Block-Busting Mario
A quick look at Nintendo’s movie success
As the poor reviews rolled in for the Super Mario Bros movie, I was concerned. Nintendo ($NTDOY) is one of my largest investment positions. The company owns some of the world’s most valuable IP, including part of Pokémon, has a significant cash pile and is conservatively valued.
If the movie flopped, it’s unlikely that the company would revisit cinema for a very long time. It’s taken 30 years to reach this point after 1993’s disastrous Super Mario Bros.
The Mario franchise is estimated to have cumulatively grossed more than $46 billion worldwide. I’m not aiming to establish the bull case for Nintendo shares, I touched on this in my 2021 write up: -
2023’s Super Mario Bros Movie has beaten Frozen 2 to become the biggest animated film debut of all-time. It’s well on the way to crossing the $1 billion mark in ticket sales.
Based on that, how much will Nintendo really earn and what are the implications?
Accountancy of Hollywood
The accountancy practices of film producers are notoriously opaque. In some scenarios studios maximise unwarranted costs to minimise the profits and payouts to third parties.
Typically, a portion of ticket sales goes to theatre owners. The remaining profits are then split between the studio and distributor.
In addition to reported production budgets, movies have to factor in marketing and advertising costs which spike investment. Screenwriter Jonathan Goldstein reported that;
Just got my latest profit statement for #SpiderManHomecoming. Despite a box office of $880M, the movie is still $130M in the red. I'd be surprised if they make any sequels.
In this example, Spiderman’s rights are owned by Sony, produced by Marvel and distributed by Sony Pictures. Each party likely squeezed the other for profit, leaving little once the marketing budget was factored in.
In Nintendo’s scenario, the movie has been produced by Illumination (creators of Despicable Me, The Secret Life of Pets) and distributed by Universal Pictures. Universal part-owns Illumination.
It was rumoured in Puck News that Nintendo funded up to 50% of the budget for the Mario Movie, entitling it to a larger share of the profit.
Based on typical Hollywood practices, another distributor might have attempted to extract higher profits from the unschooled Nintendo. However, Universal has an pre-established partnership with the company.
Super Nintendo World, opened in Universal’s Tokyo theme park in March 21, Hollywood in January 23 and a third park is under construction in Orlando. Universal is reliant on Nintendo’s IP to compete with Disney’s Marvel and Star Wars attractions.
Universal’s ownership of Illumination, ensures the relationship is straightforward. Nintendo are dealing with a combined studio and distributor, rather than two separate entities.
Besides Universal’s unwillingness risk the relationship, Nintendo is an overly-careful operator, a fact that is based on their trepidation to commit to projects and rainy day fund of almost $13 billion in cash reserves.
How much does Nintendo stand to make?
There are two key questions that need to be answered, how much profit (after marketing) the movie will earn and the percentage of profit that goes to Nintendo? With $872m in revenue 3 weeks after release, Super Mario Bros is well on its way to surpassing $1 billion at the box office. If we add some hypothetical estimates to create the three follow scenarios :-
In the worst case scenario, the movie is likely to be profitable if it reaches $1 billion of revenue regardless. I’ve fixed theatre costs as 50% of ticket sales, but in the scenario that the marketing budget is closer to the $100m, or the move goes on to gross well over $1 billion, it’s clear that all parties will earn a profit. As Illumination is part owned by Universal, it's unlikely the combined businesses will take away as much as 70% of the profits.
In the most optimistic scenario, that Nintendo takes 50% of the profit, based on its rumoured funding, the company stands to make at least $275 million. These numbers are hypothetical, the experts believe the movie could generate considerably more.
Screen Rant reported that the movie only had to achieve $250 million in ticket sales to become a success.
At the hyper-optimistic end, MST Financial senior analyst David Gibson, reported that Nintendo could generate as much as $1.1 billion. Nintendo’s profit for 2022 was $4.15 billion. Any nine-figure movie income would move the needle considerably.
On to the next one?
The Super Mario Bros has been a runaway hit, despite initial poor reviews. The success not only introduces a new generation to the characters and IP but opens the door to an expanded universe.
The wider effects for Nintendo products and opportunities aren’t yet clear. Illumination’s workload could be the limiting factor for future movie releases. The studio has less than 200 employees. To put that into context Pixar has approximately 1,250 and still only output 1 or 2 movies per year. Illumination has historically released one movie per year and has at least six in production.
Super Mario Bros has given $NTDOY shareholders a reason to be optimistic. Just how optimistic is not clear.
Ryan O’Connor has researched Nintendo extensively and discussed the opportunity of further unlocking IP. O’Connor has highlighted :-
Monetizing its IP is an area in which Nintendo has traditionally lagged, but over the last few years it’s been hard at work making up for lost time. These efforts promise to provide it with yet another pillar of defensive, high-margin, annuity-like revenue and cash flow.
Mario is undoubtedly the most recognisable character, but there are opportunities to tap into Legend of Zelda, Splatoon or Animal Crossing to name a few. It’s rumoured that a Donkey Kong movie is already in production for a 2024 release.
It won’t be clear for some time how much money the movie will generate for the company. What is clear is that Nintendo has cleared the first hurdle in unlocking its lucrative IP with a record-breaking release.