ALL HAIL IRON MAN

For fans of Iron Man, the weekend of 2 May was an exciting one – it saw the release of a new movie based on the Marvel Entertainment comic book superhero (who, by the way, gained his powers by injecting his nervous system with a modified techno-organic virus, thus fusing his armour to his body).

For fans of investment in contentbased intellectual property, the release of Iron Man was gripping, but for different reasons. Iron Man was the first film in a “slate financing” of up to 10 films based on Marvel characters. More importantly, it marked the first time that Marvel had full control and ownership of a film based on one of its many characters. A successful Iron Man debut would therefore mean a huge upside for Marvel Entertainment and its public shareholders, and the promise that the success of future Marvel character-driven movies would accrue directly to the company's bottom line.

Iron Man did not disappoint. After just 10 days in North American theatres, the movie earned $177 million. The film had a reported budget of $140 million. Already Marvel has announced plans to release an Iron Man sequel in 2010.

Marvel's claim on the profits generated by the Iron Man franchise are unusual for the mere owner of the intellectual property behind the film. Traditionally, owners of entertainment IP have licensed out to studios. The studios and bigname actors usually hog the bulk of the gross revenues from films based on third-party content, essentially guaranteeing payment for themselves, while the non-gross players stand at the bottom of a complex waterfall hoping for their share of the profits, if there are any. In structuring its roster of film financings the way it has, Marvel remains a “gross player”, giving it the rights not only to topline box office receipts but to all ancillary proceeds from DVD sales, soundtracks, video games, television series, T-shirts, you name it.

Marvel's slate financing was arranged in 2005 as a $525 million debt facility structured by Merrill Lynch. The lenders had their capital secured with only the theatrical film rights to ten Marvel characters, Iron Man being one.

In an interview last year with PEI Media, David Maisel, a Marvel executive vice president and the architect of the slate deal, described it as “groundbreaking” because “it really shows a shift in the value chain where the IP holder is now the dear aspect, and is able to take control of their destiny and get significantly more of the upside from the properties… I think it opened a lot of eyes when it was announced.”

The numbers behind Marvel's Iron Man success will no doubt be used to market a new generation of content-focussed private equity funds and deals. There has already been a shift in Hollywood toward slate deals, whereby filmmakers round up investors for what might be termed a balanced portfolio of funds. Not all of these deals have gone well, but some have been mild successes. Gun Hill I, a film fund backed mostly by two unnamed hedge funds and which put investors in a slate of Sony and Universal films, has reportedly generated a return in the high teens. But in these deals, the equity investors received profit sharing rights in specified films, which is distinct from owning the IP upon which films, and all the related revenue opportunities, are based.

The challenge for private equity investors looking to mimic Marvel's success is this – good luck finding a catalogue of IP like that of Marvel, which has had dedicated readers since the 1930s. Well before video game rights were known to mortals, Marvel was proliferating characters and plotlines with feverish fecundity. Maisel estimates that Marvel has 5,000 characters. “We're starting off with two movies a year, and then you add in the sequels – we have Iron Man, Hulk, Captain America, Thor, Avengers, Ant-Man – we're only still in the first inning. We have such a rich dugout to pull from,” he says.

To a certain extent, the recent buyouts of music publishers, talent management companies and video game companies (Elevation Partners' play) have been attempts to gain control of underlying entertainment IP. If any of these deals master IP exploitation quite like Marvel, the GPs will look like superheroes indeed.