Business | Entertainment

Parks of recreation

Why media giants are betting big on the future of theme parks

|NEW YORK

WHEN Disney opens its newest theme park in Shanghai next month, one of the first sights to greet visitors will be the Enchanted Storybook Castle. Its gold finials and blue spires will tower 60 metres above the centre of the park, making the castle the largest in any of Disney’s six such domains. A translucent canopy will house a twisting rollercoaster based on the “Tron” science-fiction franchise; robotic boats will voyage through the lair of Davy Jones, a buccaneering villain from the “Pirates of the Caribbean” film franchise.

Marvels like these are why Bob Iger, the head of Disney, has promised this will be the company’s “most technologically innovative park”. With a $5.5 billion price tag it will also be the most expensive. But Shanghai Disneyland represents just a fraction of the investments the firm has been making in its theme parks. Over the past five years alone, it has ploughed $14 billion into its parks division. There have been major upgrades to all of its existing parks and many additional wonders are already being built in them.

Disney is not alone. Major media companies are clamouring to open new theme parks or expand their existing offerings. Universal Studios, which is owned by Comcast, has its own Chinese park in the works, a $3.3 billion project slated to open in Beijing in 2019. Viacom-owned Paramount Pictures has plans for a similarly pricey development outside London. And in Dubai, Sony Pictures and Lionsgate are among the studios collaborating with local developers on a huge complex of parks that is set to open later this year.

This global boom in investment might seem tough to reconcile with the challenges of the theme-park business. Delighting both ten-year-olds and their parents is a magical feat in itself. And as anyone who has heard the gruesome tale of Euro Disney knows, parks are costly to build and expensive to maintain.

Newfound enthusiasm for them partly reflects upheaval in the media industry. As it has become harder to reap riches in television and film, companies are eager to spin gold from both their vast content libraries and to attract attention to their new offerings. Disney and Comcast have enjoyed considerable success doing this through their parks businesses, which have chugged along as reliable profit engines. Universal Studios has contributed more to Comcast’s profits over the past five years than either the broadcast network NBC or the Universal Pictures film studio, its corporate siblings. At Disney, the company’s theme-park division has generated a better return on assets than its film studio in four of the past five years.

Media companies also see theme parks as a good way to cash in on demographic and economic shifts. Thanks to rapid growth in emerging markets, nearly three billion people over the next two decades will attain middle-class purchasing power; flush with disposable income, this tide of consumers is expected to generate huge new demand for recreational travel. Already, theme-park attendance numbers in Asia are growing at the fastest clip of any market in the world; if that trend continues, the Themed Entertainment Association, an industry group, predicts the market there could eclipse that of North and South America within four years. The scene outside Shanghai Disneyland suggests why: although the park does not open for more than a month, thousands flock to its tarp-covered gates each day in the hope of peeking in.

It helps that media companies need not assume as much risk as they did in past decades of park investments. Many simply license their characters, stories and other intellectual property to local developers in exchange for a cut of gross revenues or other fees. That ensures a relatively steady stream of income regardless of whether the park is making money, thereby minimising the risks to licensors. Such deals typically give licensors less control over the final product and limit the potential return from a park project. But for firms such as Paramount and Sony which are just beginning to explore such ventures, this model has nevertheless proved popular.

Companies with more theme-park experience prefer to take on more risk for the greater control and returns that a joint venture provides. In these deals, firms supply the intellectual property, design, management expertise and some cash in exchange for equity and fees. But they cede ownership of the park assets to a majority-shareholding local developer who then fronts much of the construction costs. Shanghai Disneyland, for example, depends upon one such arrangement.

Even if theme parks have many media companies spellbound, there are hazards. Measly economic growth can make finance for new construction harder to obtain. And as parks tend to draw the majority of their visitors from close by, attendance figures rise and fall with local incomes. A full-blown recession could do even more damage; profits from parks tumbled at many big firms, including Disney, during the depths of the global recession in 2009. Companies must make certain that their soaring hopes for theme parks, unlike the towers and turrets within them, do not rise too high.

This article appeared in the Business section of the print edition under the headline "Parks of recreation"

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