September 3, 2009

Bob Iger, President and CEO

The Walt Disney Company

500 South Buena Vista St.

Burbank, California 91521

Dear Mr. Iger:

Hi, you don't know me, but I'm a comic book specialty retailer - also known as a Direct Market (DM) retailer.

I've been selling comic books in my store in San Francisco (Comix Experience) for just over twenty years now, and I am the longest-running DM commentator with a regular column ("Tilting at Windmills" where this letter is originally appearing), as well as a founding (and current) Board of Directors member of ComicsPRO, the DM retailer's trade organization. (Though, I should note that I'm writing this as an individual and these opinions may not reflect the opinions of ComicsPRO or any individual member retailer)

You've just bought Marvel Entertainment for what is reported to be four billion dollars. I strongly suspect that over the medium- and long-term this is going to be seen as an astonishingly good business move. I also suspect that the publishing arm of Marvel is among the least of your concerns in this deal, as the potential for movies, TV shows, licensing, amusement parks rides, whatever, is the true prize here for you.

But Marvel's publishing operations is a key aspect of my business, and that of thousands of other DM entrepreneurs across the world - Marvel typically represents at least 40% of the market share in the DM, and some months that number gets significantly higher. Marvel's success or failure looms large in the mind of most DM retailers, as Marvel is the #1 supplier.

DM stores are quintessential small businesses - virtually all DM stores are "mom and pop" operations, and while we have some small regional chains (I believe that the largest has just eight outlets), they are few and far between. Myself, my annual sales are something along the lines of 0.009% of what you're paying for Marvel, but that volume feeds my family, and supports my three employees. There are thousands of stores across the country that are very similar to mine, and we need a healthy and strong Marvel Comics in order to stay in business and to continue to support our families and our communities.

Marvel has often had a tumultuous relationship with DM retailers - in the late '90s, Marvel's disastrous attempt to self-distribute put thousands of stores out of business, and ended up creating a monopoly situation in DM distribution. At one point there were more than a dozen DM distributors, and now there's really only one viable option: Diamond Comics Distribution.

So I think it is fair to say that DM retailers are concerned about the possible ramifications of this new ownership situation, and what it might mean to our industry - even a small swerve from Marvel can have dramatic impacts on the DM, even if such moves would seem minor from the perspective of the multi-billion dollar operation that you oversee.

You've bought an excellent company - Marvel's characters are some of the best known, and most engaged in the "mind share" of the public. Marvel has an excellent editorial team, and has earned its dominance of the DM market by producing the kind of work that the DM seems to want. However, Marvel, despite this dominance in the DM, has not always been the most responsible partner to the DM - historically Marvel has not done a tremendous amount to reinvest in the DM, and in comparing Marvel policies in key areas such as co-op funds or promotional support, Marvel lags way behind other DM partners.

Essentially, I believe that the DM has been a smaller and weaker market that it could have been otherwise because Marvel has not always acted either responsibly, nor even necessarily in its own best long-term interests.

At this stage I do not believe that very many people believe that sweeping changes in Marvel Comics' day-to-day operations will be enacted - Marvel's publishing operations are a solid and profitable business, so why would Disney come in and enact dramatic changes?

And yet there are several small and economical choices that could be revisited where I think Marvel's comic book business in the DM could have strong and positive impact that would help our unique industry thrive and grow.

It is my fervent belief that, on a per-store basis, specialty retailers can always do a better job selling specialty products than a generalist can. Why? Because they have both the passion for, and the specialized knowledge of, that product that the generalist lacks. Comics are an unique model in that the DM pays the R&D and packaging costs through the serialization of stories before they eventually go wider in collected editions - and, more importantly, it does so in such a way as to make those works profitable before they're ever collected. Unlike any other periodical production, comic books are (relatively) cheap to produce, and are sold to the DM on a firm non-returnable basis, so for an operation like Marvel, virtually every piece of work pays its own way, and can yield considerable long-term profits.

In the 80s, Marvel used to (through the auspices of the International Alliance of Direct Distributors - an organization sadly defunct with the rise of Diamond as the sole DM distributor) participate in rack programs for DM stores, where standardized specialized racks for comic book stores were provided at a subsidized cost. Further, Marvel used to solely administrate a cash-register program to provide low-cost registers to new and expanding stores. It is my understanding that these programs corresponded with the largest period of expansion of DM stores in the history of comics.

Of course, now we're in the 21st century, so it ought to be Point-of-Sales systems that our industry partners help fund, rather than cash registers - there are several systems out there that are specifically designed for the idiosyncrasies of the DM, and stores that install these kinds of systems find they have better information and better tools with which to grow and focus their sales.

It is my belief that even a small investment in the DM infrastructure, and incentives for stores to expand, could yield incredible growth and benefits for DM stores and Marvel comics.

In much the same way, co-op advertising funding at even a tiny fraction of DM store's gross Marvel sales could have an incredibly multiplicative impact in the amount of new customers and dollars coming into the DM - Marvel, currently, funds no co-op advertising opportunities whatsoever.

I don't know if Disney is interested in helping Marvel's DM business expand at this time, but I strongly believe that even the most modest capitalization efforts could have dramatic dividends that would pay off for decades to come, and I hope you will at least consider the possibilities inherent in growing Marvel's core niche.

Even without looking at new capital programs, Marvel could make what I believe would be incredible gains in some small adjustments in its publishing plans.

As I noted above, comics in the DM are sold non-returnable, which means that DM retailers are completely dependent on having accurate and timely information in order to bring in the correct number of copies of Marvel's output. This information, of course, includes things like writer/artist/plot/cover artist/format/release date and so on - and in comics these are specific things with specific sales results. As a general rule, creative teams aren't interchangeable, so it is critical that proper information be given at the time of initial order so that comics retailers can not only do their jobs correctly, but to pass that information on to our consumers, a significant percentage of which are placing their own pre-orders through our stores.

In the last few years, however, Marvel solicitations have been done in an increasingly "loosey-goosey" manner, with key data points being changed weeks and sometimes months after our orders have been placed. It is not at all uncommon for there to be changes in 10% or more of Marvel's output any given month. This, I feel, is an unacceptable situation which makes DM retailer's jobs unnecessarily more difficult, yet it is something that could be largely eliminated by better in-house communication and focus.

Further, over the last year or so, Marvel has increasingly set its shipping schedules based upon hitting monthly and quarterly goals, rather than on what works best for the medium- or long-term health of the company. It now seems clear that Marvel has been engaging in this behavior to make their fundamentals look better for their eventual purchase. The problem is that this makes it harder for both consumers and retailers to stay within budget, and to build interest in Marvel's wares.

I could certainly provide you with example after example of this occurring, but I don't want to bog this down in minutiae. For a single example, the last shipping week of August (books arriving in stores 8/26/09) had all three titles in the "Hulk" family ("Incredible Hulk", "Hulk" and "Son of Hulk") all arriving in a single week. This makes it significantly harder to sell any of those titles, and increases the chances that readers will walk away from that franchise entirely. This is happening regularly with virtually every Marvel franchise every end-of-month and end-of-quarter. What comics retailers want on multi-title franchises is for releases to be balanced through the course of a month, increasing the number of visits from the readership.

(As I said, comics are non-returnable, so when this happens, Marvel still gets paid, even if those books simply sit on the racks at retail - sadly, this has the potential to lower sell-in numbers the longer that cycle continues)

Philosophically, it is my belief that in addition to producing the best-selling commercial properties, it is the responsibility of market leaders to be good "corporate citizens" as well. I know that, too, is the Disney Credo.

One thing that I am certain of is that Marvel can do a lot more to "make the trains run on time" and that current management has consciously chosen to not do so in order to make their financials look even more palatable. (In point of fact, we've been directly told that this is the case, so this isn't supposition of any kind)

This is one area that can, and really must change as the new regime comes in.

Marvel is also, in my opinion, dramatically overproducing on several franchises - while the problems of having three "Hulk" comics is certainly exacerbated by them all shipping in a single week, there probably shouldn't be three books in that franchise in the first place - it is my belief that much of what Marvel publishes would sell significantly better if those brands weren't over-saturated in the market in the first place. It is absolutely possible to over-saturate properties, and while some brands like "X-Men" or "Avengers" seem to be able to absorb multiple titles fairly well, other ones like "Hulk" or "Fantastic Four" would be better served by scaling back to what the market is actually interested in absorbing.

I strongly believe that if Marvel cut production by a quarter or more, our per-title sales would more than rise enough to offset that loss, and you'd have happier and more satisfied customers who wouldn't be feeling as "stretched thin".

Oddly, while Marvel is, in my opinion, vastly overproducing some franchises, it also has a strong tendency to under-produce in other areas, such as on-hand stock of permanent collected editions ("graphic novels" or "GN"). It is my understanding that current Marvel management has set hard targets on the amount of inventory that is available for reorder, and these target figures have lead to key books and properties to be completely unavailable during their best possible sales windows.

By way of example, the "contemporary entry point" to "Iron Man" (the "Iron Man: Extremis" GN) was completely unavailable to the market between the release of the "Iron Man" film in theatres and the release of that movie on DVD. Speaking just for myself, this left hundreds of dollars of potential sales by the wayside during that crucial sales period, and if the same was true for the thousands of other DM retailers, this would be a significant source of revenue that was lost to the market just when it was primed the most for it.

It isn't at all uncommon for key GNs to be available for a few weeks, then to disappear for months at a time while we wait for "inventory space" to open up. I could list twenty "critical" books that simply are not in print at the moment, and that we don't have future publication dates for. This wouldn't be so bad if publishing intentions were announced ahead of time, and retailers could decide on stocking decisions based on real data and trends, but stocking appears to be random and haphazard, costing every partner significant amounts of money.

Further, in order to "right size" inventory, Marvel regularly drops deep discounts on many in stock GNs, creating downwards pressure on sales for stores that need to sell that material at it's original SRP, and "training" a significant percentage of customers to wait for the sales.

This also happens with periodical comics - it is unfortunately common to have chapters one through three of a six-part story be utterly unavailable to the market at the release of chapter four. While I can understand the thinking that periodical comics have a smaller sales window (though that is far from universally true!), it has the impact of imposing a hard ceiling on sales when the actual potential velocity might well be much higher.

What is the most frustrating thing about this to me as a retailer is that the manufacturer has the single lowest inventory cost of any point of the supply chain, and that, mathematically, it simply makes more sense to print (say) 15k units than it does to print 5k, go back to press on another 5k, then back to press again on another 5k - not only is your unit cost then that much higher, but you're potentially missing out on weeks or even months of sales while the market waits for its resupply.

Clearly, it doesn't do anyone any good to be swimming in unsalable inventory, but an enormous amount of increased efficiency could be had by simply having more rational inventory amounts on hand, and by planning at least for the medium-term rather than solely thinking about the short-term impact on this quarter.

Marvel is a very important supplier for virtually every retailer, but I see a lot of money either being left on the table, being frittered away on poorly thought out expansions, or not being reinvested in a safe and logical manner into the market.

I believe that the Direct Market has a lot of potential that isn't even close to being tapped, and a more responsive and responsible partner in Marvel Comics could make that happen.

Thanks for taking the time from your day to listen to my concerns, I hope this is the beginning of a long and profitable relationship.

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