Disney Missing the $14B Games Business It Should Have

by Anthony John Agnello | October 10, 2011 2:49 pm

Despite recent challenges[1], mobile and social game-maker Zynga still is valued around $14 billion[2]. Its games like FarmVille and Mafia Wars remain the recognizable face of the growing games industry on Facebook. The company has more than 232 million monthly users. This is undoubtedly frustrating to much larger companies that would like to see their own mobile and social game businesses yield the same rewards. Disney (NYSE:DIS[3]) is a perfect example.

The company has spent significant sums to secure a place in the social/mobile space during the past 18 months. While it spent undisclosed sums on HTML 5 technology-developer Rocket Pack[4] in May and iPhone game maker Tapulous in July 2010, it also made a buy with an actual number attached — $563 million — on Facebook and mobile game studio Playdom that same month.

Yet as of 2011’s second quarter, the $61 billion company — with control of some of the world’s most recognizable brands and characters — has just 3.3 million monthly users on Facebook. Its entire Disney Interactive segment brought in just $251 million in revenues during that same quarter — a segment that suffered an $86 million operating loss[5] (its second in a row) “driven by the inclusion of Playdom.”

Shouldn’t a powerhouse like Disney at least be able to match some young blood like Zynga?

Well, now that Playdom is fully incorporated into Disney Interactive’s operations — Playdom and Tapulous are now one studio called Disney Mobile — it should have a greater opportunity to bring in some of that Zynga-like revenue. A Monday report at All Things Digital said Playdom alone has 12 titles ready to release on Facebook during the next year, and these games will use Disney’s oh-so-lucrative brands.

Also, Playdom has 3 million daily users for its recently released Facebook game Gardens of Time alone[6], so Disney’s audience already is multiplying on the social network to a degree that will put it on par with Zynga, Electronic Arts (NASDAQ:ERTS[7]) and other leaders in the space. So while the spending on Playdom certainly set Disney back in Q2, CEO Bob Iger expects Disney Interactive to be back in the black by 2013.

It’s hard to not to wonder if Disney is going about its games business in the wrong way, though. With other entertainment wings of the company — like its theatrical film division — making less money now than it has in the past[8], Disney could use developing segments like Interactive to pick up some of the slack. And while Disney has spent large sums to build the segment for the future, one wonders why Disney hasn’t instead focused solely on building up its licensing business in social and mobile gaming.

Put another way: Why spend to beat them when you could more easily — and more profitably — join them?

Look at the Disney Consumer Products segment. According to a report released during the company’s investor conference last February, consumer product licensing generated $1.4 billion in 2010[9]. The bulk of that revenue came from toys using Disney’s character brands, not including those owned by comic book entertainment subsidiary Marvel.

While Disney still licenses its brands to other companies in the game space — Activision Blizzard (NASDAQ:ATVI[10]), for example, makes games using Marvel brands — it seems like the company’s greatest earning potential on Facebook and mobile phones would be to put Mickey, Woody, Simba and Spider-Man in Zynga’s games rather than spend the money to build a competitor to meet Zynga head-on.

But Disney played the long-term game with Disney Interactive, and its spending on Playdom and others could start yielding real results by 2013. And maybe having control of its own developers is the way to go for Disney. Maybe not, though. Even if it insists on maintaining an in-house game maker, it shouldn’t be afraid to spread the wealth of its brands beyond that business. There’s no reason Disney’s games business — internal segments and licensing together — shouldn’t sniff that $14 billion mark.

As of this writing, Anthony John Agnello did not own a position in any of the stocks named here. Follow him on Twitter at @ajohnagnello[11] and become a fan of InvestorPlace on Facebook[12].

  1. recent challenges: https://investorplace.com/2011/09/zynga-ipo-electronic-arts-sims-social/
  2. around $14 billion: http://seekingalpha.com/article/295829-zynga-is-going-to-have-a-hard-time-justifying-its-14-billion-valuation
  3. DIS: http://studio-5.financialcontent.com/investplace/quote?Symbol=DIS
  4. on HTML 5 technology-developer Rocket Pack: https://investorplace.com/2011/03/3-stocks-to-watch-in-mobile-and-social-gaming/
  5. $86 million operating loss: http://www.next-gen.biz/news/disney-interactive-losses-widen
  6. for its recently released Facebook game Gardens of Time alone: http://allthingsd.com/20111010/playdom-readies-a-dozen-games-a-year-after-disney-acquisition/
  7. ERTS: http://studio-5.financialcontent.com/investplace/quote?Symbol=ERTS
  8. making less money now than it has in the past: https://investorplace.com/2011/09/3d-lion-king-walt-disney-dis/
  9. generated $1.4 billion in 2010: http://corporate.disney.go.com/investors/presentations/2011_investor_conference/2011_Investor_Conference_Transcript_5_consumer_products.pdf
  10. ATVI: http://studio-5.financialcontent.com/investplace/quote?Symbol=ATVI
  11. @ajohnagnello: http://twitter.com/#%21/ajohnagnello
  12. InvestorPlace on Facebook: http://www.facebook.com/pages/InvestorPlace/178906405484848

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