What does Rolex have to do with Marvel's poopification, streaming movies, and those weird DVD bundles at Walmart? AKA, how Rolex's purchase of Bucherer was a terrible, terrible mistake on their part

[Begin aside]

PSA:  Do yourself a big favor right this very moment, and go to www.theescapementroom.com

There you will find many articles written by fan favorites @DeeperBlue @Porthole and @Aurelian.  My god, I can't remember the last time I've laughed so hard. Their posts are eff'ing brilliant.

[End aside]

My love of all things Marvel Comics

When I was 10 years-old, my cousin and I went to the supermarket with my aunt, and we were being so annoying that she told us to hang out by the newsstand, while she did the grocery shopping.  In one of those rotating magazine racks, I saw this…

I picked it up, read 1 page, and couldn’t put it down.  Although our families were incredibly poor, my aunt bought the comic book for me, and Fantastic Four #277 for my cousin that night, and thus began my nearly 4 decade-long love affair with Marvel Comics.

When Iron Man hit the theaters in 2008, I was incredibly skeptical.  I thought, “Why did they choose to release a film about a B-tier character that no comic book fan really cares about?  Why wouldn’t they do something popular?”  I hadn’t realized that Marvel Studios had sold off all the film rights to the popular characters (X-Men, Spider-Man, Fantastic Four, etc.) when they’d gone through their financial difficulties in the early 90’s.  And, then imagine my surprise when the film turned out to be not only good, but great!

From 2008’s Iron Man, to the culmination of Avengers: Endgame in 2019, everything had gone right in the world.  I mean, the writing and directing in the MCU was so good they were able to take D-tier characters, like Ant-Man, Dr. Strange, and even the frickin' Guardians of the Galaxy, and turn out incredibly funny and touching films!  Craziness.  Every single day, the world was becoming a better and better place.  It was a sign that my people could begin to emerge from the shadows and into the light.  Not only were we no longer actively being oppressed, but somehow our worldview had taken over the public discourse.  We could finally freely express our views in the open, without ridicule and opprobrium.  And dare I say it?  We had even earned a modicum of respect!  Comic book nerds unite and take over!

[In 2019, this was considered sexy]

One evening, my wife and I had dinner at one of those hoity-toity, hipster establishments, where the cool kids gather after work in downtown to consume over-priced, twee cocktails, and munch on avocado toast, back when only those “in the know” ate avocado toast.  You know how hipster this place was?  It had taxidermied exotic animals displayed throughout the dining area!  Our server came to take our drink orders, and, of course, he was 6’2” and muscular, with blond flowing locks.  

I said, “Hey, anybody ever tell you that you look like Chris Hemsworth?  You know, the actor who plays Thor?”  

He said, “Oh, yeah, I get that all the time.  I’m a huge Marvel nerd.”

You?  You are one of the most beautiful human beings I've ever laid eyes on, and when you’re not dating models, you spend your weekends as a volunteer fire fighter.  You?  A “Marvel nerd”???  

Marvel does not belong to you!  Marvel belongs to me and my people - the short, the ugly, the socially maladjusted, the rotund!  How dare you engage in this grossest of cultural appropriations???

So, you see, when even the volunteer fire fighting Doppelgänger of Chris Hemsworth claims to be a Marvel nerd, that is how you know your worldview has utterly and completely triumphed!

Now, imagine how crushing the past 4 years have been, as the MCU has churned out nothing but utter dreck, since Avengers: End Game.  Honestly, and I’m not even joking here, I suspect that one of the main reasons I got into watches was because the MCU had gotten soooooooooo horrifyingly bad that I needed something, other than alcohol, to help take my mind off it, and control my rage.  I mean, when I finished watching "Falcon and the Winter Soldier," every evening for an entire week afterward…

I would explain in excruciating detail to my wife why the writing was soooooooo bad, how the characters were completely unsympathetic, how you could drive a semi-truck through the plot holes, etc., etc.  My wife’s response was, “Honey, it’s just a TV show.”  

Me…

It’s because of streaming?

Then, maybe six months ago, @Edge168n and I got together for a watch window shopping trip.  After checking out a bunch of Vacheron’s and seeing the new Tag Carrera Glassbox, we sat down for lunch.  And, of course, I went off on the poopification of the MCU, and how the employees of Disney (which owns Marvel Studios) had effectively destroyed $180B of market cap through their awful, awful writing - all the evil they’d wrought upon Marvel, they’d done to Disney, Pixar, and Star Wars too, with this result...

@Edge168n, however, said, “Nah, I don’t believe in ‘Culture War’ explanations.  You can always cite some political gripe.  No, I prefer systemic analyses.  When you look at the entire media sector, companies that launched their own streaming services have all suffered massive falls in valuation.”

My reaction…

After I got home from that trip, however, I thought about it more and more, and it occurred to me that maybe there might be something, not much, but something to what @Edge168n had said.  I mean, maybe Disney was so focused on creating new content for Disney+, it had lost management attention to quality, resulting in the travesty that is “She-Hulk: Attorney at Law” and “Thor: Love and Thunder” and “The Eternals” and, and, and...!  Sure, I’m willing to concede that there could be interaction effects.  Maybe.  I then texted @Edge168n to say, “Well, I could see how there might be some validity to your argument.  I think I’ve come around to 60 / 40.  60% of the decline is MCU writers waging the 'Culture War' and alienating fans, and 40% is streaming.  So, you see, I’m still right.”

And this post, well, this post is about how and why streaming would cause Disney’s stock price to halve, and thus its market cap to fall by ~$180B, if I were wrong, and if @Edge168n were right - which he’s not, because, you know, the 3 hardest words to pronounce in the English language are “I was wrong,” which I was not - and how that applies to Rolex.  

How bundling works

Why would creating your own streaming service cause your stock price to halve?  It all has to do with bundling.

You ever walk into a Walmart, and as you’re checking out, there’ll be a bin full of DVD sets?  Have you ever taken the time to look at some of these utterly nonsensical combination packs?  Here’s an example…

Who in their right mind wants to buy a combo pack of The Dark Knight, Slammed, Ocean’s Twelve, and Free Willy???  Like, who says, “Honey, I’m gonna head over to Walmart right now to get us these 4 movies to watch.  We’ve been waiting YEARS to find this perfect combination in the DVD bin, and I swear that tonight is gonna be our lucky night!”

As ridiculous as this is, bundling is imminently sensible, and it generates a ton of additional marginal revenue and marginal profits for companies!  Here’s how…

• For simplicity, let’s have a 2 DVD bundle

• Let’s say that the bundle of Dark Knight and Ocean’s Twelve is priced at $12

• Consumer A is willing to pay $8 for Dark Knight, but only $4 for Ocean’s Twelve

• Consumer B is willing to pay $8 for Ocean’s Twelve, but only $4 for Dark Knight

Now, let’s see what happens and how much money the media company makes depending on different scenarios:

1. Media company prices Dark Knight for $8 and Ocean’s Twelve for $8, which are sold separately:  Media company makes $8 in revenue from Consumer A and $8 in revenue from Consumer B, so $16 total

2. Media company bundles Dark Knight and Ocean’s Twelve together for $12:  Media company makes $12 in revenue from Consumer A and $12 in revenue from Consumer B, so $24 total

Isn’t that incredible?  Just by bundling these 2 DVDs together, the media company earned 50% more revenue!!!  And, because the marginal cost of producing one more DVD is for all intents and purposes nearly $0, that 50% additional revenue falls directly to the bottom line!!!

Bundling ensures that you capture more consumer spending, even when (especially when) consumers' willingness to pay for particular parts of the bundle varies dramatically!

See how Marvel / Disney is EFF’ing it up?

Well, Disney and all the other media companies out there used to focus solely on creating content for theatrical release, and then eventually selling that content to cable providers.  And those cable providers bundled everything together!  You might really, really want ESPN and be willing to pay $8 for sports, and you don’t really care about history that much, so you’re only willing to pay $4 for The History Channel.  It’s the exact opposite for me.  But, because the cable companies bundled everything together, they got $12 of revenue out of each of us, instead of only $8!

Disney, Paramount, HBO, Discovery, etc., etc., they ALL decided to unbundle!  They deprioritized their relationships with the cable operators, in order to launch their own stand-alone, direct-to-consumer streaming services!  So, now, instead of getting $12 out of each of you and me, they’re only getting $8.  Unbundling is very, very bad for the top lines and especially bottom lines of these media companies!

What does bundling have to do with watches???

Well, when it comes to Rolexes, ADs have been selling us bundles!!!

• You are willing to pay $1M for a DateJust, because Rolex is the pinnacle of haute horology and fine watchmaking

• But, you are only willing to pay $2k for a Tudor 

• Your local AD would like to sell you the Rolex for $1M, but Rolex has told the AD that the AD can only sell the DateJust at MSRP of $8k or else they lose their AD-ship!  

• So, when you come into the AD and ask for a DateJust, the sales associate says, “No problem.  First you must bring me home-cured prosciutto every week…

• “Second, you have to buy a $4k Tudor.  And then, you’ll get the next $8k MSRP DateJust allocation”

• And, you do it!  Why?  Because you want the DateJust sooooooooo bad!  It is worth $1M to you, so of course you’ll pay $4k for the Tudor even though the Tudor is only worth $2k to you, because you’ll then get the DateJust, and as we all know, Rolex is the pinnacle of haute horology!

See what happened there?  By bundling the Tudor in with the DateJust, the AD was able to make $12k in revenue!  In the absence of the bundling, and given that Rolex has mandated that the AD can only sell at MSRP, the AD only makes $8k in revenue through the sale of only the DateJust, but $12k when the AD is able to play games.

This is what happens when you can no longer bundle

So, Rolex bought Bucherer.  

One of the oft-quoted reasons for Rolex having done so is that Rolex has gotten fed up with all the games ADs have been playing - damaging the Rolex brand in the process - and that this is a way to make sure that consumers will be allocated Rolexes, without any shenanigans.  But, as we’ve just established, the only way for ADs to capitalize properly on the demand for Rolexes is through the shenanigans!  Shenanigans = bundling!  When you dictate that ADs can only sell Rolex watches for below-market MSRP, then ADs maximize revenue and profit by bundling / playing games!

And to put a very fine point on it, let’s create a hypothetical.  Let’s say that Rolex bought Bucherer for $3.5B.  Let’s say that Rolex paid a 5x multiple on earnings, so Bucherer was making $700M a year in profit.  Well, a lot of that profit was coming from the shenanigans / bundling!  If Rolex now ensures that Bucherer doesn’t play any more games, well, earnings must fall!  If net present value of all future earnings falls by 25%, then by definition the market cap of Bucherer falls 25%, meaning that Rolex paid $3.5B for a Bucherer that, in the absence of shenanigans, is now only worth $2.625B!!!  Rolex would have overpaid for Bucherer by $875M!

Sounds unrealistic, doesn't it?  And yet, look at precisely what happened to Watches of Switzerland upon the announcement of the Bucherer acquisition by Rolex…

If Rolex’s acquisition of Bucherer is designed to put pressure on the entire AD network, and to get the entire AD network to stop playing games, well, this is what happens to your stock price when you can no longer bundle!

See how Rolex is EFF’ing it up?

“But, @Mr.Dee.Bater, who cares about overpaying for Bucherer?  Can we both agree that $875M is chump change?”

Absolutely.  I mean, who cares about a piddly little $875M.  But, you know, three-quarters of a billion here, three-quarters of a billion there, and pretty soon we’re talking about real money!  If Rolex paid a premium for Bucherer, who cares?  No, the real damage to Rolex comes from the following 3 factors:

1. You’ve just caused Watches of Switzerland’s market cap to plummet by 25%, because you’re going to crack down on shenanigans and they can no longer sell the Rolex-plus-other-random-stuff bundles to their customers.  Watches of Switzerland wasn’t the only AD doing this.  EVERY SINGLE ROLEX AD was maximizing revenue and profit through bundling!  In effect, EVERY Rolex AD’s value has fallen by 25%, because the net present value of all their future free cash flows has fallen by 25%!  I don’t know about you, but if a business partner of mine just did something that caused my company to plunge in value by 25%, I’d be pretty pissed.  In fact, I might just start to try to diversify away from such a bad partner.  If Rolex can do this to me at their pleasure, what’s to say they won’t do something else just as harmful to me on a whim?  Given that, I might try to find ways to tout other partners / watch brands, who are nicer to me, and make my life easier, not harder

2. Rolex itself will find that there are fewer customers for some of its watches.  The reason that people buy the 31mm two-tone, diamond set mother of pearl Datejust?  Well, probably so that they can “build a relationship” with the AD in order to get the watch they really do want, which is the stainless steel sports model.  Tudor sales?  Again, previously, I was happy to buy the Tudor for $4k, knowing that I would then get a Rolex for MSRP.  If ADs can’t bundle anymore, why would I pay $4k for Tudor that I only value at $2k???

3. Desperate customers won’t bring in home-cured prosciutto to sales associates anymore!  Oh, the humanity!  Think of the poor prosciutto-less sales associates!!!

This kind of move is something that a dominant player makes when they are overcome by…

And I stand by this analysis I wrote up previously...

https://www.watchcrunch.com/Mr.Dee.Bater/posts/for-god-s-sake-can-we-finally-put-a-fork-in-it-aka-putting-an-end-to-threads-about-which-watch-is-a-better-investment-or-which-watch-will-hold-its-value-better-265419

The 3-word phrase that is the hardest for any human being to say

So, that’s it!  If I were wrong, and if the MCU has become utter crap due to Disney’s focus on streaming, thereby causing Disney’s plunge in stock price due to “unbundling," then this analysis should give us some insight into how much of a mistake is Rolex’s acquisition of Bucherer.

But, I’m not wrong.  See, I’ve updated my thinking to 50/50.  50% of the fall in Disney’s market cap is due to 'Culture War’ issues and the writers alienating fans and 50% is due to streaming / unbundling.  But, I’m not wrong.  I’m still at least 50% right.  

And how do I know it?  Well, because this guy validates my worldview…

https://www.youtube.com/watch?v=_-Rdh1UIE3Q

What about you?  Have you, in the past, purchased other watches and jewelry to get the Rolex you really wanted?  Would you buy whatever Tudor or whatever other watch to “build a relationship” with your AD, even if it had zero effect upon your chances of getting the stainless steel Rolex you do actually want?  And, most importantly, do you hate the MCU as much as I do now?