Why Disney would like you to subscribe to vacations

[This post was originally published at Forbes.com on 25th March 2012.]

"I'm only here for the Fast Passes." That is what I unashamedly told the consultant trying to pitch us on Disney's Vacation Club. We had been at

Cinderella Castle at the Magic Kingdom, Walt Disney World Resort (Photo credit: Wikipedia)

Walt Disney World and while we were waiting for something such as children cycling through a bathroom run, we had wondered what all of the "enjoy your vacation for 70% off, ask us how" posters were all about. Standing right there was an appropriately uniformed person to ask them how. He said lots of stuff but I wasn't really paying attention. But then he said, if you'd like to hear all the details, it will take about an hour but in return Disney will give you enough Fast Passes for the day. From then, I was all ears (pun intended).

A Fast Pass is Disney's ingenious method of allowing theme park visitors to spend less time in queues. They usually work by turning up to a popular ride, grabbing a pass which then gives you an hour window to queue skip at some time later in the day. You can only hold one of these at a time so they have to be used sparingly.

But the Fast Passes on offer here were not of that variety. They could be used right away. And there were enough of them that we would be free of queues for a day. It didn't take me long to work out that that would save us a couple of hours in queuing. So I'd happily trade-off hearing a sales pitch on the Disney Vacation Club for that any day. I may even get a blog post out of it.

To that end, despite my clear and transparent motivations for being at the pitch, I paid attention. At our scheduled time, we were brought the Disney Vacation Club installation at Walt Disney World. This was a large facility that was part of the Saratoga Springs Resort. We were led to a consultation room with its appropriately Disney styling and we were given the deal. Here's what it was. Instead of paying for vacations -- specifically accommodation -- as we currently did, when we booked them, we could pay for them in advance. For either a one time payment or a 'mortgage' over 10 years (or it turns out anything in between), we would get 50 years of holidays. Yes, 50! For we who were currently involved in heavy planning of our activities over the next 50 hours, this was quite an adjustment in time horizon.

Now you might say that this just sounds like a 'time share.' A traditional time share is where you buy a 1/52nd share in a property somewhere and you are required to vacation during a specific week each year. For those, more popular weeks carry higher payments but you do get some real estate in the process. This has never been too appealing a notion to us as we never found a place we would be happy with to vacation every year and there just seemed to be too many things that may change our minds even if we did.

The Disney Vacation Club is 'time share' like in that you get 'time' and you are 'sharing' but that is about it. Instead, while legally you are buying a share of a property, in actuality, Disney has set up an organized market over the top of it that allows you to vacation at some 200 possible locations (near as I can count) at any time of the year you want. Now, it is subject to availability but when you are encouraged to book several months in advance, that isn't an issue. And there is a 'rate of exchange' based on your primary buy-in. What that means is that you purchase points and Disney assigns different redemption amounts for points at different properties and at different times of the year. Want to vacation at more deluxe accommodations, buy more points. Want longer vacations, buy more points. In economic terms, you are paying for the rights to a certain amount of vacation quantity/quality at Disney resorts.

But it is even better than that. First, if in one year, you don't want to do that, you can bank the points and have a longer vacation next year. Second, if you are impatient and want a longer vacation this year, you can borrow from next year's allotment. Third, this isn't tied to you. You can gift vacations to friends and family and indeed, leave the future vacations to your children and perhaps your children's children. If it is at a Disney resort they get all the resort privileges too. Finally, you aren't confined to Disney resorts. Disney has done deals with others so that you can choose places to go all over the world. To be sure, the redemption rates are higher for those but if you want to go to Australia, paying in advance in this way isn't going to cause you a dilemma.

What about the financials? Now I won't go into the details as that borders on financial advice that I am not in a position to give. But the demonstration of the costs and benefits was crystal clear in the pitch and stood up to my probing questions. If you are the sort of person who pays full price for vacations, you can, indeed, save 70 percent on accommodation but probably only if being a Club member turns you into the person who would plan for vacations and take advantage of discounts. Instead, for us, I believed it would have saved us 50 percent on what we paid for this year. That means that the Disney Vacation Club would pay for itself in 7 to 9 visits. Although it also would save me the days of planning for a vacation and researching options. Once you bought it, there'd be no reason to stress over that anymore. All that said, if you want to learn more about that I recommend this grumpy blog post from 2007.

What I would say is that the financing option offered by Disney wasn't too attractive at 12.5% APR for we Australians. That said, there was apparently no credit check required for non-US and non-Canadian citizens. For Disney you can't exactly make a few payments and run off with the property so they don't act as if you can. That was refreshing. I had never seen a financial option where foreigners were treated better.

Finally, your points can be resold to anyone (with a few minor restrictions). But it has to be officiated by Disney and they have a 'right of first refusal' to buy the points back at the price you may have negotiated. This is probably done to stop people trading just for individual year vacations but if you were a Club member you would probably appreciate Disney's oversight on asset value depreciation. It can't exactly hurt. You either resell the rights to whomever you have negotiated with or to Disney.

As I sat there listening to this, it all seemed too good to be true. What were Disney getting out of this? The consultant told us that Disney were doing this because their customers asked for it. That I didn't doubt. And then he went on to tell us that Disney weren't really getting anything out of it and that is why they made it work so flexibly. As I sat there in the considerable Disney Vacation Club installation, I doubted that. But I'd get no help from the consultant. I'd have to work that one out for myself.

So here goes. The first place my keen economist senses takes me is to tax. Is there some tax advantage to all of this? The answer is, probably yes. When you stay in a hotel or resort in Florida, Florida charges a whole lot of taxes for that accommodation. But when you buy into Disney Vacation Club you are buying real estate. That may involve some taxes but they appeared to be far less than the 12 or 13% tax that was running in Orlando.

But taxes weren't getting us the whole way. If our vacation accommodation costs were halved, the real value had to be greater than that for Disney to get their cut.

The second place I looked was in capital budgeting. Disney build resorts. They are high quality and expensive. So they face an issue of forecasting demand. If you can get people to buy in early, you get those capital costs funded upfront. That sounds attractive but remember, it is more costly for me to get money to pay for Disney's capital costs than it is for Disney. So that is a negative. But if Disney can improve the risk profile of their investments because some demand is assured, then that does get them something. But something tells me that this wasn't going to be a huge benefit.

The third clue is that accommodation costs are just a part of what we spend on a holiday. You might want to stay a few more days but here Disney will allow that for a 25% discount (which is about as good as it gets). There are airfares but Disney don't share in that. More importantly, there is food and activities. At Disney resorts these are considerable. There are park fees, food and Disney paraphernalia. Of course, if you were to come every year, you'd likely economize on these. Now Disney could, of course, discount its own accommodation to encourage more visitors and this stream of cash (you know, they way movie theatres try to encourage popcorn sales by getting more people through the door). But lower priced accommodations, may screen for the cash constrained. Instead, if you have customers who have paid in advance for their accommodation, they may be more liberal in their spending; especially, if they are friends and family who didn't have to fork out for that at all.

In the end, taxes, capital planning and extra spending, all could explain part of the value but my guess is that there was something else. I went so far as to read the contract about all this which was the most beautifully clear legal document I have ever read. Two pages, no fine print. From my examination, there didn't appear to be anything sinister hidden there and a good search of what was written on the web didn't uncover any broad disgruntlement. Instead, we have 20 years of the program, 145,000 odd club members (encompassing perhaps up to half a million people) and Disney Vacation Club sales points at regularly spaced as bathroom facilities at Disney theme parks and hotels. All that points to Disney and its customers getting something from all this even if I couldn't quite parse it during my own vacation time. To add to all this, Disney gives you it all back in taking the pitch.

And what did the children do while we were listening to all this? Disney, of course, had that covered. There was a big activity center and the kids happily played for an hour and when we came to pick them up with "Let's go to the Magic Kingdom" they all said (even the 13 year old!) "do we have to?" Well, yes, but not before they were parcelled out the door with an ice cream sundae.

I came for the Fast Passes but the pitch was worth hearing even if you weren't writing a post about it. It will cost you at most an hour which you make up for in reduced queuing and your kids will be more than happy for the fun.