For
a grown man, Tim Rothwell knows an alarming amount about video games.
Get him started on the subject and he'll launch into the acronym-laden
language of hardcore gamers. The new portable system from Nintendo is
the "DS." Massively multiplayer online games are "MMOGs." Rothwell,
president of the consumer products group at Marvel Entertainment Inc.,
speaks this strange tongue with an ease that seems both impressive and
troubling - until he cuts to the chase. Then it's just impressive. For
in the past three years, 25 million video games based on characters
Marvel has licensed (think Spider-Man, X-Men and the Incredible Hulk)
have been sold, and the royalties streaming in now count for roughly
one-third of all sales in Rothwell's group. "It's just exploding," says
Rothwell. "It's on fire for our company."
Naturally Marvel - which brought in $115 million in licensing
revenue in the first six months of 2005 - is fanning the flames. The
next frontier is the wireless market, with its 1.7 billion customers
worldwide, most using phones capable of downloading some sort of
Marvel-branded content. And the possibilities don't end there. For
Marvel, as for every other owner of entertainment content, the
proliferation of digital media is opening up a whole new world of ways
to distribute, leverage and repurpose their property: games, ring
tones, DVDs, MP3s, broadband video. "Every day you pick up the paper
and read about some new technology and new form of delivery for
assets," says Rothwell.
What you don't read so much about are the structures that Rothwell
and his peers at other companies have to come up with to turn all that
virtual content into real dollars. Sure, the sad story of the music
industry's grudging reaction to digital technology seems familiar. But
there's a lot more to the picture than that, and companies are learning
more every day about developing strategies, organizing internally and
choosing the right partners. A whole new ecosystem of service providers
and middlemen has sprung up to facilitate their efforts. And some clear
differences are emerging, driven by the type of business that
originates the content, as well as the strategic judgments of the
companies in question. Consider: Where Marvel is trying to move its
content onto mobile phones via licensing agreements with multiple
carriers, Walt Disney Co.'s ESPN unit is creating its own private-label
wireless network. "The carriers have a different business model than we
do," says Manish Jha, senior vice president and general manager of
Mobile ESPN. "They're trying to reach a broad audience. We want to
focus on the sports fan. By designing a network from the ground up, we
can create a much more compelling experience."
Marvel and ESPN may be venturing into new territory, but the space
isn't exactly uncharted. In particular the music industry has provided
some valuable lessons on how to exploit digital content - and certainly
on how not to. Perhaps the most important is this: Pursue digital
content seriously, even if - make that especially if - it upends your
business model. Venture halfheartedly, or fail to venture at all, and
you're likely to find competitors quoting Marvel's The Thing: "It's
clobbering time."
The music industry's mistake wasn't that it bit off more than it
could chew, but that it bit off more than it was willing to chew.
Instead of licensing songs for sale online, the recording companies
decided to sell the songs themselves, banding together and getting into
the technology business. In 2001, EMI Group, Bertelsmann AG, and Time
Warner Inc. partnered with RealNetworks Inc. to launch MusicNet. Around
the same time, Sony and Universal Music Group launched their own
service, called Pressplay. But the recording companies never could
quite put their hearts - or, more important, their wallets - into
online distribution; their preference, and priority, stayed with
traditional retail channels. The result: MusicNet and Pressplay would
prove major disappointments and would ultimately be sold to companies
outside the recording industry.
Meanwhile, the online music market exploded anyway, and companies
like Apple Computer Inc. picked the fruit the recording industry left
hanging. The recording industry hasn't exactly been left destitute: By
licensing content to Apple's iTunes and others, it gets a piece of the
pie. And licensing is a strategy the major recording companies are
actively pursuing. In a presentation at the Bear Stearns Annual Media
Conference in March, EMI's executive vice president for strategy and
development, Adam Klein, said that EMI will make 100% of its catalog
available online and partner with "any legitimate, secure and
attractive music service." But it will also keep its deals short term
in order to "remain flexible."
Short-term deals may minimize risk, but they also highlight the big
downside to licensing content: You're not calling all the shots, and
you're often making compromises. ESPN, for example, has licensed
wireless content to all of the major U.S. carriers, but in order to get
on their systems, it often has had to dumb down its content so it can
be used on the multitude of phones each carrier supports. Pricing is
another sticky issue. It is Apple, for example, that sets the price of
songs sold on iTunes - a major source of frustration for the music
companies. So much so that in September, Apple CEO Steve Jobs publicly
called the recording industry "greedy" for wanting Apple to charge
higher prices for popular songs.
Neither ESPN nor Marvel plans to sit in the back seat as their
content goes digital. But they also realize that they cannot go it
alone. Instead, they need to work with partners who better understand
the technology - and the big picture. "It's all about the joint
venture," says Thomas Guida, an intellectual property lawyer at Baker
& Hostetler LLP in New York.
Wireless, where Marvel and ESPN are placing their latest new-media
bets, is a particularly tricky area. Typically, getting content onto
mobile phones means working with multiple carriers - each of which may
use a different wireless technology to distribute content - in multiple
regions. Each carrier, in turn, supports numerous phones, all with
different screens, keyboards, and processing power. "There aren't a lot
of standards in the industry," says Scott Jensen, the vice president
for licensing and brand partnerships at Mforma Group Inc., a 5-year-old
technology company in Bellevue, Wash., that has carved out a business
helping entertainment companies like Universal Studios and Viacom
International Inc. get their content onto wireless networks. A single
game may have to be developed in several hundred variations. "You're
constantly on a treadmill," says Jensen. "It's a massive process to
support all the different technologies and devices."
Marvel's strategy is to adopt the licensing approach of the
music industry. Little wonder: Since emerging from bankruptcy in 1998,
Marvel - which has seen enough ups and downs to make Spider-Man hit the
Dramamine - has built licensing into its single largest source of
income. In the first six months of 2005, licensing fees contributed
$115 million of Marvel's $192 million in revenue. And new-media
licensing has been particularly robust. While apparel and accessory
licensing dropped almost $7.5 million compared with the first half of
2004, and toy licensing was down by more than $2 million, Marvel's
entertainment licensing - film, theme-park attractions and electronics
- swelled from $16.2 million to $41.5 million. "This is a real
business, and it continues to expand for us," says Rothwell. Besides
bringing in more royalties, new media can also bring in higher royalty
rates than the T-shirts and the toys do. "If a traditional license
ranges from 9% to 12%, we pay more than that," says Mforma's Jensen.
"In some cases, considerably more than that."
Marvel, however, has developed some specific rules about where - and
how - it will license new media. Unlike EMI's strategy of finding
multiple partners, Marvel wants to keep the list short. It has only one
partner in the wireless space - Mforma - and just one partner, Lions
Gate Films, for made-for-DVD movies. For its forthcoming massively
multiplayer online games, it works only with Microsoft Corp. This
sole-partner strategy enables Marvel to trade exclusive rights for
higher royalties and a guaranteed floor. It also enables Marvel to keep
its staff lean; the entire company numbers just 230 employees. "We
don't have the infrastructure to manage millions of relationships,"
says Rothwell.
It is Mforma, with its 700-plus employees, that works out the deals
with the carriers and develops products that fit all the various
networks and devices. Since coming on board in December 2004, Mforma
has launched mobile games based on Spider-Man and Marvel's Fantastic 4
characters - the latter timed to coincide with last summer's release of
the "Fantastic 4" movie - and plans future products based on other
Marvel properties coming to the big screen, including Ghost Rider and
X-Men.
The challenge, of course, is to make sure that in the end, you don't
wind up with too lean a staff, outsourcing not only the technical
nuances of moving content to new platforms, but oversight of those
programs, too. Rothwell's solution has been to go outside the company
and hire experts to connect Marvel's new-media areas and its licensees.
To oversee video games, for example, he hired Ames Kirshen away from
Warner Bros. Interactive, where he had been overseeing games based on
DC Comics properties. "You need to get people who have experience in
these spaces," says Rothwell.
Marvel's system allows it to retain a measure of control over its
properties. In its video game deals, Marvel gets to review, and
approve, various stages of the creative process and signs off on the
finished product. "It's not like we're doing deals and going away,"
says Rothwell. "We're actively involved." That, however, doesn't
guarantee success. While some of Marvel's licensed games have been big
hits - Activision's "Spider-Man 2" game sold 442,000 units in June
alone - others have been disappointments. A recent title, the
Electronic Arts Inc.-produced "Marvel Nemesis: Rise of the Imperfects,"
for the Nintendo DS, took a critical drubbing upon its release in
October and a week later was languishing at 3,451th place in sales in
Amazon.com's computer and video games department.
Working with partners raises some thorny legal issues, as well. For
one thing, who controls the rights to any derivative work from the
project - say, a song incorporated into a game? Traditionally,
contracts between content providers and their technology partners could
be cloudy on this question. "We've had to get our arms around a lot of
deals where it wasn't clear who owned what," says Rothwell. "You're
working in an environment where technology is evolving daily, and you
need to make sure that your current partners don't go into a new
business or prevent you from getting into it. You need to define the
rights you're granting and spell it out as much as possible."
Inevitably, though, licensing means limits - especially in wireless,
where the placement of content is up to the carriers. When users go to
download mobile content, they typically have to go through a main menu
screen listing the available options. Positioning can be a major
sticking point in negotiations. "You want to get top placement on the
phone because people don't scroll down," says Jensen of Mforma.
For ESPN, the way to bypass the limits of licensing is to bypass
licensing. When launched at year's end, Mobile ESPN, its private-label
wireless network, will give ESPN total control over every facet of the
wireless experience. Users will pay a monthly fee for wireless phone
service - just as if they were paying T-Mobile USA Inc. or Verizon
Wireless (the company has not yet announced pricing). But everything
about the service, from the phones to the bills, will literally bear
ESPN's stamp. If ESPN's strategy seems bold, keep in mind that its
parent company, Walt Disney Co., has long been an active player in new
media. When Apple launched its video-capable iPod this fall, Disney was
the first content provider to offer television shows for download,
making episodes of "Lost" and "Desperate Housewives" available at $1.99
a pop.
Keep in mind, too, that even Marvel recently adopted the
same do-it-alone strategy with its film business. While it had
previously licensed its characters to studios including Sony Pictures
(Spider-Man) and 20th Century Fox (X-Men), Marvel announced in
September that it would produce up to 10 movies on its own, based on
characters such as Captain America and The Avengers. "We get to control
our own destiny," says Rothwell. "We can decide when to open a film. We
can build our own film library and assets. We get all the profits."
Of course, the downside of controlling every facet of the business
is that you have to control every facet of the business. For ESPN, this
means responsibility for the mundane aspects of running a wireless
service: billing, sign-up and technical support, to name a few. Like
Marvel, ESPN has heeded the lessons of the recording industry: It's
getting help with the technical stuff. The company has enlisted two
technology partners, Visage Mobile and Convergys Corp., to make sure
the bits flow where they need to and to handle administrative and
back-office tasks. ESPN's partners will absorb a big chunk of the
risk, too: Visage has already invested $50 million in the platform used
by ESPN and other customers. Even the bandwidth is leased: ESPN Mobile
will actually run over space on Sprint Nextel Corp.'s wireless network.
Customers just won't know that, because their phones, and their bills,
will have ESPN logos on them.
ESPN's strategy is to woo customers from their current wireless
providers with richer, personalized sports content and greater ease of
use. There will be more video, since all ESPN phones will be able to
display it, and a dedicated button on the handset that takes users
directly to ESPN content. A customized activation process will mean
that users can turn on the ESPN features they want when they sign up
for service, instead of having to hunt through a carrier's Web site or
on-phone menu. If all goes as planned, monthly subscription fees will
provide ESPN with a steady, recurring source of revenue.
By bundling content and service, ESPN can ask customers to write out
just one check a month - a big marketing advantage. But not all content
companies can follow ESPN's lead or, indeed, do much with wireless at
all. "ESPN can do it because it is so sports-centric, and that
translates well into mobile," says Adi Kishore, an analyst at Yankee
Group Research Inc. Video needs to be short, because tiny phone screens
can make long programs uncomfortable, if not unbearable, to watch.
Sports highlights can be easily edited into small nuggets of content.
"If you're the Discovery Channel or USA Networks, it's a bit more
problematic," says Kishore.
Even ESPN is hedging its bets some. As carefully planned as its
private-label network may be, and as much as the company plans to tout
it - with a publicity blitz to coincide with the Super Bowl - ESPN will
continue to license content to cellular providers, according to Jha.
In fact, understanding what users will, and won't, go along with is
the biggest challenge facing content companies. That makes it doubly
important for companies working on a digital strategy to devise a
mechanism for keeping tabs on the marketplace. At Marvel, it means
having those industry experts in-house. At ESPN, it means a greater
reliance on focus groups and research. ESPN recently discovered that
when users want short video clips on their phones, they mean short. "We
thought people would be fine with three- to five-minute clips," says
Jha. "But they really wanted 30 seconds, or one minute."
ESPN's focus group revealed one other surprise: Video wasn't even a
priority. While carriers and phone manufacturers are hurrying to build,
and tout, video-capable systems, users are, so far, decidedly ho-hum
about them. "They wanted scores and fantasy sports. Video was not at
the top of the list," says Jha. Nonetheless, with its state-of-the-art
production facilities and pedigree in video, ESPN is pulling out all
the stops: Its mobile network will feature several hours of video each
day - chopped into small bites. It has also licensed video to Verizon
Communications Inc.'s new Vcast service. "It's an up-and-comer," Jha
says of mobile video.
Entertainment companies may have developed strategies to better
understand, and manage, today's digital markets, but anticipating new
ones still involves a lot of guesswork - and risk. While users watch
their small pictures, ESPN will be hoping it has seen the big one. - Alan Cohen
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