Why Disney’s MagicBands Are a Cash Cow in the Making

Earlier this year, Disney rolled out its new MagicBands, multicolored wristbands poised to make a huge return on investment through big data, target marketing, and increased guest spending.

Jul 15, 2014 at 11:31AM

News flash: Disney (NYSE:DIS) found another way to simplify guests' resort experience and make a ton of money in the process.

Just in time for summer, Disney has rolled out MagicBands for guests visiting the Walt Disney World resort. These wearable bands strap various aspects of guests' Disney vacations to their wrists.

MagicBands link to the company's new guest planning management system, MyMagic+, which allows guests to book reservations and keep track of their trip from an app on their computer or smartphone. Using MyMagic+, guests can link their credit card, hotel reservations, park tickets, FastPass+ reservations, and PhotoPass card to their convenient, waterproof, and durable MagicBand, which they keep around their wrist throughout the trip.

MagicBands contain an RFID chip, and with a swipe of their wristband near a scanner, guests can access all of these aspects of their trip throughout the resort. Scanners are placed throughout the parks, hotels, shops, and other points of interest. Also, hidden long-range scanners set up throughout the resort keep track of where guests are during their stay.

After Disney spent hundreds of millions to make the project a reality, will MagicBands and the MyMagic+ system be profitable and produce a significant ROI?

How do MagicBands make money?
The easier it is to make a purchase -- such as swiping a card versus counting dollars and change -- the easier it is to spend money. Convenience, coupled with delighted ignorance of price or necessity, often leads to an impulse buy.

And that is exactly what Disney is banking on.

With MagicBands, Disney hopes that if it's easier to make dining reservations from a smartphone app, then guests will make more dining reservations. If guests don't have to take their credit cards out to make a purchase, the easier and faster it is to close on merchandise sales, before guests have time to second-guess their purchase. Easy FastPass+ ride reservations help to keep guests in the park longer, and spending their travel allowance.

Plus, additional revenue streams, such as limited-edition bands that cost more than twice the retail price of the standard band -- and wristband accessories at extra cost -- rake in still more cash.

But MagicBands are more than a moneymaker for Disney. While the main consumer-facing benefit is convenience, which can drive Disney's sales alone, the main corporate-facing benefit is big data.

Disney dives into big data
Because Disney can scan MagicBands from a variety of touchpoints, the company can gather data from every MagicBand interaction. That can tell Disney a great deal about individual guest preferences, as well as overall trends. Disney may gather data concerning the types of foods that a guest buys, or which shops they visited.

So what does Disney do with all this data? What most companies do these days -- target marketing.

Mickey Mouse's mass-marketing strategy
This massive amount of guest data means Disney now has an even more powerfully targeted marketing initiative than before. If Disney knows where guests shopped and what items they bought, Disney can send them deals specifically tailored to their interests. This type of customized marketing -- akin to what's used for online ads that analyze browsing histories -- could lead to even more impulse buys.

If a guest stays in a hotel at the Disney Resort and didn't make FastPass+ reservations, Disney might assume that the guest is going off the resort grounds to other Orlando attractions. To prevent losing that customer's business for a day, Disney might send discounts for meals in one of its parks to encourage the customer to at least stop in or, better for Disney, cancel the off-site plans. The marketing potential is massive.

MagicBands' potential for ROI
The numbers might not be exact, but Disney can estimate the influence of MagicBands on purchases by tracking the amount of money a guest spent using the MagicBand, including dining and merchandise. ROI could also include estimates of possible revenue driven by the MagicBands' convenience as a hotel key, FastPass+ reservation holder, and other features of the wristband.

Disney spent hundreds of millions on the rollout of the MagicBand system, including all of the scanners and other cosmetic changes to the resort, the behind-the-scenes tech development, and the production of the wristbands themselves. The costs continue as Disney expands MagicBand use to eventually become mandatory. One goal is to get rid of turnstiles and paper tickets, so that guests only use MagicBand scanners at park entrances.

But the revenue numbers are already there. In the first quarter of this year, when MagicBands were in beta testing, revenue in Disney's parks and resorts segment increased 6%, according to Skift.com, and the segment's operating income increased 16%, to $671 million. Per-capita guest spending increased 8%, partially because of higher ticket prices, but also because of higher spending on food and beverages, one of the main tenets of MagicBands. While these numbers are not based on MagicBands alone, these positive trends are a good sign.

In addition to driving revenue, MagicBands also help Disney improve the efficiency of its operations. Disney can learn where guests dine, shop, or ride and at what times. With that information, the company can control staffing operations to meet demands and save on unnecessary staffing during slower periods.

The bottom line
With so much potential for MagicBands to increase guest spending and other revenue, it's no surprise that Disney found yet another way to make guests' experiences more enjoyable, while also turning a profit. Sooner or later, Disney will sit back and watch all of its guests walking around with these multicolored wristbands as the company rakes in data, marketing power, and return on its investment. Don't be surprised if other theme parks recognize these wristbands' potential and follow suit.

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Carolyn Heneghan has no position in any stocks mentioned. The Motley Fool recommends Walt Disney. The Motley Fool owns shares of Walt Disney. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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