MAY 11, 2016 • The Walt Disney Co. announced that it was exiting the business of game publishing, as well as discontinuing its Disney Infinity Toys-to-Life franchise. Moving forward, the entertainment conglomerate will no longer self-produce or publish digital games on any platform in favor of licensing IP under its control to third-party game studios. To facilitate the withdrawal from game publishing, Disney is taking a one-time $147 million charge for the second fiscal quarter ending April 2. The charge was linked directly to an inventory write-down on Disney Infinity products, plus severance and other asset impairments Disney classifies as cost of products. The company did not disclose sales numbers on Disney Infinity for the quarter yet did say the series turned in lower results. During a financial conference call, Disney chief executive Robert A. Iger said it was the additional risk of manufacturing and managing interactive figure inventory of the Toys-to-Life segment that was a major reason Disney Infinity was discontinued. “We knew going in that there would be a lot of risk with this product, and the fact that we did so well initially, gave us the confidence to continue with it. The truth of the matter is that the risk that we cited at the beginning when we went into this caught up with us,” Iger explained. “And we just feel that it’s a changing space and that we’re just better off at managing the risk that that business delivers by licensing instead of publishing. It’s just that simple.”
Impact: You have to give Disney credit. At different junctures during the last 30 years the company has spent heavily to leverage its entertainment IP to publish its own first-party computer, console, social, online subscription MMORPG, free-to-play, and most recently Toys-to-Life games. Each effort has ended with less than spectacular revenue outcome, and resulted in a retrenchment from in-house production and in some cases from foregoing publishing to focus on only IP licensing. The recent Business of Video Games report from DFC has a recount of Disney’s troubled history with video games as an example to explain the challenges of broad media companies in the game space.
This recent retrenchment is a major one that eliminates independent publishing. Disney seems happy enough with its Star Wars relationship with Electronic Arts to model its future video game business around similar relationships. Licensing of its IP for consumer products continues to be a big revenue earner for Disney, so it boggles us as to why the firm has such a hard time finding success leveraging that IP into hit games on its own. There has been no shortage of big-ticket acquisitions, ambitious products or high-profile game executive hires, so being stingy with the corporate purse has not been the issue. Of course, they also had the LucasArts developers when they acquired the Star Wars IP. To be fair, most motion picture studios have had the same problem establishing a profitable game product mix that survives long-term. Warner Bros has had much of the same history and many of the same problems. The one saving grace for Warner has been their relationship with Lego, which they got when they acquired the talents of developer Traveler Tales.
The issue Disney’s game division faced was that prior to Disney Infinity the division had losses of about $1.3 billion over a six-year period. With Disney Infinity, it looked like the company had finally produced a game cash cow. The company closed it fiscal 2013 in September of that year, one month after Infinity 1.0 launched, and fourth-quarter game revenue doubled versus the same period the previous year. Move forward to September 2014, and console game revenue was up 24% for the year. The interactive games division earned $116 million in 2014, versus annual losses of $87 million in 2013 and $216 million in 2012 – all thanks to Infinity. So what went wrong? A year ago toy industry analysts started to report demand for Toys-to-Life interactive figures was softening compared to traditional action figures. Another factor is the segment is very crowded with Activision Inc., Lego A/S (through Warner Bros. Interactive Ent.), and to a lesser extent, Nintendo Co. Ltd. all vying for consumer attention. A big concern is buying entry-level Toys-to-Life packages often are a $100-plus hit to the pocketbook, which can also dampened consumer interest to purchase. DFC had its own questions whether there was enough novelty delivered by Infinity 2.0 to justify buying a whole new $100-plus package. Some reviewers also had concerns that the interactive story content in Infinity 2.0 did not justify the cost. Lastly, fads take off and don’t always last. Whatever the cause, Disney did not like the sales numbers and chose not to continue with Infinity, game development or game publishing.
After Disney’s exit, what are prospects for Toys-to-Life? Obviously there is less pressure on Activision, Nintendo and WBIE in sharing the Toys-to-Life segment. That said concerns on consumer burnout and high pricing still remain. MSRP fatigue is less of a problem for Nintendo, however, since Amiibos are collectable and don’t break the bank. Then there is Warner’s Lego Dimensions which seem like a high-end category killer because of the Lego brand. DFC still sees an opportunity to modestly grow the Toys-to-Life category, yet that depends significantly on feature innovation, high quality game content and less price gouging to combat consumer burnout. With Lego as simply the stronger brand, Disney Infinity was probably on its downcycle and with the rest of the game business driving significant losses it is clear Disney decided to stop the bleeding for now.
