Thursday, March 14, 2013

NextGen (MyMagic+) is going to make Disney money. Here's how.

The "received wisdom" in Disney fan circles is that MyMagic+ (NextGen) is a boondoggle; a waste of more than one billion dollars. No way is Disney going to recoup that investment, they say, and it's so lamentable because that kind of coin could have bought a huge number of new rides, maybe even its own theme park! Instead we get wristband replacements for admission tickets, privacy incursions, and ride reservations that some people don't even want.

Well, the received wisdom might be a bit premature. If you look steadily, evenly, and calmly at the numbers, I think you'll find that Disney probably know what it's doing. I think they WILL see a return on investment. The main reasons that the community has not come to the same conclusion are the dual problems of scale and timeframe.

Let's start with timeframe. Disney isn't going to expect a $1 billion boost in the first year. Let's pretend they expected the gains to be spread out over many years--say, 20 years--the way one amortizes the depreciation of capital investments. That's 50 million dollars a year (assuming for a moment there is no such thing as inflation, future value of money, or opportunity cost from NOT investing money that would otherwise have been in pocket).

Let's be generous. Let's say Disney wanted to recoup its investment in ten years, rather than twenty. That's $100 million each year additional profit that needs to be earned to justify this expensive endeavor. Impossible, right?

Not impossible when you bring the scale into this equation. Each year, 30 million people visit Walt Disney World. Let me say that again: 30 million. If each of them spends an additional $4 dollars OVER THE COURSE OF THEIR ENTIRE TRIP then you've already made up those $100 million needed to justify NextGen. Well, let's call it $5 or even $6 to account for the difference between revenue and profit. Heck, let's call it $10 per person just to err on the side of caution.

Are you telling me that a family of four visiting from Wyoming for a week in 2017, having made ride reservations and lunch reservations, won't use some of that downtime to go shopping? They have seven days of shopping (since their vacation lasts seven days) and they only need to spend an additional $40 that they wouldn't have otherwise to make up the difference. If they were visiting for one day I could see them resisting those "additional purchases." Maybe even two or three days. But seven days of luxury in the parks, with no real need to wait in lines? I think they will eventually nibble.

All of the above assumes that people don't make additional purchases because Disney targeted them (they know now, courtesy of those wristbands, which rides are your favorites). Or that people won't go to Disney instead of Universal because the ride reservations will be seen as beneficial and convenient (hey, it WILL be true for some people).

In many ways, Disney is not in the theme park business anymore, but in the hotel business. If the perk is good enough, Disney can get more people to stay at its hotels. The perk appears to be an extra number of advanced reservations. From Disney's point of view, this is win-win. The reservations cost almost nothing from an operational point of view (once NextGen is paid for), but they could bring hotel bookings up to 100%. Forget $10/trip. We could be talking a lot more than that, in terms of additional money rolling in.

And then there's the trump card: saving face. Even if we assume the worst-case scenario, that Disney actually never makes additional money from these investments, I think we can say that Disney will never admit the failure. They will simply invest more in the parks and "roll together" the expense of NextGen with other capitol improvements. Carsland, Avatar, Disney Springs... they will all drive attendance. Personally, I think we are less than two years out from Disney announcing a major, major Star Wars land (or even park). That will be rolled in also.

Make no mistake. Disney will spin NextGen as a success, whether it really *is* (I think it will be) or whether it has to be combined with other capitol improvements.

Edit: an early tweeted reply to this post reminded me that there are also operational savings to be had by this technology. One of the early goals of the original FastPass was to "spread out" demand for the ride. With advance reservations, people really will be arriving earlier in the day to get on their coasters, and the ride will be better "optimized." Disney can also close rides earlier and save money - the $4/person can be had merely in savings, in some cases. Extra Magic Hour is likely to become a thing of the past, since Disney has a new "thing" to promote as the reason for staying at their hotels (you get more reservations).

Kevin Yee is the author of numerous independent Disney books, including the popular Walt Disney World Earbook series and Walt Disney World Hidden History.