NOV. 5, 2007 • While the game industry always prides itself on being at the forefront of technological development, nowadays some old-line media companies are just as capable of driving innovation. Corporations such as The Walt Disney Co., have weathered several technological changes in its life-time, and have experience in tackling the types of challenges being presented in trying to  maximize profits that can be generated by the latest innovations in electronic entertainment.

By now, terminology like “user-generated content” and “media: anytime, anywhere” have become almost exhaustingly pervasive. The notion that users watch their favorite show whenever, wherever they please is now so commonplace that the major networks increasingly offer them online. Without exception all of the major media companies have built online portals in order to serve their increasingly scattered clientele.

The game industry, on the other hand, is starting to fall behind. For one, everyone is still waiting for a credible measurement tool to justify the recent flurry of in-game advertising acquisitions. As Nielsen, the industry’s standard in audience measurement, is trying to figure out how to calculate a CPM for gaming, monetization appears only possible in casual gaming. Similarly, digital distribution is still in its infancy. But iTunes, Joost, Netflix and others all offer increasingly larger libraries of movies, series, and so on.

So it seems only logical that it may take the well-financed traditional media companies to stake out added value beyond compelling content creation, which they often have failed at. Of the traditional media companies, the one that seems best poised to make an impact in the game market is Disney. While the company behind the magic kingdom may not strike the average person as a hi-tech firm at first glance, it has an impressive history of bringing its stable of characters alive on screens through several technological generations via savvy partnerships, wise acquisitions, and sometimes innovative in-house development.

Disney actually has a long history in the game industry that includes quite a few successes, but also many failures and retreats.  However, currently the company is clearly in expansion mode, and like many large media companies, is once again following a strategy of in-house publishing over licensing.

Disney became a leading publisher in the 1990s.  In 1994, Disney consolidated its software entertainment operations under the name Disney Interactive.  Prior to this, Disney had focused on licensing its brand to dedicated game publishers like Capcom and others. The primary goal of Disney Interactive was to produce and publish video games and educational programs based on Disney properties. Particularly the latter proved to be fertile ground. In its first two years Disney Interactive’s market share in this sector increased 15% and Disney became the number two publisher of children’s education software in the first half of 1996. The strength of hit titles like The Lion King Activity Center and Toy Story Animated Story Books allowed the company to carve out a strong position for itself as the software industry started to mature.

However, the educational software market collapsed with the rise of the Internet in the late 1990s.  The biggest success came with licensed action video games published by companies like Activision, Virgin and Sony.  Disney Interactive struggled, while

Disney’s straightforward model of licensing movie-based software titles gained a lot of momentum. Action games based on Disney animated films like Tarzan sold millions of units in the late 1990s.  This success attracted a lot of outside attention, and big name developers quickly inked licenses to Disney’s properties. Sega and Konami capitalized on a series of ESPN-based games (currently licensed to Electronic Arts).  Even U.K. based Eidos saw bread in Disney’s stable and developed, among other, a game based on the 102 Dalmatians.

In 2001, Disney Interactive posted a $22 million increase in revenue. This growth was mainly attributed to the success of the Who Wants to Be a Millionaire video games, Pooh learning titles and the Toy Story 2 action game (from Activision).  However, as a developer/publisher. Disney Interactive was clearly struggling. In 2001, Disney Interactive was renamed Buena Vista Games in an effort to highlight a new focus on developing games.  Since then Disney’s best known success to date would appear in 2002, as a licensing deal.  Square Co. Ltd. developed and published Kingdom Hearts, a role playing game featuring Disney cartoon characters,.By 2004 the game had sold over four million copies.  Meanwhile THQ had a huge success with games based on Pixar titles.  For example, games based on the Pixar movie Finding Nemo shipped more than five million units worldwide.

Today, Buena Vista Games has once again been renamed Disney Interactive and the company is clearly in expansion mode. In fiscal 2005, Buena Vista Game reported a revenue increase of $53 million, followed by a further revenue increase in 2006 of $112 million.  For 2006, much of the revenue increase was due to in-house titles such as The Chronicles of Narnia: The Lion, The Witch, and the Wardrobe; Chicken Little, and Pirates of the Caribbean.  In late 2006 Disney formed Fall Line Studios. Located in Salt Lake City, Fall Line Studios focuses on game development of the well-known licenses for the Nintendo DS and Wii systems.

Most of Disney’s published products have been based on the company’s more kid-oriented licenses.  However, Disney Interactive seems to be expanding its portfolio into more teen and adult oriented fare.  In 2006, Buena Vista Games acquired U.K. developer Climax Racing (later renamed Black Rock Studio).  Climax was best known for Sony’s ATV Off-Road Fury title.  In mid-2007, it was announced that Disney Interactive had acquired Junction Point Studios.  Junction Point is headed by Warren Spector, a game designer behind such titles as the Deus Ex first-person shooter title.  Disney also acquired the right to the first-person shooter Turok franchise (originally published by Acclaim) in 2005 and setup a Vancouver, Canada studio, Propaganda Games, to create tiles based on the franchise.

After successfully moving into the console and PC gaming industry, Disney is now actively gearing up to pursue its share of the elusive online audiences. With development spending at Disney Interactive at approximately $100 million in 2006, the company stated plans to triple its in-house development efforts. Following the boom in the overall game industry, Disney plans to increase its spending on game development up to $350 million a year within the next few years. Of this amount, roughly 70% will go towards developing established content franchises; the remaining 30% will be spent on additional intellectual properties and cross-platform ventures.

Looking at Disney’s most recent announcements, it’s obvious that the company is not afraid to venture out of its comfort zone. The youth-oriented subscription massively multiplayer online game (MMOG) Toontown, launched in 2003, can be considered a successful pioneer for its time.  An upcoming MMOG based on the blockbuster hit Pirates of the Caribbean movies is getting a lot of attention. Furthermore, Disney’ Internet division, Walt Disney Internet Group announced an agreement with Shanda Interactive Entertainment to develop and distribute a Disney-branded online casual game in China. And, mostly recently WDIG acquired Club Penguin in the struggle against Nickelodeon over pre-teen eyeballs.

Given Disney’s extensive history in trying to adapt to new platforms and trying to find ways to migrate its existing IP onto new distribution channels, there’s much to say for its role in coming years. Disney has struggled in the game business, but among the large media companies they have had the most success and shown the strongest determination to stick it out.  In an industry where even the largest dedicated game publishers are comparatively small, a well-capitalized media giant like Disney Interactive can rapidly expand to become an important player.  The lines between what is a game, what is a social community/virtual world, plus the growing need for well-known licenses and advertising revenue, means the time could be right for a company like Disney.