The Theme Park Duopoly That Can't Be Stopped

[Music] Theme parks, there's nobody on earth that doesn't like them. Take the family, ride some rides, buy some merch, eat some food, have some fun. But despite being a bit of a novelty experience you might have, you know, once or twice a decade, these theme parks are actually extremely valuable assets to the businesses that own them.

In 2021, Disney's parks brought in 16 billion dollars of revenue and Universal's theme park business generated 5 billion. Interestingly, the more you look into this rather niche industry, the more you realize that they aren't just fun parks but rather strategic money printing assets with huge competitive advantages that protect the park's profits and feed reliable cash flows to their owners. So let's take a look into the world of theme parks and why they're the happiest places on earth for both guests and shareholders.

Now I'm here at Universal Studios in Orlando, Florida. This park originally opened to the public on June the 7th, 1990, and cost 430 million dollars to build, about 1 billion in today's dollars. Today, it takes in about 11 million visitors per year and sits alongside Universal Studios Hollywood, Osaka, and Beijing to form Comcast's theme parks segment—a segment that generated 5 billion dollars of revenue in 2021 and formed 1.3 billion of NBC Universal's 5.7 billion of EBITDA.

While a theme park isn't, say, as scalable as a grocery store, these are still very valuable assets for both Disney and Comcast because what they're able to do is generate cash flow that they can funnel up the chain that Disney and Comcast can then use for other growth ventures. What's really interesting is the strategy behind how these parks are able to do that, and it all comes back to economic moats.

An economic moat is an intrinsic characteristic of a business that protects the profits and growth from other competitors in their industry. For example, Coca-Cola has a big brand moat, Apple has their ecosystem, Facebook Messenger and WhatsApp have large network effects, and it's the same story with these theme parks; their moats are brand and barrier to entry.

So let's start with the barrier to entry. This is the type of moat that quickly enables businesses to become monopolies. As the name suggests, it's a moat that describes the situation where a particular industry is so difficult to enter, either from a cost or regulatory perspective, that new wannabe players simply can't get their foot in the door—it's too difficult. This generally leads to a few dominant players that just never get disrupted.

In the case of the U.S. theme park industry, there's quite an obvious duopoly with Disney and Universal. The interesting thing about these businesses is they never started life with the intention of becoming theme park companies. They actually had to rely on the cash flows from already successful film and television businesses to be able to funnel money into building these enormous parks.

Disneyland Resort in California opened all the way back in 1955 and originally cost 17 million dollars to build— that's 168 million in today's dollars. But at the time, Disney was already making 1.35 million net profit, mostly from their television and movie businesses, to help finance their original 2.9 million dollar portion of the Disneyland costs. That's the other thing: this theme park was such a big project originally that Disney couldn't even do it themselves; at the time, they actually partnered with American Broadcasting, Paramount Theatres, and Western Publishing just to secure the funding to get the park off the ground. So the fact that this business is so capital intensive to get off the ground immediately stops most players from even trying.

Then fast forward nine years to 1964, and Universal joined the game with their reopening of Universal Studios Hollywood. Now, their strategy was different from Disney, however, as their park started as a studio tour and then slowly transformed into a theme park over time. Thus, they didn't need to sink a large amount of capital up front just to build the theme park that we know today; they got to chip away at it.

That brings up another interesting point to the barrier to entry discussion because Disney and Universal's theme parks have now been established for so long and built up over time. They obviously don't need to build the park from scratch. In fact, most of the CapEx either goes to maintenance, upgrades, or expansions to the pre-existing parks. For example, Universal's latest expansion, which was the Wizarding World of Harry Potter, is estimated to have cost 265 million dollars to build.

But if we look at Disney's most recent full theme park build, which was Disneyland Shanghai, that project cost 5.5 billion dollars. So I don't know about you, but spending 250 million every 10 years or so definitely sounds better to me than having to spend 5 billion up front all at once. So that's another advantage that both Disney and Universal now have. That's the barrier to entry moat and the primary reason why Disney and Universal sit unchallenged in the U.S. theme park industry.

But beyond the barriers to entry, as I alluded to earlier, another equally important factor in the success of these parks is the strength of the brands that are found within them. Despite what we were discussing just before with barriers to entry, you know, make no mistake, there are still many companies worldwide that could make a theme park if they so desired—Apple, Google, Berkshire Hathaway, Amazon—all these companies have the money.

Their problem, however, is that they lack the entertainment brands that draw in the crowds, and without the branded merchandise, the themed shops, the character performances, and the immersive rides, the magic of these parks just doesn't exist. You know, there's a certain magic to whizzing around Gringotts with Harry Potter or taking down the First Order alongside Chewbacca or seeing Snow White walk down the path next to you or grabbing a Krusty burger with Homer Simpson standing out the front. Without these brands, the experience of a theme park just doesn't work.

You could build a theme park, but who's going to come? Without a brand, there is no moat. It's the same story time and time again in business. You know, why do you drink Coca-Cola? Why do you choose Starbucks? Why do you always buy an iPhone? Why do you wear that t-shirt you've got on right now? Brand, brand, brand, brand.

Just looking at the two most recent big expansions from Disney and Universal, you know, they didn't just build some roller coasters and a hot dog stand. Universal built an entire themed area immersing you in the world of Harry Potter. Disney just did the same with Star Wars in the theme park world. You know, Marvel, Star Wars, Jurassic Park, Harry Potter, The Simpsons, Transformers, Fast and Furious—these are all brands that draw crowds and that's what gives these theme parks their true advantage.

So barrier to entry plus the brands definitely equals a very wide moat. If we take a look at this chart, we can actually see the competitive advantages working their magic. So let's compare the one-day ticket price for Disneyland and plot it alongside annual attendance. Now, remember, a competitive advantage gives a business pricing power, aka prices can continually rise over time with no negative impacts to the business.

Now take a look at this. Over time, Disney's one-day ticket price continues to rise. It was 27 dollars back in 1980, and that is adjusted to inflation, of course. Then about 20 years later, it had risen to 78 dollars, and another 20 years later, it had risen to 122 dollars. But has that negatively impacted the attendance rates at Disneyland over time? No way. In the last pre-pandemic year, which is 2019, Disneyland had 18.67 million visitors.

Rewind 20 years, and it had 13.9 million. Rewind another 20 years, and it had 11.5 million. So long story short, Disneyland continues to raise ticket prices over time, and the result is more people come through the turnstiles. That right there is a business protected by a strong economic moat, and ultimately this leads to Disney and Universal consistently printing money from their parks, under normal conditions, of course.

This obviously can then be used to either expand their theme park businesses or, during times where there is no major expansions occurring, it can just be funneled up the chain for use in the other areas of their business. For example, Disney is currently drawing on the profitability of all their other business segments to fuel the growth of Disney Plus, Disney's new streaming service that continues to grow very rapidly.

So overall, guys, that is the story of Disney and Universal's theme parks and how some of the most enjoyable places on earth are actually extremely valuable business assets. So I hope you enjoyed the video. Please leave a like and subscribe to see more. But with that said, guys, I'll see you all in the next video.