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Business of Magic
A look at the business of Disney
|Alex Stroup, Editor|
Think you’ve heard this one before? Well, you haven’t.
Yes, I am going to argue that the new Disney’s California Adventure theme park, luxury hotel and mall development in the old Disneyland parking lot is a bad idea. But these are not the same old arguments you’ve heard before. You see, I’m not going to trot out the usual reasons you’ve probably already heard – like it’s the quality or the type of rides or that it’s not up to "the Disney standard". No, that wouldn’t be very original and, frankly, that would be very subjective. Because what I may hate in rides and attractions you may love. Besides, in reality, one or two data points - you and me - wouldn’t really prove anything about whether DCA is a good or a bad idea.
So instead, I’m going to argue this from a business perspective. Not whether the new additions will be fun or not (and it to some extent, how can DCA not be fun? – many of the rides are time-tested amusement park favorites), but whether this new development makes good business sense. I’m going to look at this new development from two sides: in terms of tactical business success and then from a strategic standpoint. By tactical business success I mean it makes a good profit in the short-term, while strategic success means that it sets up the park – and The Walt Disney Company – for further growth and greater profits in the future.
I’m going to start with the tactical side of DCA. By "tactical", I’m talking about short-term business concerns – that is, profit. Actually, there’s a lot more to short-term business concerns than just profit: there’s how much a new investment costs, where you get the money make that investment and how much that money costs ("cost of capital"), whether you can pay the bills on time ("cash flow") and very importantly, how much you expect to get back each year on that investment (the "return on investment"). But the key component to each of these measures is still profit. So, for the sake of simplicity, we can stick with examining the profit potential of the new park, hotel and mall, and still have a valid analysis.
(However, I do want to at least point that the "Return on Investment", or ROI, is a very important financial measure. Basically, this is the amount of profit you get back each year divided by the original amount of money sunk into the project – hence, the name "return on investment". Think of it like the amount of interest you earn annually on your savings account. The idea behind this measure is that if you invest a whole lot of money but only expect to get a small amount back, it might be smarter to invest that money elsewhere where the return is greater or at least less risky. I wanted to mention this all because I believe Disney, as a prudent corporation, used ROI as a primary consideration when it was planning DCA. This is almost certainly why they made design decisions to keep the costs down, such as by copying attractions from WDW and by buying standard amusement park rides like the swing spinner and "mad mouse" coaster. You see, a lower investment in the new resort expansion means Disney can get a higher ROI – a very good thing – from the same amount of profit. But that’s why I’m going to ignore the ROI: it’s still based on profit. The investment is already made, so if the profits end up falling short of their projections, then the ROI will follow it down as well.)
So without further ado, let’s get started. Here are the reasons I believe that DCA and rest of the new development may not end up being as profitable as Disney’s planners think:
Let’s first talk about some business basics. Profit is, of course, the amount of revenue minus the costs. And the key factors for revenue is the number of customers and the amount they spend. So if the number of visitors / customers / "guests" is lower than expected, then revenues and therefore profits are likely to be lower as well.
Now, how do we decide to become customers? It’s quite simple, at least in theory. It’s all about perceived value and price. In general, if you perceive the value of the product is greater than its price, then you want to buy it. Basically, the perceived value is the maximum price you are willing to pay for a product or service.
What does this have to do with DCA? Well, the big question is whether we the theme-park-going public will think Disney’s California Adventure is worth the price Disney is going to charge. If we assume that Disney will charge the same admission price for DCA as it does Disneyland, this could easily be a problem. For $41 a day at Disneyland, you get 57 attractions, most of which are pretty much unique to at least the Disney parks, if not unique to Disneyland itself. On the other hand, at DCA this same $41 would get you only 24 attractions, by my count – and that’s including the winery, bread, and tortilla making exhibits and three children’s play areas. Less rides for the same money obviously means less value for each of your dollars. This lower value could be a major issue, as a lot of visitors already think Disneyland is pretty expensive.
(By the way, Disneyland Paris was one of the cases that we studied in MBA program. The high admission price and the relative lack of rides was identified as one of the major problems that Disneyland Paris had at its opening - it had 29 attractions. DCA will have just 24. And, from the rumors I’ve heard, the forthcoming Hong Kong Disneyland will have even fewer. It makes me wonder if there isn’t some kind of corporate amnesia at Disney…)
We can also use a more current example. We can compare DCA to the most recent Disney park to open: Animal Kingdom in Florida. By my count, it opened with only about 17 attractions and the general consensus is that it is a poor value: a half-day park with a full-day price. Disney’s California Adventure will most likely have the same problem.
Aggravating this value issue is the nature of DCA’s rides: many appear to be "off-the-shelf" standard amusement park rides with just the slightest theming or Disneyized upgrades. Not that these rides won’t be fun (since hundreds of millions of amusement riders over the decades can’t be wrong), but they are hardly unique. I call them "commodity rides". The economic definition of a commodity is a product that is made almost exactly the same by many manufacturers, like the nails you buy in a bin at a hardware store. Such products compete on price alone.
Following the same reasoning, DCA’s off-the-shelf rides are easily comparable to rides at other (and, I’ll point out, generally lower priced) amusement parks. I can easily compare a simple looping roller coaster, a "mad mouse" coaster, a space-shot or a carousel to similar ones at other parks, and also compare the admission prices. If it costs $3.00 to ride a genuine wooden rollercoaster at the Santa Cruz Boardwalk, I have a pretty good idea what that kind of ride is worth. But how much is a ride on Indiana Jones or Pirates of the Caribbean (which are only available at Disney parks) worth? My point here is that just like commodity products, widely available, off-the-shelf "commodity rides" will have a lower perceived value than unique, differentiated attractions. The lower the perceived value of the attractions, the fewer people will be willing to pay Disney’s Disneyland-level admission prices. If the perceived value is low enough, Disney may find its DCA profits to be shallower than the park’s fake ocean.
Some of the critics of the new Disney’s California Adventure park state that it will be too small to handle the expected crowds, that the attraction lines will be too long and that it isn’t enough to see – that it is a "half-day" park in which it will only take a few hours to see everything. Are these concerns real?
Well, the easiest way to find out would be to wait until the new park is open and then see, but that it would be much too late (especially for Disney) to be able to do anything about it. It’s much better to find out as early as possible – but how can we do that? That’s what MBAs are frequently expected to do: predict the future. And, mind you, without the help of Madam Leotta from the Haunted Mansion.
Okay so it’s really not a matter of gazing into a crystal ball or looking at tea leaves. Instead, it is a matter of analyzing and estimating – simply breaking large things down into smaller parts that we can estimate. What we want to know here is the capacity – the number of guests that can be entertained – of Disney’s California Adventure and, since the park is the sum of its attractions, in this case it makes sense to analyze the new park attraction by attraction. All we need for each attraction is how many people can ride or view it at once and also how long the attraction takes.
Where can we get this information? This is fairly easy, actually. Some information can be found in Disney’s own press releases. And since some of the attractions are copies of WDW attractions, in these cases we can use what we know about the original versions. For many of the Paradise Pier attractions, the ride vehicles are in plain view (thank you, Disney, for not building a berm around the new park!) and there are lots of photos of them on the Internet, so we can easily count the seats in the cars. When we have no hard data about the remaining attractions, we have to make educated guesses, perhaps basing the guesses on similar attractions at Disneyland or other parks.
And this is exactly what I’ve done.
Using the methods I just described, I have created my own estimate of the attraction capacity of DCA, and it has some surprising results. Of course, realize that my estimate is going to be rough, since I don’t have the complete, inside information that Disney’s planners do. In other words, my guesses are bound to be off somewhat. However, I’m pretty confident that these estimates are fairly close, and, besides, when there was doubt I’ve tended to bias my assumptions in favor of Disney by giving the rides higher capacities. There is, however, one major assumption, which we’ll discuss later, that significantly increases the maximum capacity. (And, if you want to check my numbers or are just curious as to how I came up with the totals, you can take a look at a copy of my spreadsheet here as a standard Excel file - (by the way, you may want to right click on the link and save the file to you hard drive first) - or as an HTML version.
Now that we have an estimate of the new park’s capacity, let’s go back and try to answer the questions we posed above. First, we asked whether Disney’s California Adventure will be able to handle the expected crowds. By my calculations, DCA will be able to, at most, send just under 33,000 people through its attractions every hour. At first glance, this seems to match up with the 30,000 limit where it is rumored that Disney will cap attendance to keep things from getting too crowded. But think about this number for a moment – it means, on average, one attraction per guest per hour. And if that happens by the longest attraction (the Animation Tour) you would spending over half that hour doing something else - probably standing in line. Even worse, many of the Paradise Pier rides are likely to last only one or two minutes. Another calculation shows that, at any one time, only about 6,000 visitors can actually be taking in a ride, film, show or exhibit, which means four-fifths of the paying visitors will have to be somewhere other than on an attraction! Now, I’m not an expert on theme parks operations, but this seems rather low number to me.
(Perhaps someday in the future, I’ll go further and drag out the notes from Operations class and work through some of the queuing theory equations to estimate how long the lines might be for some of these rides. But not today.)
The other question posed was whether Disney’s California Adventure will be a "half-day park". This is a tricky question to answer, because the answer will have a lot to do with the size of the lines, which in turn will have to do with how popular the various attractions will be. But there is one thing my analysis does show: that if you went on every attraction at the new park, you’d spend less than 3 and half hours (3 hours and 12 minutes, to be more precise) in them. But that includes everything – going on every single ride, including the carousel, getting in and out of the attractions, and viewing all the exhibits – even the tortilla factory exhibit and the bread-baking exhibit. In fact, the exhibits (including what I assume to be two in the Hollywood section) take up 40 minutes of that 3-and-a-quarter hours. If you only went on the rides and movies and there were no lines, it would take only an hour and forty minutes to see it all. Although I haven’t had the time to make this same calculation for Disneyland itself, my quick thumbnail estimate is that it would take somewhere around 5 to 6 hours to see all the main Disneyland attractions.
Now if you looked at my spreadsheet, you might have noticed that I did my estimates assuming that all the rides and shows are always full. This isn’t very realistic (as all ride cars or shows are never 100% full), but it’s probably an acceptable assumption for what I am trying to accomplish. I was looking for the maximum capacity of the rides, and so full trains and theaters are reasonable. In addition, since my numbers are not that precise anyway (they are, after all, just my best-guess estimates), the increase in capacity that comes from assuming full attractions might help offset any places where I underestimated an attraction’s a capacity. In other words, these assumptions stand a good chance of just canceling each other out.
On the other hand, recently there have been rumors that Disney itself has been creating DCA attraction loading rules and procedures to fill the ride vehicles up full all the time (see the D-I-G Update for June 19). For instance, loading the Wonder Wheel cars 100% full 100% of the time and figuring that the California Screaming coaster’s cars are also pretty fully loaded. If these rumors are indeed true, then the loading rules and assumptions they are creating are just plain nonsensical. If I may be blunt, whoever came up with these procedures has either never been in an amusement park and is too dumb to realize that *nothing* in the real world runs at 100% capacity (which I think is highly unlikely - Disney doesn't hire people that foolish) or they are so desperate to come up with estimates that meet the corporate goals that they are purposely ignoring reality. I think this second option is very likely because it is fairly common in the business world - it's called "goosing the numbers". If the estimates (be it the budget or the schedule or the capacity numbers) don't meet the boss's target, then you go back and change the assumptions until the estimates meet the goal. You're not really being dishonest, you're just being very "optimistic" (wink, wink).
The problem, like in this case, is that these kinds of assumptions usually have a zero chance of holding in the real world. Attraction vehicles *never* leave the load station 100% full all the time – groups like to ride together and not with other groups (I mean, who really wants to ride Splash Mountain with an utter stranger in your lap?) – and theaters are usually not 100% full as well. This is why the "Single-Rider Lines" (like on the Rocket Rods or WDW’s Test Track) work so well – there are always vacant seats that can be filled. It takes a lot of extra time to mix, match and break up groups just to get full cars. Which, in fact, is why all other amusement parks send out partially-filled vehicles. They get higher real-world capacity by sending out partially filled roller-coaster cars more quickly than having to wait to fill them up completely.
Of course, if you have to use these kinds of tricks and assumptions to hit your targets, then you are in big trouble. The whole point of estimates is to check to see if your plans are reasonable and if they are not, to be able to make changes to get the desired results. Not to get some kind of "right answer". Sure, meeting the target will make the boss happy for now, but when reality comes along and things fail to pan out, he or she will be *really* upset with you. Just ask any CEO who's had to resign when their stock collapsed because they couldn't meet the numbers that they had been promising Wall Street.
Now if Disney middle managers are playing these kind of games with the numbers, it tells me that Disney is so politicized that middle management is afraid of giving the truth to the senior executives (i.e., the messengers get shot), and that without real honest analysis, there is no way for Disney to correct any problems with their DCA plans. This is a very, very dangerous game to play – sort of a business version of a "Hail Mary" pass. It also tells me that all is not well with the true capacity numbers, which means that the park is likely to be more crowded and have longer lines than what Disney was originally expecting.
Probably the company’s main goal in the new expansion project is not to add more rides and attractions, but to add more hotel rooms (the Grand Californian) and the new Downtown Disney mall. This is where the big profit comes from. I’d also bet that that they’re basing their estimates on the history of the similar properties in WDW. But this is not Florida and things are quite different here.
(Let me first state that I have never actually stayed in a Disney-owned hotel myself. I have never been able to justify spending the extra money – yes, I’m , uh, frugal – when I get up early to go the parks, stay up late, and spend almost all of the few hours a night in my room asleep. And before you mention WDW’s All-Stars Resorts as a fairly inexpensive choice, I’ll point out that they weren’t built the last time I visited Florida. So I’m basing the appeal of Disney resort hotels on what I’ve heard other people – those who actually stay in them – say.)
In Florida, the main reasons I’ve heard for staying in the Disney resorts are: 1) They’re very convenient – close to the parks with easy transportation; 2) They allow you to stay in the "Disney magic" even when outside the parks; and 3) The service is to, well, Disney levels.
For the sake of argument, let’s assume the level of service at the new Grand Californian is up to Disney standards – there’s no reason why it shouldn’t be. Instead, let’s take a look at the other two pieces:
First, that the Disney hotels are more convenient. This is certainly true at WDW, since Disney owns so much of the land around the parks that the nearest hotels are a good 20 or 30 minutes away (if there’s no traffic – sigh). Meanwhile, with the WDW resort hotels, you can walk, hop a bus, ferry or even a monorail and be inside a park in a few minutes. There’s definitely some major value in that.
Now let’s jump to California. Yes, the Grand California is practically seconds away from both parks. But there are many other motels that are almost as close. Many are within a 5 minute walk across Harbor Blvd., and most are within a 10 minute shuttle bus ride – not much longer a ride than if you park in the new Disneyland parking lots. In other words, you can get close to the level of the Grand Californian’s convenience by staying in a non-Disney hotel across the street while paying a much, much lower rate.
Or, to look at it from the other side, if you think the Disney’s room rates are too high in Florida, you have little choice: you have to stay a long, long way offsite in order to get a better deal. On the other hand, in Anaheim, there are dozens of competing motels with a two-block radius. And as we are told in basic economics, more competition means lower prices. My point here being that Disney may believe that it can get the same level of room rates and filled rooms as, say, WDW’s Wilderness Lodge. However, I don’t believe that to be true – there is just too much competition close by in Anaheim.
The second reason to stay in Disney hotels in Florida is that the WDW resorts "envelop you in the Disney magic even after you leave the parks". This is reasonable, since they are highly themed concepts of their own, far away from the distractions of the outside world. (International Drive, on the other hand, has all the atmosphere of downtown Los Angeles during rush hour.) Again, this escape from the "real-world" is of some value to the guests, justifying part of Disney’s higher room rates.
Does this same Disney resort atmosphere apply to the Grand Californian? I don’t think so. Sure it’s themed, and although it is right next to DCA and the Downtown Disney mall, it is still awfully close to a busy street (Disney Drive / West Street), next to a mall (Downtown Disney), across the street from Disneyland’s parking lot, near a very busy neighborhood filled with motels, restaurants and traffic (not that much unlike International Drive in Orlando, I’ll point out) and not that far from an Interstate freeway. Some of the rooms in this new hotel will look out on its own parking lot, while others will get a lovely view of the tram stop from the main parking lot along with the big green side of the Indy show building (which they may try to hide using a sort of green, jungle-pattern wallpaper – honest, I saw them testing it out a few months back). If you’re really lucky, you’ll get a room that overlooks the new park, and see and/or hear the night clean-up crews as they repaint, clean up the restrooms, do construction and repair work, and refill the margarita wagons. Not quite the magical experience you’d get from the Grand Floridian, Polynesian or Wilderness Lodge hotels in Florida.
So, it won’t be the same "magical environment" that you get with Florida resorts - another reason why these new hotel rooms may not be able to command the same rates and occupancy as the WDW premium resorts. Yet another reason that Disney’s Anaheim expansion plans may bring in less profit than it expects.
Does this sound a lot like the last point? It should, because it is on a similar track. If Disney thinks the West Coast incarnation of Downtown Disney will have the same clientele and performance as the WDW one, then I think they are going to be surprised. Here’s why:
I see two major factors driving Florida’s Downtown Disney to be successful. First, the majority of WDW visitors are from out of the area, and, second, they tend to stay from several days to a week or more to see all the parks. From reading trip reports on the rec.arts.disney.parks newsgroup, it seems like most visitors spend only one or two of those evenings at Downtown Disney. I’m guessing that they want to see it, and they are spending enough evenings in the parks that they feel they won’t miss much by spending one of those nights away at the mall. And besides, if you’re spending 5 or 6 nights in the parks, then one evening out of the parks is a nice change of pace. And besides, most of the parks aren’t open as late in Florida, especially in the off-season when most close at 7 p.m..
But, once again, things are different in Anaheim. It’s pretty much accepted that more locals visit Disneyland than out-of-the-area visitors (I think the figures I’ve heard recently were 60% local vs. 40% tourist at Disneyland as opposed to the 60% tourist / 40% local mix at WDW). And even with DCA, the Disneyland Resort is likely to be at best a three day (two for Disneyland, one for DCA) trip for out-of-town visitors. By this count, the upgraded Disneyland Resort will have a lot of locals (who can spend their evenings in their homes watching "Who Wants To Be A Millionaire" on TV) along with some tourists who only have an evening or two at the parks. Now, if you came in from out of town and just spent $100+ for a three-day pass for the parks, are you more likely to spend your one or two precious evenings in the parks themselves, or in a very nice mall? Would you spend two hours at the Downtown Disney theaters to see the same movie you can see at your local multiplex when you could be watching Fantasmic! or riding Pirates of the Caribbean instead? I think most will opt for staying in the parks.
(And note that if the mall profits come up short, I wouldn’t be surprised if they shorten the park hours to help fill the thing up.)
So what I’m thinking is that most tourists won’t bother to spend much time in Downtown Disney, and who you’ll get in the mall instead is a very high percentage of locals instead. Which is what I observed at Universal Hollywood’s CityWalk a few years back – it was Saturday night and it looked like late-teens / early 20’s Date Central. Not that there’s anything wrong with that – the couples I saw at CityWalk were all well-dressed and well-behaved – but this may be a different demographic than Disney is anticipating. I think a lot of the local youth will see Downtown Disney as a good place to hang out, sort of like Disneyland but without having to own an Annual Pass. Fighting through weekend date crowds may make the mall even less appealing to the tourists. On the other hand, Downtown Disney faces a lot of competition for the local residents’ dollars, as there are many other upscale entertainment / mall complexes in the L.A. area. For example, I was at the Irvine Spectrum Center recently (to see Fantasia 2000 on the IMAX, naturally) and I was quite impressed.
To summarize, Downtown Disney in California doesn’t have the same captive audience that its Florida predecessor has. And it also has a lot of competition for the local resident’s attention. Therefore, I feel that the new incarnation of Downtown Disney won’t be nearly the success as WDW’s is. Which equals lower profits for Disney.
When Walt originally designed Disneyland, he tried to make sure that each land had a "wienie" – a visual landmark in the back of each land that could be seen from the hub at the end of Main Street. The wienie would grab the visitors’ attention and interest, and pull them into the land to see more. So Tomorrowland had the original Moonliner, Fantasyland had the castle, and Frontierland had the Mark Twain riverboat.
I’m going to take that concept one step further. I think an entire theme park should have one or more "wienies", attractions that capture the public’s interest and imagination and make them want to visit the park. In other businesses, this might be called the "killer app" or the "marque attraction", the one item that brings in the mass audience. For Disneyland, the wienies are rides like Pirates of the Caribbean or Indiana Jones. These create a "buzz" that pretty much advertise themselves. It is these rides that get the key segment of Disneyland’s customer base – the longer-distance, occasional visitors who stay more than one day, stay in local hotels and eat all their meals at the resort – to make the effort and spend the money to make a trip to visit Anaheim. (Indiana Jones, for example, was the new ride that I just had to see and it got me to start taking once-a-year trips to Disneyland after a nearly ten-year absence.)
And as far as I can tell, Disney’s California Adventure has no truly compelling wienie. Grizzly Peak is obviously intended to be a one – it indeed looks interesting, but it’s really just another rapids ride. I don’t think it will be compelling enough to draw customers from a long distance (does anybody know if Shipwreck Rapids has been a big draw for Sea World? It certainly hasn’t convinced me to visit….). Similarly, the looping "wooden" coaster doesn’t seem interesting enough to be a wienie. Roller coasters need to be really special to garner enthusiasm – the fastest, the highest, the longest, the most loops, etc. This one, although likely to fun, doesn’t appear to be particularly special. A number of the other rides already exist in Florida (Muppetvision, Tough to be a Bug, etc.) and aren’t major wienies there so they’re unlikely to be ones in California, either.
The one ride that I feel does have some "wienie" potential is Soarin’ Over California, the IMAX hang-glider simulator. If the "hang-glider" seating pods actually move as I’ve heard, this would make the attraction different from most IMAX shows. But unless they do something really special with this film, I don’t think it will different enough from existing IMAX "flying"-type films or even other motion-simulated IMAX rides (such as Universal’s Back to the Future) to really engage the fancy of potential visitors.
So with no wienie to capture the attention of potential guests, Disney will have to rely on either massive P.R. and advertising campaign or word-of-mouth to stimulate interest in the new park. Advertising is very costly, and while word-of-mouth is cheaper it is also less predictable. Either choice could easily affect both revenue and costs, lower the profit from the new expansion. Wouldn’t it be much better to have at least one attraction in the park that speaks for itself?
Have I convinced you yet that Disney’s California Adventure doesn’t have enough high- customer- value rides? If not, allow me to use a lesson from history. And if I have convinced you, too bad – there’s going to be a quiz on all this later, because today’s history lesson is about another Disney park: EPCOT’s World Showcase. And even though it’s a history lesson, we don’t actually have to go back very far. In fact, World Showcase’s problems still exist today.
What problem is that, you ask? Better than asking me, we can ask the people who visit. World Showcase has well-themed and beautiful country pavilions. It has some very nice restaurants and quite a few interesting gift shops (which, at least, sell unique souvenirs that harken back to their host countries). The big complaint, at least from what I’ve seen by reading the newsgroups, is that there just isn’t enough "real" attractions: just two "real" attractions (American Adventure and Maelstrom) and a bunch of movies. In fact, there are only 7 attractions (if you don’t count art or "cultural" displays and singers and performers, as Disney seems to on its website) but 21 restaurants and lots of shops. From what I understand, World Showcase is usually the least popular part of the Disney World theme park complex.
Now, let’s relate that to DCA. Looking at the most recent list for the park, there are 24 attractions versus 28 restaurants and 16 shops. That’s a ratio of 1.75 attractions for each shop, and 1.1 attractions for every restaurant. Disneyland, on the other hand, has a ratio of 1 attraction per shop (57 to 56) and 2 attractions for each restaurant (28 restaurants). And of DCA’s attractions – guess what – four of those are movie-based (Muppets 3-D, Bugs 3-D, California Soaring IMAX and the California Show). Sound like any other park we just discussed? Let’s just hope that DCA is better liked than World Showcase.
(Before you continue, if you’re not familiar with Disney’s California Adventure (DCA) - the new theme park, hotel and shopping complex that is being built where Disneyland’s original parking lot used to be - I suggest you check out the D-I-G’s Preview of DCA by clicking here.)