Disney set to break ground on Shanghai theme park

Reporting from Los Angeles and Beijing —  As Walt Disney Co. prepares to break ground on its first theme park in mainland China, the significance for the company reaches well beyond the opportunity to sell legions of Mickey Mouse-ear hats.

Although much smaller than Walt Disney World in Orlando, Fla., the Shanghai park holds outsize importance for the company, because it would provide entree to a market of 1.3 billion people, 30 million of whom enter the middle class each year. When it opens in five years, the $3.7-billion tourist attraction would serve as a launching pad for Disney’s broader ambitions in the region.

Shanghai Disneyland culminates a decade-long effort to bring Disney’s distinct brand of themed attractions — built around Mickey, Minnie and the panoply of animated characters — to the world’s most populous country. Disney Chief Executive Robert A. Iger plans to attend the ceremonial groundbreaking Friday, underscoring the project’s importance.

“We view it as a real cornerstone of our growth initiative in that market,” Iger said in remarks made at a recent investor conference in Anaheim.

The 963-acre park would bring the Magic Kingdom to the Middle Kingdom. Plans include a castle that would be bordered by themed areas, two hotels and a shopping district near a lake, with additional land set aside for future development. The Disney resort would anchor a broader International Tourism Resort, roughly 12 miles southwest of Pudong International Airport.

“In about five years, we’ll have a park that is distinctly Disney, yet authentically Chinese,” Disney Parks and Resorts Chairman Thomas O. Staggs said in remarks to investors in February. “Taken as a whole, we believe China is the most exciting opportunity we’ve had since Walt first bought land in Florida in 1964.”

China so far has proved a frustrating market for U.S. entertainment companies. The Communist government tightly controls distribution of foreign movies and television programs, which in turn has fueled rampant piracy of Hollywood content. Prime-time television slots are reserved for domestic fare such as the wildly popular animated series “Pleasant Sheep and the Big Bad Wolf,” while imports including Mickey Mouse (known in China as Mi Lao Shu) struggle for airtime.

Disney would share ownership in the new theme park with Shanghai Shendi Group, a government-controlled entity that would own a 57% stake in the joint venture, according to reports in Chinese media.

Investors hope Disney’s strategy of partnering with the government will give the Burbank firm the leverage it needs to negotiate a 24-hour cable network in China or to win wider distribution for its films. As the majority owner of the park, China would benefit from prospective visitors’ greater exposure to the Disney brand, media analyst Alan Gould of Evercore Partners said.

But even Iger has acknowledged that there are no guarantees.

“There isn’t a specific promise to launch a Disney Channel in China,” Iger said at Disney’s February investor conference. “But obviously, it’s something that we would love to be able to do at some point.”

For now, Disney has developed innovative end runs around the limitations on traditional media.

The entertainment giant partnered with China’s two dominant online video sites, Tudou.com and Youku.com, to stream Disney’s ABC prime-time shows including “Desperate Housewives” and “Grey’s Anatomy” directly to adult viewers.

And to reach Disney’s core family audience, the company operates a few English-language schools in China for children ages 2 to 12. The so-called Disney English centers use learning materials filled with images of Winnie the Pooh, Donald Duck and other characters.

“Disney, in our view, has the strongest China strategy of any of the studios,” Evercore Partners’ Gould wrote in a recent analyst note.

Gould estimates that Disney stands to collect fees of $65 million to $70 million in the first year of the park’s operation, growing to potentially $200 million in 10 years. The Shanghai park also will serve as a powerful brand ambassador.

“Disney sees the theme park as a way to establish themselves in the Chinese market,” said John Gerner, managing director of Leisure Business Advisors, a consulting firm in Richmond, Va. “That will drive people to the movies, establish the characters, which will drive merchandise sales.”

Success is far from assured, however.

The Hong Kong Disneyland Resort, which opened to great fanfare in 2005, has been criticized as too small and offering too few rides to live up to Disney’s giant aspirations. That’s why the company is pumping millions into the park to add scores of attractions and themed areas including Toy Story Land, which opens in the fall.

And there will be plenty of regional competition. By the time Shanghai Disneyland opens, Disney rivals will include Universal Studios Singapore, a renovated Ocean Park in Hong Kong and perhaps even Asia’s first Legoland, set to open in Malaysia in 2012.

Enterprising local operators could prove formidable as well.

At least two Beijing theme parks have borrowed liberally from Disney’s repertoire — including costumed Plutos, Minnies and a castle that looks eerily similar to the one in Orlando. Knockoff Disney clothing, toys and DVDs are widely available in China.

“The key to Disney’s success has been migrating products to different platforms and cross-selling them. The challenge to doing that in China is piracy,” said Patrick Chovanec, a professor at Tsinghua University’s School of Economics and Management in Beijing.

“The downside is you don’t get paid for all that content,” he said. “The upside is everyone knows the characters. So the question is, how do you monetize it?”

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