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The Economics of Disney World: The Formation of an Empire

“You can go anywhere on the planet and you will see a kid wearing a Madagascar T-shirt. You can say May the Force be with you, they know what you’re talking about. […] Entertainment is one of the brightest spots of our economy and we have to harness its power.”

These words of Barack Obama bear truth in all the past, present and future times of the world.
Entertainment is a big business, no doubt, but it is one that relies heavily on the discretionary spending of consumers to thrive. It might be the fifth largest sector based on employment but if one takes into account the ripple effect it has on jobs like caterers, florists etc. the impact of this sector is still uncharted.
If we study the relation between the rise in entertainment prices and inflation rate, we will observe something peculiar. The former rises at a higher rate than the latter. The man on the street thinks increased hockey player salaries have led to higher ticket prices. This man couldn’t be farther from the truth. During periods of inflationary demand and rising incomes, entertainment is one of the areas where consumers spend a disproportionate amount of money. Now, because the supply of sports teams is limited, surging demand allows owners to push up prices. Economics 101.

Now, talking about current scenarios, if we look at the motion picture sector Hollywood ended 2016 with a record-shattering $11.4bn box-office haul, thanks to superheroes, The Force and a string of animated hits. Among all, in terms of studio profitability, The Walt Disney Company ranked first (of course), followed by Time Warner and 21st Century Fox. So now let’s delve deeper into the company behind the Happiest Place on Earth.

Like all good things, this too started within the family. Brothers, Walt Disney and Roy O. Disney, founded Disney as the Disney Brothers Cartoon Studio. Soon, it established itself as a leader in the American animation industry before diversifying into live-action film production, television, and theme parks. Taking on its current name in 1986, it expanded its existing operations and also started divisions focused upon theatre, radio, music, publishing, and online media.

Since financials have become a must to assign credibility, let’s talk numbers. 14 on Forbes list of world’s most valuable brands. 175,000 employees. $45.97bn in sales. One third of this accruing to its theme parks. 80% ownership of ESPN. 100% ownership of ABC networks. (Fun Financial Fact: More than 84 million Mickey Mouse ear hats have been sold since 1955.)

The company is best known for the products of its film studio, Walt Disney Studios, which is today one of the largest and best-known studios in American cinema. Disney’s other three main divisions are Walt Disney Parks and Resorts, Disney Media Networks, and Disney Consumer Products and Interactive Media. Disney also owns and operates the ABC broadcast television network; cable television networks such as Disney Channel, ESPN, A+E Networks, and Freeform; publishing, merchandising, music, and theatre divisions; and owns and licenses 14 theme parks around the world.

Almost everyone (except chickened out adults) will agree that the theme parks are the best-est part about Disney. There are 6 parks in the following locations- Paris, Tokyo, Hong Kong, Shanghai, California, and Florida. The driving force behind the parks’ profits is its scale. They attracted 132.5mn guests last year, which is more than double of the number of visitors in its closest rival. Now most people believe that Disney completely owns these parks, which is actually not true. In fact, Tokyo Disneyland is not owned by the Mouse at all! Among the rest of the parks, in most cases there is a case of split ownership. Some are due to government regulations, while others are for tax purposes and others are for different reasons entirely.

Now, one may ask, how do these theme parks help earn revenue at all then? Let us take Tokyo’s example. The Oriental Land Company owns all of the Tokyo Disneyland Resort and pays Disney a licensing fee for ticket sales, merchandise and food. At the time Tokyo Disneyland was being built, so was EPCOT Center. Disney was interested in gaining extra revenue while spending none of their own money, and this could do just the trick. A big reason why this resort is known as the best of the Disney parks is because Oriental Land Company pulls the trigger on new attractions, maintenance and even marketing. They must then contract Disney to create those new offerings, which is another way Disney creates revenue for themselves.

Did you know, Disneyland was built in such a way with high walls that once you enter you are supposed to be totally detached from the outside world? I wish I could say the same for the effects of the outside world on its economy as well, but that is sadly not the case. The September 11, 2001 terrorist attacks in the U.S. immediately impacted Disney’s financial situation. The hardest hit were Disney’s Parks and Resorts, as vacation travel came to a halt. The recession that followed the attacks did not help matters. The suffering economy, coupled with a drop in ratings, led to a dramatic decrease in advertising rates for Disney’s Media Networks, and in particular, the ABC Network. By 2001’s end, Disney suffered a staggering $158 million loss in net income. Another recent example are the Paris Attacks. Paris has been hit hard with terrorist attacks over the last several years and that impacts Disneyland Paris far more than opening new attractions could fix.

If you are an investor, you might be wondering whether Disney is a good bet or not? It is a great “forever stock” — a stock that you can buy, hold for the long haul and rely on for consistent gains and dividends year after year. It has two important traits of a forever stock — high barriers to entry and a reliable and growing dividend.

Regardless of that, many investors are sceptical because of Disney’s high stake in ESPN. Why is that a problem you ask? Allow me to elaborate.
There was a time when ESPN was the only sports venue out there. If you wanted to watch or hear about the biggest names or games, you were pretty much forced to watch the channel. That turned ESPN into a cash cow for Disney’s stock. However, today, that simply isn’t the case. There’s a million blogs, networks and other ways for viewers to get their sports fix. And some of these are starting to rival ESPN for viewership. Not helping Walt Disney stock is the general trend of cord cutting by consumers. People continue to cancel cable subscriptions in favour of online streaming services. That trend is accelerating as streaming services like Netflix and Amazon are now offering original programming to compete with traditional cable networks. The combination of sports junkies going elsewhere, and people leaving cable altogether has removed about 11 million ESPN subscribers off of Disney’s manifest. Even Disney officially said that “lower advertising and affiliate revenue and higher programming and production costs” at ESPN was the reason for the declines in its revenues.

Let us also look at some of the solutions that Disney is planning to execute. Directly, Disney has turned to new streaming partnerships to counteract the loss of subscribers at ESPN. Getting ESPN on Sling TV or on PlayStation Vue helps regain customers lost to cord cutting. And let’s not forget that Disney owns a 30% stake in streaming service Hulu, which could easily start offering the channel.

And the real thing in all of this, Disney still has plenty of time to figure out a solution. That’s because its other businesses — studio entertainment, parks and resorts and consumer products — are growing like weeds. The company continues to see huge success from its Marvel and Star Wars movie franchises, while its new Chinese theme park operations are about to break even after opening just a short time ago. Overall profits at Disney are up, cash flows are growing and it continues to see rising revenues.

Another option Disney is looking at is to acquire Twitter or/and Netflix for their content value. However, Disney, Pixar, Marvel, Star Wars, and Lucasfilm are all content assets whose value is continuing to increase. Disney doesn’t have any problems there. It’s at ABC and ESPN — aggregators of content — where the problem lies. Spending tens of billions of dollars to acquire a lower margin aggregator wouldn’t solve their existing problem. In my opinion, they should not focus on acquiring the aforementioned companies right now.

In current times, the Comcasts and Disneys of the world make more money from their consumer product lines than from movie ticket sales. Consumers have begun abandoning the cinema for the pleasures of the couch.
Disneyland will never be completed. It will continue to grow as long as there is imagination in the world. –Walt Disney

By Khushi Bhojnagarwala.
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