Disney's Sophomore Success

Disney (NYSE: DIS  ) shareholders have come to count on a lot of things -- Mickey Mouse, Pirates of the Caribbean, the theme parks, ESPN, and Desperate Housewives.

Now, though, it looks like The Disney Channel is music to the ears of many with a financial interest in the Mouse. Hannah Montana, That's So Raven, Lizzie McGuire -- the Disney Channel hits with kids and tweens go on and on. But perhaps the basic cabler's biggest contribution to the zeitgeist to date is High School Musical.

The first film was a huge and surprising hit, and now, the sequel, High School Musical 2, is an even bigger success. More than 17 million fans and/or curious types tuned in for Friday's debut of the new flick, making it the most-watched basic cable program of all time. (Our Foolish community chimed in with their thoughts on the Disney discussion board.)

I haven't seen either movie, but I can tell you that Disney has done a great job in leveraging the popularity of the first film to propel the franchise beyond expectations. I'm not sure what official expectations for the sequel were, but I tend to be pessimistic when it comes to serving the needs of the fickle tween audience. In my mind, the film could have bombed as easily as it succeeded. (Admittedly, the hype leading up to its premiere dimished the odds of failure.)

Rick Munarriz recited the impressive stats of the first High School Musical last week. Beyond the hundreds of millions of viewers who've seen the film, and the millions who've purchased the soundtrack, a surprising 4.5 million consumers have bought the related books. It's pretty cool that Disney has been able to competently further the film's adventures in print. This phenomenon is also asserting itself in retail channels; Wal-Mart (NYSE: WMT  ) is currently moving merchandise based on the movies for the all-important back-to-school selling season, as are other chains.

You've got to wonder how Viacom (NYSE: VIA  ) , which competes with the Disney Channel through its Nickelodeon asset, feels about all this. I bet there's a lot of green in execs' eyes over there, not to mention those of the bigwigs at CBS (NYSE: CBS  ) and News Corp. (NYSE: NWS  ) -- they'd hardly mind having a High School Musical on their books, either.

Where does Disney go from here with the franchise? Well, there's a theatrical film due next year, which makes me wonder whether the concept thrive in the presence of intense competition at the multiplex. Will those more than 17 million fans translate into paying moviegoers? 

On a cost basis, the first film cost a little more than $4 million to make, while the second cost around $7 million.  In my opinion, $4 million seems a bit steep to gamble on a movie that depends on basic cable as its initial distribution. Plus, the tween crowd may not embrace a High School Musical 3. To keep risk to a minimum, let's hope that further entries in this series, or future attempts to launch another hit franchise, don't see their budgets escalate too much.  

High School Musical 2 will keep kids tuning into the Disney Channel, and it should keep the basic-cable channel a force to be reckoned with. This, in turn, should drive a lot of business for Disney's other segments. Still, the Mouse had better be ready to call it quits when the franchise peters out.  Disney may have struck gold with High School Musical and its sequel, but let's hope that the company remains savvy in the future, given tweens' tricky, fickle tastes.

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Fool contributor Steven Mallas owns shares of Disney. As of this writing, he was ranked 7,470 out of more than 60,000 investors in the CAPS system. Don't know what CAPS is? Check it out. The Fool has an all-singing, all-dancing disclosure policy.


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