The Moat Around Disney's Magic Kingdom

I had the opportunity to go away to Florida over the holidays and spend quality time with my girlfriend and my family which was fantastic. I love my work and enjoy watching the markets and learning more about new businesses all the time (my girlfriend Kathryn did frown at me as I put on CNBC every morning we were away). Nevertheless it is good to get some distance from the office from time to time and get some perspective on life. Sometimes I can’t help myself though.

One of the things we did while we were in Florida was to spend time at the Walt Disney World parks. Everyone who has been to these parks will appreciate the unique experience these parks offer. They are truly one of a kind. They also offer up a great business lesson on pricing power.

One of the things we look for in a business is a moat. A moat is not an actual moat like the one around Cinderella’s castle. No the moat I am talking about is a business advantage which allows the business to maintain some kind of edge over their competitors. This means they will have better customer retention, and better pricing power, because they have something that cannot easily be replaced or substituted for by another business.

On the very first day we went to the Magic Kingdom, we had a minor issue with one of our tickets.  As a result we had to spend a few minutes talking to their customer service desk. While they were sorting out our issues, I noticed another young family beside us also having a discussion with another Disney employee. From what I overheard it was very clear that the father of the family was quite frustrated with his Disney experience thus far that morning. It was apparent from their conversation that Disney wanted him to pay some extra amount for their tickets. The father’s response to this was a great illustration of the extreme pricing power that Disney can have.

He said (I’m only paraphrasing as the actual conversation was much longer) “Look, whatever you tell me I have to pay, I will pay.  But just so you know this has not been a good experience.” Here was a person who was extremely unsatisfied with the experience that was being provided (I can only speculate as to what the reason was and whether it was valid. My personal experience was that the Disney staff were very helpful.), and yet he was basically admitting that he would pay almost any price for a ticket to the park on that day for each of his family members. There was no way he was going to be able to tell his two young daughters that they were not going to Disney World on that particular day. This pricing power is the culmination of decades of marketing, brand building, and amazing production and execution at Disney theme parks. To reproduce that kind of moat from scratch would cost far more than the current market value of Disney (about $167 Billion (USD) as I write this). 

This pricing power is distributed throughout the park. Food is very expensive in the park because of the simple reason is it is in Disney World. Any items that are sold in the park are sold at a substantial markup because:

(a)   It’s Disney

(b)   It’s in the park.

I would estimate that over ? of the people in the park were wearing either a Disney T-Shirt, hat or Mickey/Minnie Mouse ears, or all three. This is the kind of business you want to own!

Later in the trip I was watching CNBC (surprise) and they ran a story about how Disney Land was going to be raising their ticket prices in light of the new Star Wars Park that will be opened late this year. The parks are already bursting at the seams capacity wise, and the rise in prices is designed to make sure that the parks do not become too overcrowded. What a problem to have for a business owner.

I think the content production business is a very interesting space right now as there is tons of competition to produce and distribute content online via streaming apps. Some of the newer tech companies (Netflix, Amazon, Alibaba and Tencent) are competing with traditional film companies like Disney, Time Warner and others in an all out battle for viewers. The consumer is the real benefactor as there is so much quality content that has been produced in the past few years. With that being said, streaming presents all new opportunities for Disney to use their brand name and iconic franchises to carve out a sizable share of the market. I would guess that their content library will probably even allow them to charge a premium over other competitors because of their pricing power. This is of course just speculation on my part as we will have to wait and see what Disney’s streaming service will look like. But when you can take on the best and the brightest in your industry, in a highly competitive environment, and still charge a premium for your service, you know you have a great business. These are exactly the kind of businesses we want to invest in.

Now if only the price of Disney stock would come down a little….