Why ESPN's layoffs are bad news for DCL passengers

There have been a couple of threads recently noting (and perhaps fairly bemoaning) DCL's slow shift to a more onboard revenue focus, most recently, new food charges in 678 on the Dream.

Before I start, let me make clear that while I do know a couple of people at DCL the following represents ONLY my analysis of publicly available information.

DCL is just one part of a larger organism all of which interact..

Big news in media stocks over the past few weeks has been that ESPN is no longer the cash juggernaut that it used to be. Questionable decisions on rights purchases plus a steady loss of subscriber base has culminated in large layoffs of long term employees. They may stabilize but its never going to be the same cash cow it was.

The parks are doing great attendance wise (except Euro perhaps) and Shanghai will only increase that trend. However, with the current arms race with Universal and overseas development, there is also a corresponding outflow of significant funds, preventing them from being sources of large cash flows for a while. Also, except for Shanghai and Euro, the parks are operating at close to capacity, limiting growth potential (hotels were at 89% occupancy in 2014)

Marvel movies of course are doing gangbusters, but that's sporadic revenue and their TV arm and comic arm are not doing as well. Lucasfilm is in a similar trend (with Star Wars VII they will probably finally just make back their investment).

ABC is doing ok...

And so on..

Why is this important to DCL? When ESPN and Parks were providing massive profits and cash flow, other divisions of Disney could scoot by without worrying as much about their contribution.

This is going to change and the DCL folks know it. My analysis is that you will see more of these types of move.

DCL has some major advantages. The Disney brand and related properties are some of the biggest, for example leveraging Star Wars, frozen, etc. Also, for some things they can leverage Disney buying power.

That said, they have some major disadvantages not easily corrected. With only 4 ships, they can't easily position ships in new markets like China to develop business and brand awareness. Their smaller size also limits purchasing power for DCL specific items like fuel. They lease and operate a portion of an island that sees less visitors (less ships) than the other lines.

This means their opportunity for organic growth is very limited, fares being inelastic. So they have no choice to look at increasing per berth onboard revenue and this is how you do it.

I expect to see more and more add on fee options over the next couple of years, and only time will tell how this affects demand for the product. Based on my experience with spending patterns at the parks, casual cruisers probably will not be affected, but they may lose some long timers (not necessarily a bad thing from a strictly financial standpoint as in general, repeat cruisers represent less overall revenue - at a lower acquisition cost)

My understanding is that DCL is the only part of Disney that has made a profit EVERY year. Recently they have greatly increased opening day fares as well as adding more on board items with additional cost.

They chose to launch their most recent items on the Dream. This was a wise move as it is the ship with the lowest percentage of repeat cruisers (who spend less per night of cruise than repeat customers). I believe that these items will be more offensive to repeat cruisers; first timers do not have the experience of these items being either not available or included in the cruise fare in the past.

You are right that it probably won't deter the first timers. But those of us who are somewhat regular cruisers are definitely seeing the increased prices along with more on board costs as price gouging. I'm definitely spending time on line looking at other cruise lines...there is a little more time before I have to determine whether to cancel my DCL bookings or not.

Wow! Really fascinating analysis. Thanks for taking the time. Lots of variables and feedback loops involved.

I'm sure DCL would like to run as its own entity/business unit, and make its own pricing decisions, but can't when it's part of a more complex organization.

Even at these current high (relative to other lines) prices, I think they can command them - all those folks back in WDW spending comparable per-day rates for a much less exclusive experience. We're sold!

Yes,DCL has been profitable, but as an amount of margin, not as much as they might like without the high profits/cash flow from other units.

Disney is currently running at about a 23.1 PE Ratio on the stock, maintaining that going forward without squeezing more revenues out of non core segments (ABD/DCL/Maker Studios, etc) is going to be a challenge for a while.

Until recently DCL barely got a mention in the earnings report except as being noted as part of Parks and Res. That's going to change.

My understanding is that DCL is the only part of Disney that has made a profit EVERY year. Recently they have greatly increased opening day fares as well as adding more on board items with additional cost.

 

They chose to launch their most recent items on the Dream. This was a wise move as it is the ship with the lowest percentage of repeat cruisers (who spend less per night of cruise than repeat customers). I believe that these items will be more offensive to repeat cruisers; first timers do not have the experience of these items being either not available or included in the cruise fare in the past.

 

You are right that it probably won't deter the first timers. But those of us who are somewhat regular cruisers are definitely seeing the increased prices along with more on board costs as price gouging. I'm definitely spending time on line looking at other cruise lines...there is a little more time before I have to determine whether to cancel my DCL bookings or not.

I basically agree. ESPN not being a huge cash cow and declining fast is a HUGE problem. I expect it to hit everything not Marvel or Star Wars. Oh, and I believe Disney recouped their Lucasfilm investment a decent time ago. Through merchandise of course. Disney is the master at that. They only bought it for $4Billion. I think their yearly Star Wars merchandising is like $20Billion. Probably will ramp up even more now that the Star Wars movies are ready and rolling.

Still, I think the main cause is being tied so closely to Parks. The parks (in the US; I'm actually not too sure how "successful" any of their Int'l parks really are, although they are improving some) are way too popular. So much so that they're legitimately overpricing just to try and limit demand. Which isn't working. The cruise line is the same way. Not as bad, but every little price addition they try doesn't seem to affect demand at all.