Disney's "High School Musical" Hits The Big Screen

High School Musical 3
High School Musical 3

Today Disney brings "High School Musical 3" to the big screen, after cultivating the franchise on the Disney Channel, where it debuted the brand and ran the first sequel. But "High School Musical 3" (aka HSM3) is far more than a movie—it's a tween phenomenon, and more importantly, it epitomizes a strategy for Disney.

"High School Musical" is a prime example of CEO Bob Iger's strategy to inexpensively create brands to exploit across all of Disney's divisions.

In the case of HSM, Disney built the film's audience on the small screen, so there's virtually no risk in spending to bring HSM to theaters. So far, it's been a gold mine, bringing in $100 million in operating income between fiscal 2006 and 2007 and more than $100 million in operating income in fiscal 2008, which recently ended. That's over $200 million before H-S-M 3 opens in movie theaters, which is sure to give the brand a global profile and a serious boost.

With Disney's fourth quarter and full-year earnings coming up on November 6th the company is in the spotlight: can it sustain its growth and the premium its stock is trading through the financial crisis and consumer pullback? Disney'sstock is down about 30 percent year-to-date, but it's still trading at a higher p/e ratio than the likes of Time Warner, Viacom, News Corp and CBS which have fallen much father. Many analysts attribute this premium to Disney's consistent ability to build unique, sustainable franchises. So High School Musical's performance will prove a sign of the studios ability to maintain that track record in this economic environment.

This film comes as Disney's studio is under particular pressure; the company's film division is expected to be recession resistant, while the theme parks in particular are likely to suffer from the economic downturn. Morgan Stanley analyst Ben Swinburne points out that because the studio is really driven by the quality of films and how audiences respond, it could be a real bright point for the company for the next two years.

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But it's not just that the studio—15 percent of the company's operating income—is being looked to to compensate for losses elsewhere, there's also fact that it faces incredibly tough comparisons. In recent years Disney churned out huge box office blockbusters like the Pirates of the Caribbean franchise. This year its "Narnia" sequel wasn't a huge hit, and even if film performance is strong, it still won't look great compared to previous years. When it comes to HSM, it's a much lower budget film (I've heard less than $20 million, plus more for advertising and distribution), and while it's not expected to do numbers like Pirates' did, it's expected to yield much higher margins.

So far it looks like HSM won't disappoint: it's expected to bring in about $40 million at the box office opening weekend. Fandango is reporting that advance online ticket sales are huge -- as of the night before the movie's open it was the site's 13th most popular movie ever. Fandango also says tickets are selling in groups of four, so it looks like families are heading to theaters together. In economic times like these an upbeat musical like HSM must seem like a good escape.

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