Market Watch

Disney Interactive Shifts Focus to Online and Digital Gaming

January 25, 2011

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Disney Interactive Studios, part of the wider Disney Interactive Media Group, is reducing headcount across a number of studios in a bid to position itself in order to exploit growing opportunities in digital and online gaming. The move marks a fundamental strategic shift away from publishing packaged games which accelerated with the acquisition of social games specialist, Playdom, in July 2010 for $563m.

The latest round of redundancies will reduce DIS's headcount of approximately 700 by around 50 per cent. Propaganda Games has already been closed following underwhelming Tron: Evolution sales. Junction Point, which made the strong seller Epic Mickey (1.3m units in the US sold through in December), UK based Blackrock Studios and Utah based Avalanche Software are likely to be affected following today's announcement given their historical focus on packaged games. Disney games assets which are unlikely to be significantly impacted include Playdom (social), Club Penguin, Toontown Online (virtual worlds targeting younger demographics), Tapulous (music gaming for mobile) and a handful of other online and digital gaming assets.

Disney's strategic shift marks the end of a long and concerted effort by Disney to deepen its involvement in packaged games. Disney moved from a model based on licensing IP to external developers to building its own games production resources and publishing titles distributed through its well established DVD distribution infrastructure. Disney's decision illustrates the increasingly harsh commercial environment in publishing packaged games: it is costly, risky and intensely competitive. Moreover the still substantial rewards on offer for market leaders in packaged games have become increasingly concentrated amongst a handful of the biggest publishers. Given the high costs of games development, publishers can only release a limited number of titles per year which serves to concentrate business risk amongst a small number of titles. The consequences of a poorly selling title have intensified in the current generation and against a backdrop of a declining packaged games market, Disney were unwilling to continue investing given the other opportunities open to it.

It also illustrates the need for traditional games companies to realign their cost structures when transitioning business from the packaged market to digital and mobile opportunities. Although growing strongly these fragmented opportunities do not hold the scale of the traditional games sector especially in Western markets, meaning that companies need to eject fixed costs to make profits. This is perhaps less onerous on Disney as its packaged business was relatively immature compared to the largest publishers.

IHS Screen Digest believes that DIS will increase focus on Playdom and social gaming while settling on how best to exploit its vast IP resources through smaller scale titles distributed via digital sales channels. DIS' virtual world and MMOG performance has been hit and miss. While big hit Club Penguin has grown steadily if unspectacularly, other services such as Pirates of the Caribbean Online and Toontown have never reached mass adoption.

Find Out More > iSuppli | Screen Digest Games Intelligence

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