MerchandisingHISTORICAL BACKGROUND AND DEFINITIONS
THE MERCHANDISING PROCESS
CASE STUDY: SPIDER-MAN
While there has been merchandise associated with Hollywood films since at least the 1930s, the deliberate production of additional commodities associated with motion pictures has become more common since the 1970s, and accelerated tremendously during the last few decades of the twentieth century. For some films, merchandise provides a lucrative source of additional profits for film companies, sometimes even contributing production funds.
Until the 1960s and 1970s, relatively little merchandising activity took place in Hollywood, except by the Walt Disney Company. Merchandising started for the Disney brothers with the tremendous success of Mickey Mouse's Steamboat Willie (1928). In 1929 the company was offered $300 to put Mickey Mouse on writing tablets. The extra income helped to finance expensive production at the Disney studio. Thus, during the 1930s, a wide range of Disney products appeared in markets around the world, everything from soap to ice cream to Cartier diamond bracelets. Mickey Mouse is often claimed to be the most popular licensed character in the world and still appears on thousands of merchandise items and publications.
Disney continued to develop merchandise connected with its films and film characters over the years. But the Disney Company was the exception, rather than the rule. Though the motion picture industry may have been relatively slow to pick up on merchandising, this type of activity accelerated dramatically during the 1990s and early twenty-first century. The current phase of film-based licensing can be traced back specifically to the merchandising successes of Star Wars (1977) and E.T. the Extra-Terrestrial (1982), but has continued with the blockbuster, action-figure based films of the 1990s (for instance, Batman  and Spider-Man ), as well as the successful franchise films in the early twenty-first century (such as The Lord of the Rings [2001–2003] and Harry Potter [beginning in 2001]). Further merchandising opportunities and close relationships between products and films are presented in films such as A Bug's Life (1998) and Toy Story (1995), where the film is about toys or characters particularly suitable for toys.
The distinction between tie-ins and merchandise is often blurred, as some merchandise is produced for tie-ins. Merchandise can be defined as commodities based on movie themes, characters or images that are designed, produced, and marketed for direct sale, and not connected to established products or services, as is the case with tie-ins. An example of a tie-in is represented by the promotion of Disney films at McDonald's restaurants, even though there may be some merchandise items involved in such activities. Licensing is the legal act or process of selling or buying rights to produce commodities using specific copyrighted properties. Merchandising can be thought of as the mechanical act of making or selling a product based on a copyrighted property.
There is an extremely wide variety of movie-based merchandise, including items based on a specific movie, character, or theme, or ongoing movie characters and themes. While there has been a strong emphasis on children's toys, games and other items (lunch boxes, school supplies, and so forth), and on video games, other movie-based merchandise includes home furnishings (clocks, towels, bedding, mugs, telephones), clothing, jewelry, stationery items, print material (novelizations and posters, for example), food (especially cereals and candy), and decorations (such as Christmas ornaments). There are also other, more unusual, less mass-produced items that sometimes accompany (or follow) movie releases, including "art objects" such as prints, sculptures, ceramic figures, and animation sets. For instance, in 2005 one could purchase sculptures of most of the characters from Lord of the Rings, including a bronze statue of Gandalf for around $6,500. Other merchandise is based on the celebrity status of Hollywood stars (for instance, products with images with Marilyn Monroe and James Dean are plentiful), or generic movie or studio themes. Indeed, many of the majors feature studio tours, complete with well-stocked gift shops offering a wide range of merchandise featuring their familiar corporate logos.
Movie-based merchandising can be viewed as part of the proliferation of commercialization in Hollywood, the increase in animated features, and the rerelease and remaking of films with readily identifiable, ongoing characters and themes (or franchises). However, this type of activity also is part of a larger, more general merchandising and licensing trend. For instance, entire TV programs and characters—especially those aimed at children—are an obvious and prevalent form of merchandising, while sports teams and players, rock stars, and musical groups have long histories of licensing and merchandising activities.
Licensed products represented $66.5 billion in retail sales in North America in 1990, but had grown to around $110 billion by 2003, according to the International Licensing Industry Merchandisers' Association (LIMA). While exact statistics on the film industry's merchandising revenue are nearly impossible to find, LIMA's Licensing Letter estimates that $16 billion is derived annually from sales of entertainment merchandise; another estimate cites $2.5 billion in royalties from entertainment properties in 2001 (Goldsmith, 2002, p. 7).
It is especially difficult to measure the precise revenue from movie licensing accurately due to the move toward long-term relationship agreements between licensors and licensees. Although entertainment licensing in the merchandising industry has been influenced by the emergence of merchandise based on other types of properties, there is little question, according to many experts, that film licensing continues to dominate the licensing market. Entertainment licensing is also the most concentrated type of merchandise business, with just a few large players (the major movie studios and broadcasting companies, such as Disney, Fox, and Viacom) dominating the licensing activity.
Film producers and distributors rarely manufacture film-related products themselves, but license the right to sell these products to other companies (called licensees). In most instances there is no risk to the producer or distributor (the licensor) because the licensee incurs all manufacturing and distribution expenses. The producer/distributor typically receives an advance payment for each product, as well as royalty payments, often between 5 and 10 percent of gross revenues from sales to retailers (in other words, the wholesale price). If the movie does not succeed and the products do not sell, the manufacturer is responsible for the loss (Cones, 1992).
The owners of licensable film properties are most often the major film studios. Special licensing divisions often are organized to handle the company's own copyrighted properties, and sometimes those owned by others as well, for example, Warner's Licensing Corporation of America (LCA) and Disney's Consumer Products division. But even smaller successful film producers sometimes become involved in licensing, as represented by Lucasfilm Licensing. Studios' revenues from merchandise vary greatly depending on the films released in any one year. However, these companies have serious interests in merchandising and consumer goods, as indicated by the $2.5 billion revenues reported by Disney's Consumer Products division in 2004, and the 3,700 active licensees handled by Warner Bros. Consumer Products division.
The major studios realize that not only can the sale of movie-related products generate substantial revenue, but the presales of merchandising rights can sometimes contribute to a film's production budget, as in the case of Lord of the Rings, when 10 percent of the budget for the trilogy was apparently raised by selling rights to video games, toys, and merchandise companies. In addition, these products can be useful in promoting films and thus movie-based merchandise is often part of the massive, coordinated promotional campaigns often started months before a film's release. Typically, 40 percent of movie merchandise is sold before a film is released.
Although movie-related merchandise often is common, products based on films are sometimes considered risky for merchandisers, as they ultimately may not be successful and often have short life-spans. Licensees may have to take further risks initially by sinking money into a film that is not completed (or sometimes not even started). On the other hand, a studio may need to change a release date, especially to coincide with the lucrative Christmas season or to avoid other competing films.
In addition, studios and licensees have been cautious after some significant losses in the past. For instance, most agree that the huge number of products associated with Star Wars: Episode I—The Phantom Menace (1999) was ultimately unproductive. One problem is that Hollywood-related merchandise has a relatively short time to prove itself on retail shelves before the next big property arrives. As Andrea Hein, Viacom's president of consumer products, explains: "Licensing is all about wanting a piece of something. You've got to have the time and place for that property to be nurtured" (Goldsmith, 2000). Evidently, the success of the merchandise is tied directly to the success of the film. A representative of LIMA states that, "… marketing and merchandising is [sic] never the major driving force behind a film. If a film's no good, no one will buy the product" (Monahan).
It might be noted as well, that many, if not most, movies do not translate well into merchandise and thus have limited merchandising potential. While the Star Wars and Harry Potter films produce additional revenues from a seemingly endless stream of merchandise, films like Saving Private Ryan (1998) and Life is Beautiful (1997) have much less merchandising potential. Musicals such as Saturday Night Fever (1977), Grease (1978), and Dirty Dancing (1987) can earn substantial revenues from soundtrack recordings. Moreover, a hit song can promote a film. In fact, music videos have become important marketing tools. The ideals, of course, are film franchises such as Star Wars, Harry Potter, and other similar films that continue to inspire additional commodities, and thus, additional profits.
Thus, for many films, licensing represents a potential source of income to film companies and merchandisers. The potential merchandising bonanza represents sizable profits as sales of merchandise licensed from movies continue to grow. While the first Batman in 1989 grossed $250 million at the box-office and earned $50 million in licensing fees, subsequent films have generated even more products and produced even more revenues. Recently, the Lord of the Rings trilogy is said to have attracted over $1.2 billion thus far in merchandising revenues.
The first Spider-Man film, released in spring 2002, represents an interesting case of movie merchandising. The character of Spider-Man has existed for almost 40 years, created at Marvel Comics in the early 1960s. Prior to its film debut in 2002, the character had been featured in comic books, multiple cartoons, and briefly, a live-action television show. The comics alone are sold in more than 75 countries and in 22 different languages. In spite of this, it took more than fifteen years for a movie on the character to be made. After a complex history, Variety reported that Columbia/Sony acquired the rights to produce a feature (including sequels) and rights to produce a live-action TV series for a cash advance of $10–15 million.
b. George Walton Lucas Jr., Modesto, California, 14 May 1944
Early in his life, George Lucas was interested in car racing; however, a serious accident changed his plans. He studied film at the University of Southern California film school, where he made several student films, including the prize-winning THX–1138: 4EB (1967). In 1969, Lucas and Francis Ford Coppola formed American Zoetrope, which produced the full-length version of THX 1138 (1971).
Lucas went on to form his own company, Lucasfilm Ltd., and in 1973 released American Graffiti (written and directed by Lucas). The widely acclaimed and innovative Star Wars was released in 1977, after Lucas had established ILM (Industrial Light & Magic) to produce the visual effects. The movie had been turned down by several studios before Twentieth Century Fox agreed to distribute it. In a fortuitous move, Lucas agreed to forgo his directing salary in exchange for 40 percent of the film's box office and all merchandising rights. The movie broke box office records and earned seven Academy Awards®, as well as selling so much merchandise that the Star Wars series is credited with influencing the growing trend of merchandise accompanying blockbuster films, and has created huge profits for Lucas.
In 1979, Lucas Licensing was formed to oversee the licensing of products and characters from Lucas's films and claims to be one of the most successful film-based merchandising programs in history. Lucas was also involved with Steven Spielberg in creating the Indiana Jones series, another blockbuster series accompanied by merchandising handled by Lucas Licensing. The company claims over $8 billion in consumer sales worldwide, including, according to its website, the best-selling boys' action toys of all time, 60 million books in prints, and more than 60 New York Times best sellers, and merchandise sold in over 100 countries. In recent years, Lucasfilm has emphasized entertainment software (a Lucasfilm term commonly applied to video games), which is developed and published by LucasArts, formed in 1982.
Lucasfilm, Ltd. handles the business affairs of the companies in George Lucas's empire, including THX, Ltd., Skywalker Sound, Industrial Light & Magic, and Lucas Productions. It not only produces film and television products, but is also involved with visual effects, sound, video games, licensing, and online activity. Important technical developments from Lucas's companies have included the THX System for motion picture sound, plus many developments in visual effects. The company's creative and administrative headquarters is located at Skywalker Ranch in Northern California.
Lucas is considered one of the most successful directors in the industry, and Lucasfilm can arguably be called one of the most successful Hollywood production companies, with five of the twenty highest-grossing films of all time and seventeen Academy Awards®. The company is estimated to have received $1.5 billion in sales in 2001.
THX 1138 (1971), American Graffiti (1973), Star Wars (1977), Star Wars: Episode III—Revenge of the Sith (2005)
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With such a long history, it is not surprising that the film was so highly anticipated. Sony Pictures arranged extensive promotion and planned wide-ranging merchandise for the $139 million blockbuster. Spider-Man was to be, as the Business Week's Hollywood reporter put it, "the
holy grail" for Sony: a film that would create opportunities for endless tie-ins in the form of fast food, video games, toys, and sequels. The film debuted in May 2002, earning almost $115 million in its opening weekend and over $400 million by the end of November 2002, making it the highest grossing comic book adaptation as well as the highest grossing movie of the summer. Such numbers are particularly impressive in light of estimates that as much as 80 percent of a film's revenue now comes from the sale and rental of videos and DVDs, as well as other merchandising opportunities.
Not surprisingly considering the long, convoluted history that brought Spider-Man to the big screen, the licensing deals for the film were complex as well, with Marvel Enterprises and Sony sharing the royalties in a 50/50 deal managed by the newly formed Spider-Man Merchandising L.P., created in early 2002 to manage the character. In a separate deal, Marvel Enterprises—the publisher of the Spider Man comics—also granted the company rights to the comic book version of the hero.
And, so, the merchandising began. The rights to produce every kind of product imaginable were licensed to hundreds of different companies: everything from action figures, games, and dolls to skateboards, bicycles, and birthday party supplies. Spider-Man costumes became the odds-on favorites around Halloween, and "Spidey" images adorned everything from boxer shorts to sheets and comforters. The video game rights were sold to Activision, which produces games not only for Sony's Playstation 2, but also for the Microsoft-owned rival X-Box system and for home computers as well. Sony, Marvel, and the various licensees have benefited greatly from the merchandise bonanza, which continues to attract revenues (as well as prompting lawsuits over the dispersal of these revenues). For instance, a company spokesman reported that toys from Spider-Man (the movie) generated over $100 million in total revenue for Marvel in 2002. Subsequently, Spider-Man 2 appeared in 2004, generating huge box-office returns and additional merchandise, as well as reinvigorating the market for previous Spider-Man products generally. Spider-Man 3 began filming in 2005 for planned release in 2007.
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——. "With Billions in Play, Studios Keep Toying with Pic Wares." Variety 387, no. 4 (10–16 June 2002): 7.
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Monahan, Mark. "A Magic Formula to Print Cash." Daily Telegraph (29 September 2001). http://www.telegraph.co.uk/arts/main.jhtml?xml=/arts/2001/09/29/bfpott29.xml (accessed 7 April 2006).
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