popular characters and
increases Marvels dependence on these characters to achieve expected profits. Marvel needs to
question what would happen to their profits if consumers lose interest in major characters like Spider-
Man, and how this would also negatively affect all divisions within the company.
By introducing new characters and investing in creating customer awareness, Marvel can gain
popularity for these characters and distribute some of the risk associated with their dependence on
popular superheroes.

3. Investing in Capital-Intensive, but also Potentially More Profitable Activities Motion Pictures
Marvel has been focused on activities that required very little of their own capital investment,
thereby emphasizing their use of licensing as a means of generating revenue. This strategy was very
applicable when the company did not have the cash and financial means of providing any capital
investment, however, with its current standing, activities requiring large investments may be
necessary to reap the bigger rewards. In particular, Marvel may want to seize the opportunity to
capitalize on motion pictures.
With an ever-growing consumer market for entertainment products, Marvel can invest physical
and human capital in setting up its own production studio and producing its own films. By taking this

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risk, Marvel could fully own (and not just license) its popular superheroes and have full control over
the whole filmmaking process, release time and strategies, and marketing and advertising strategies,
and retain the profits from the project.

RECOMMENDATIONS
After considering Marvel Enterprises long-term goals and areas in which it has not yet seized all
revenue-generating opportunities and profit-maximizing activities, it is recommended that the
company introduce new heroes and character families under publishing to expand and diversify the
Marvel Universe. Distribution channels for resulting comic-book series and graphic novels should be
better planned and organized to effectively build awareness and facilitate easy access to these new
products. It is also recommended that Marvel focus less on minimizing risk and expenditures and
invest more physical and human capital in producing its own motion pictures.

ACTION & IMPLEMENTATION PLAN
The main issue with introducing any new characters under the Marvel brand was that they
never got enough exposure through marketing efforts to rise to the level of Spider-Man or The Hulk. As
a result, majority of consumers are likely paying too much attention to existing popular heroes, and
are less likely to personally seek out lesser-known characters. To respond to this behaviour, Marvel
can build the awareness of new heroes with consumer awareness of known heroes. One of Marvels
greatest strengths is that it has interlocking story lines and families of characters created by
association with popular heroes. So, by publishing comic-books introducing new characters as part of
a team with a known character, for example, the target audience of comic books featuring known
characters (and previously untapped consumer groups) can be exposed to lesser-known heroes. By
using the brand equity built by Marvels successful characters, it can effectively market its new
characters.

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If Marvel can gain an audience for these new characters, opportunities for licensing activities
may also increase. Assuming Marvel invests enough capital to produce motion pictures for its popular
heroes and stories (discussed below), it can additionally engage in licensing the use of their lesser-
known characters to external production studios so that they may gain exposure through the media.
This can lead to the development and marketing of toys and other consumer products, since increases
in demand have shown to be closely related to film releases.

In terms of distribution, Marvels publishing had been relying heavily on direct market channels
such as specialty stores to carry a large amount of their products, but these stores were not very
strategically located to be easily accessible to a large consumer base. Perhaps it would be beneficial
for Marvel to also reevaluate their distribution methods, and consider enhancing their online specialty
shops via their company website. This would categorize their product lines ranging from comic-books
to toys to collectors items and make them available to anyone who visits the site. Exclusive
memberships are also an option so that those willing to pay a membership fee can gain access to
specialty items and other advantages, but this may alienate Marvels current customers who are not
willing to pay the fee. The company should be aware of the response of customers to these changes
whether it is accepted and appreciated or considered too corporate and act accordingly.

In implementing this strategy, Marvel executives should be aware of the possibility of market
cannibalization, as well as costs of expanding the product line (characters). While it seems unlikely
that responses to a new character could reduce sales volume and revenue for products associated with
their major heroes (many of which have had years to build awareness and equity), Marvel needs to
consider the likelihood of cannibalization and examine the implications in terms of possible revenue
loss. As well, developing new characters and stories requires human capital, and this is an investment
decision that Marvel should weigh against the potential payoffs.

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Investing their own capital in large-scale projects like motion pictures is bound to require
Marvel to face high fixed costs in setting up the studio itself, as well as other costs in hiring talent and
human capital, cost of production technology, and marketing expenses. These costs should be covered
in full by the revenue generated by the film when released, although there is little guarantee that this
will be the case besides the initial popularity and awareness of the characters and effective marketing
of the film. This type of project is high-risk due to the level of investment on Marvels part, but as its
CEO says, there could be a huge payoff as well.

As mentioned previously, lesser-known character films are likely much riskier to invest in, since
there is even less guarantee of the films becoming a hit and generating high revenues. For these films,
Marvel might consider using its licensing strategy to have the major studios produce them, and gain
profits through their revenue-sharing agreements. If these characters do well, Marvel can also
capitalize on this opportunity, and produce spin-offs or sequels in their own studios (provided they
are not under contract with other studios).

An advantage of Marvel producing its own films is that representatives of the company itself can
dictate exactly how each character in each film will be marketed to the public. However, there is the
challenge of building the brand equity and customer loyalty in the Marvel Studios brand, something
that large-scale production studios like Sony Pictures and 20th Century Fox had already possessed
before making Marvel films. A considerable amount needs to be invested in not only marketing the
films, but the studio brand as well, in order to successfully implement this strategy.






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APPENDIX
Exhibit A: Target Segments, Competitors, and Distribution Channels for Marvel Company Divisions

Exhibit B: Comic-Book Industry Market Shares

Smaller,

Independent

Publishers

25%











DC Comics

35%

Marvel
Enterprises
Inc.
40%

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Exhibit C: Production Costs and Revenues of Marvel Movies Released, Revenue-Sharing Arrangement
for Marvel

Title

Production Cost

Total Box Office

Earnings (Domestic
and W orld)

Revenue-Sharing
Agreement

Blade
Blade II
Spider-Man
X-Men
X-Men II

$45M
$55M
$139M
$75M
$110M

$183M
$232M
$1.23B
$453M
$621M

HE

The Hulk
Daredevil
The Punisher

$120M
$75M
$33M

$374M
$282M
$55M

HE
RP
HE
PP (5% share for Marvel)
RP ($5M cap)
RP
PP

Exhibit D: Motion Picture Revenue-Sharing Agreements Marvels Share

Agreement
Revenue Participation (RP)

Profit Participation (PP)

Hollywood Economics (HE)

Marvels Shares

3-7% of production studios theatrical gross revenues

1-2% of production studios home video gross revenues
3-7% of production studios other gross revenues

50% of production studios operating profit (including cost of prints,

advertising expenditures, distribution fees)
A share of production studio profits less expenses typically a
negligible amount

References
Elberse, Anita. Marvel Enterprises, Inc. (Abridged). Harvard Business School Case 505-001,
November 2004 (Revised May, 2005).

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