When Comcast (CMCSA +0.95%) bought a controlling stake in NBCUniversal in 2011, some analysts thought that it would sell the Universal Studios theme park unit, which didn't fit in with the rest of the combined business. Instead, Comcast pumped even more money into the business, and beefed up its attractions.
It spent an estimated $100 million to build Transformers: The Ride at Universal Orlando, which opened in 2013. It added new Despicable Me- and Harry Potter-themed rides to the park, while new King Kong, Fast and Furious, Hello Kitty, and Nintendo attractions are all in the works. It also added eight new restaurants to its CityWalk shopping area during the past two years. A new water park, Volcano Bay, will open in 2017.
Source: Author.
Comcast also invested $1.6 billion into expanding Universal Studios Hollywood with new Harry Potter and Despicable Me attractions, new hotels, and thousands of new parking spaces. In coordination with a consortium of Chinese companies, it's building a $3.25 billion theme park in Beijing, which is scheduled to open in 2019. Plans to develop parks in South Korea, Russia, and Dubai are temporarily on hold, but they could all eventually boost Universal's global footprint beyond its two overseas locations in Japan and Singapore.
Let's take a closer look at how much Universal Studios' theme parks matter to Comcast, and how they complement its other business units.
Why Universal Studios matters
Last year, revenue at Comcast's cable and Internet business rose 5.5% annually, and accounted for 64% of its top line. Revenue at NBCUniversal -- which accounted for the rest -- rose 7.5%. Universal Studios theme parks and resorts accounted for 10% of NBCUniversal's 2014 revenue, but that figure has risen during the past few years.
|
Theme parks revenue |
2012 |
2013 |
2014 |
|
Growth (YOY) |
4.8% |
5.3% |
17.3% |
|
% of NBCUniversal |
8.8% |
9.5% |
10.3% |
Source: Comcast annual reports.
Only the theme parks and broadcast TV businesses posted double-digit revenue growth at NBCUniversal last year. Cable networks revenue only improved 4%, while filmed entertainment revenue declined 8%.
During the first six months of 2015, theme-park revenue surged 29.2% annually, to $1.42 billion, thanks to the popularity of The Wizarding World of Harry Potter: Diagon Alley at Universal Orlando, and a new Fast and Furious attraction in Hollywood. During that period, the unit's operating cash flow improved 49% annually, to $617 million.
Strengths and weaknesses
During last quarter's conference call, NBCUniversal CEO Stephen B. Burke declared that the theme park business would remain "a major growth driver for the company" during the next five to 20 years.
Universal's theme parks are dwarfed by Walt Disney's (DIS +2.30%) chain of parks and resorts, which generated nearly six times as much revenue last year. Nonetheless, Universal is mimicking two of Disney's key strategies.
First, it's growing by expanding its existing parks and using joint ventures to build new parks overseas. Second, it's using park attractions to promote its studio films and vice versa. For example, it recently added a Jurassic World "raptor encounter" to Universal Studios Hollywood to complement the movie's theatrical release.
Source: Universal Studios.
But there are also risks to Universal Studios' growth. Theme parks fare poorly during economic downturns, and interest can quickly wane without bigger and better attractions. Cowen and Company analyst Doug Creutz recently told the New York Times that theme park operators were always "pouring money" into the business for a "relatively low return."
But for now, theme parks seem like a stable business, and Universal's double-digit revenue and operating cash flow growth are more impressive than the single-digit growth at its industry peers. Disney's theme-park revenue and operating income respectively rose 4% and 9% annually last quarter. Six Flags' revenue and adjusted EBITDA both improved just 3% annually in its most recent quarter.
What does this mean for investors?
Universal Studios' theme parks represent only a small slice of Comcast's top and bottom lines, but they're becoming increasingly important to the company's future. If Comcast's cable TV business gets hit by cord-cutting or its Internet services get disrupted by Google Fiber, it might need to rely on theme-park growth to offset some of those losses.
