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Disney's Big Character Test

Shareholders now need to figure the root of Disney's outperformance to get a better sense of whether its conglomerate plans will work, or falter and cause shares to stagnate, as they did in the bull market between the dot-com bust and the financial crisis.

Ten years ago, media conglomerates bought up studios, Web startups, networks and retail stores in a failed effort to push intellectual property through a growing number of distribution platforms, says Peter Cuneo, a principal at media investment company Cuneo & Co. He blames failed cross-synergies on weak content, likening industry efforts to fueling a Ferrari with regular grade gasoline.

Previously, Cuneo headed a turnaround of Marvel as it emerged from bankruptcy in the late 1990s and early 2000s, and was vice chairman of the company when it was sold to Disney for $4 billion in 2009.

In experiencing Marvel's evolution into a factory for blockbuster movies, Cuneo cites the company's decision to use motion pictures to breathe new life into its comic book characters as a reason why Disney will now benefit from its ownership.

When Disney bought Marvel, Viacom's Paramount unit had distribution rights for Iron Man and other Marvel-inspired films. Meanwhile, Sony (SNE) and Twentieth Century Fox hold the film rights to Spider-Man and X-Men films in perpetuity, meaning that Disney doesn't see an ownership benefit.

While Spider-Man and X-Men are ubiquitous characters and their on-screen success isn't surprising, Cuneo points out that Marvel's Iron Man movies revived an action hero that had vanished into obscurity, with a big studio and comic books payoff.

Disney will need to replicate that type of success with some of the thousands of lesser-known Marvel characters for its acquisition to truly be a blockbuster deal.

Since buying Marvel, Disney has paid a big price to pull some of its movies in-house. In 2010, Disney took back the distribution rights to The Avengers and Iron Man 3 only after amending Paramount's previous agreement with Marvel for a minimum $115 million payment. In fact, in the hit launch of The Avengers, a movie concept that Cuneo says was underway prior to Disney's acquisition of Marvel, Reuters recently reported that Paramount still stands to collect 8% of the film's box office, DVD and Web-related revenue, citing unnamed sources.

While licensing arrangements on Marvel franchises underway prior its acquisition might shave some present revenue, CEO Iger intends to make big investments to exploit a full ownership of most future Marvel movies, park rides and merchandising opportunities.

Like with Disney's Pixar-inspired Cars Land, CEO Iger said on a recent conference call that the company expects to use Marvel characters to expand its theme parks, particularly in California, Europe and Asia, where it is currently completing a Shanghai Disney Resort. Meanwhile, Disney owns all current and future Marvel related retail revenues.

"[The] box office is only one part of it. There are multiple opportunities to continue to mine this great set of characters," said CEO Iger of its Marvel unit and properties like The Avengers, in a May 8 earnings call. In particular, Iger pointed to Disney's integrated retail of Marvel characters and its "Imagineering" team's work to build Marvel-based attractions at many parks in the U.S. and internationally.

"In this case, one plus one equals three," says Cuneo, who notes that Marvel has expanded Disney's connection to a teenage and adult male audience that translates well in the U.S. and in key growth markets like Asia.

Of course, most of Disney's Pixar and Marvel movie-making, retail and theme park ambition could be realized without acquiring either company.

"There was never anything that stopped them, or anyone else, from building rides, movies, etc. around these characters on the basis of licenses," says Bruce Greenwald, a Columbia Business School professor and a co-author of The Curse of the Mogul. "This does not mean that it makes sense for them to have bought Marvel and Pixar for billions of dollars to achieve the same result," he adds.
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