Defying more than gravity.

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Theme Parks Will Not Be Digitized

Justin Fox is a Bloomberg View columnist. He was the editorial director of Harvard Business Review and wrote for Time, Fortune and American Banker. He is the author of “The Myth of the Rational Market.”
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For the world’s entertainment giants, this is a time of fear and doubt. These companies are still bringing in piles of money -- industry leader Walt Disney Co.’s profits are expected to hit a record $8.7 billion for the fiscal year that ends Wednesday. But cracks are beginning to show in the business model, especially the double revenue stream of advertising and user fees that has made U.S. cable television networks such wonderful things to own during the past couple of decades. The digital forces that upended music and publishing seem now to be, finally, stalking TV and movies in a serious way.

Hey, but digital isn’t going to ruin the amusement-park business, right?

That’s one way to look at Comcast’s decision to spend $1.5 billion on a majority stake in the Universal Studios Japan theme park, the company’s biggest-ever overseas acquisition. Theme parks were presumably an afterthought when Comcast bought NBC Universal in 2011, and the company-owned U.S. parks accounted for just 3.9 percent of its revenue in the first half of this year. But thanks to the expansion of the already spectacularly successful Wizarding World of Harry Potter at Universal Studios Florida, Universal’s theme park operating cash flow was up 48.9 percent in the first half of this year. Comcast will now also benefit from the success of the Japanese Wizarding World, which opened last year, and has another Wizarding World due to open next spring at Universal Studios Hollywood. (There’s also a Universal Studios park in Singapore, owned by Malaysia’s Genting Group, and a park planned for Beijing owned by Comcast and several local partners.)

Meanwhile, at Disney, theme parks have long been a pillar, accounting for almost a third of revenue. And while Disney’s Florida flagships haven’t been able to match Potter’s magic lately, theme parks overall have continued to be a bright spot for the company, with operating income up 16 percent in the nine months ending June 27. With “Star Wars”-themed “lands” coming soon to Disney World and Disneyland, that growth could well accelerate.

So that’s great for Comcast and Disney. The problem for the rest of the entertainment industry is that there are limits to how far theme parks can take anybody else. Here are visitor figures for the world’s five biggest theme-park operators:

Merlin Entertainments is the product of a recent bit of private-equitying by the Blackstone Group. In 2005 Blackstone bought Merlin, “one of Europe’s leading operators of branded visitor attractions under the Sea Life, Dungeons, Seal Sanctuary and Earth Explorer brands” (no, I haven’t heard of any of them either), immediately added the Legoland theme parks and then, in 2007, acquired Madame Tussauds’ wax museums and other attractions that include the iconic London Eye ferris wheel. The company went public in 2013, and now has a market capitalization of 3.7 billion pounds ($5.7 billion).

OCT (it stands for Overseas China Town, an amusement complex in Shenzhen) owns six Happy Valley amusement parks and several other attractions in China. Six Flags has 18 parks in North America, and plans to expand into China. It struggled in the last recession and filed for Chapter 11 in 2009, but it emerged from bankruptcy in 2010 and since then it’s been a pretty hot stock:

Those contrasting stock trajectories may demonstrate the enduring power of in-person entertainment versus the kind that can be digitized. But it’s hard to tell what exactly the big entertainment companies should do with this information. Time Warner has had a long involvement with Six Flags, owned it outright from 1993 to 1998, and still licenses many of its characters to the parks. But when it came time to create an attraction around its megafranchise Harry Potter, the company struck a licensing deal with rival NBC Universal.

That’s because Universal and Disney are the only successful creators of destination theme parks that people will pile into airplanes to get to. Of the world’s top 12 individual theme parks by attendance in 2014, nine were Disney properties and three were Universal’s, and even Universal had been struggling with declining visitor numbers until Harry Potter came to the rescue in 2010.

Merlin’s Legolands have some long-distance pull, but it’s mainly with the under-11 set and it’s very much entwined with Lego’s toys. OCT and Six Flags build parks that you get to by car or, in OCT’s case, by train. The same goes for the world’s sixth-biggest theme park operator, Cedar Fair, which bought the Paramount chain of theme parks from CBS in 2006. These companies have been doing well lately, but they aren’t really in the business of creating magical, branded experiences that people are willing to pay a huge premium for. They’re more in the roller-coaster business.

Because the Universal Studios parks rely on licensing deals with other entertainment companies for many of their attractions, others can share in the bounty -- Time Warner’s theatrical “consumer products and other” revenue, which includes its proceeds from the Wizarding World of Harry Potter deal, rose from $129 million before the attraction opened in 2009 to $271 million in 2014. That’s nice, but it’s not transformative. Theme parks are a great, seemingly digital-proof business for Disney, and a promising one for Comcast. For the rest of the entertainment industry, they will probably remain a sideshow.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Justin Fox at justinfox@bloomberg.net

To contact the editor responsible for this story:
James Greiff at jgreiff@bloomberg.net