Was all that worrying for nothing? When entertainment mogul Disney bought cartoon character powerhouse Marvel Entertainment for $4 billion a few years back, Hasbro investors felt waves of trepidation that the biscuit wheels were about to come off the gravy train. While the toymaker had just inked a licensing deal for the portfolio's 8,000 or so characters at the time, the agreement only ran to 2017, and you could hear the doomsday countdown clock start ticking in the background.

This morning, though, both companies announced that they had agreed to extend their royalty arrangement through 2020, and for a cool guaranteed royalty payment of $80 million by Hasbro, the day of reckoning has been put off for a few more years. Maybe things aren't so bad after all.

Maybe, but Marvel's characters are an integral part of Hasbro's success, and when the studios aren't releasing one of their iconic figures to the big screen, the toymaker is the one that suffers. In its second-quarter earnings announcement also just released this morning, Hasbro said its boys segment suffered a 35% plunge in revenues based in part on tough comparisons its Marvel IP had with the year-ago period. Sales tumbled to $253.7 million from $389.1 million last year, too much of a decline to make up for the increase in revenues experienced in the categories of girls (up 43%), games (up 19%), and preschool (up 4%).


Although today's news gives the toymaker a few more years of breathing space, it highlights the importance of Marvel -- and movies generally -- to Hasbro's bottom line. 

The new extended contract actually has its genesis in Hasbro's licensing agreement with Lucasfilm, the owner of the Star Wars franchise that Disney also acquired last year for $4 billion. Hasbro has licensing rights to the characters and the cartoons that appear on its Hub television network are a perennial revenue enhancer. The TV channel is still a small portion of Hasbro's overall revenue picture, and won't challenge anytime soon Disney's own TV work or that of Viacom's Nickelodeon, but it is gaining critical acclaim if not more revenues. 

Hasbro's contract with Lucasfilm extends to 2020 and with both properties now part of the House of Mouse, Disney sought to align both contracts, which is why the toymaker was able to get the contract for Marvel extended. Yet because there are three more Star Wars films planned by the time the agreement runs out, Hasbro has agreed to pay Disney $225 million in guaranteed royalties, with $75 million due at the signing.

As we saw with Marvel, Hasbro's Star Wars relationship is also key because the first-quarter dropoff in sales would have been a lot worse had there not been Star Wars toys put into the sales channel in anticipation of the May 2013 release of Star Wars Episode 1: The Phantom Menace, which was re-released in 3-D. They've also got other tie-ins with the franchise scheduled for the back half of the year, including an Angry Birds Star Wars II release.

While it's interesting that Disney would agree to extend the contract rather than bring production in-house with its own considerable marketing muscle, it seems to me Hasbro was negotiating from a position of weakness. It needs those portfolios more than Disney needs the toymaker, which has had a longtime relationship with Hasbro's rival Mattel and could always switch over if it wanted.

The countdown clock may have been reset again, but I'm not particularly worried. Analysts had expected Hasbro to fall apart after Disney pulled its portfolios from the toymaker, but that didn't happen. Not only have they extended the agreement for an additional period of time, but Marvel character-based cartoons appear on Hasbro's Hub, something Wall Street didn't think would happen either.

Once the deadline draws near again, it is possible Disney decides to cut out the middleman after 2020, but they could also be just as pleased with how Hasbro has handled Marvel's characters, and while the House of Mouse might not get all the profits as it would if it brought development in-house, it avoids the costs as well and spreads the risk. Armageddon may have been avoided after all.

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The article It's a Marvel: Disney Extends Hasbro Contract originally appeared on Fool.com.

Fool contributor Rich Duprey has no position in any stocks mentioned. The Motley Fool recommends Apple, Google, Hasbro, Mattel, Netflix, and Walt Disney and owns shares of Apple, Google, Hasbro, Netflix, and Walt Disney. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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