Disney's Game Foray Could Dwarf Competition - TheStreet

Disney's Game Foray Could Dwarf Competition

Its game-making moves may squash its rivals.
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Traditional video-game publishers had better watch out. Media giant

Disney

(DIS) - Get Report

is pumping up its game muscles.

The company, which continues to invest in its game division by adding creative talent and building new studios, is set to release its first original game title for the

Nintendo

(NTDOY)

DS console next month.

The release of

Spectrobes

underscores Disney's heightened ambitions in the game business. The entertainment conglomerate, content in the past to license its best properties to other video-game publishers, now wants to own more of the market.

Disney's moves could be bad news for traditional video-game publishers, especially

THQ

(THQI)

, which has seen some of its biggest hits come from Disney licenses.

THQ's

Cars

game, co-published with Buena Vista Games and based on the Disney/Pear hit movie of the same name, drove video-game sales for the holiday quarter, shipping more than 7 million units.

If

Spectrobes

is a hit, it could mark a new and pivotal direction for the division that has so far piggybacked on the content and characters developed by Disney's movie and TV studios.

"Our value to the company is not just financial but also strategic," says Graham Hopper, senior vice president and general manager of Disney Interactive Studios. "We help extend the value of the company much more deeply because when someone plays the game, it deepens their connection to the property."

Earlier this month, the company changed the name of its games division from Buena Vista Games to Disney Interactive Studio to better reflect the weight of the Disney content in its portfolio and "the enormous value consumers see in the Disney brand."

Spectrobes

, as Disney Interactive's premiere original game title, will be a big test to see if the division got the recipe right. The game, in which players collect prehistoric creatures of the same name and then train them to do battle with an evil species, could spawn a television series or even a movie if users take a fancy to it. That would be another first for Disney, whose games have been based on existing movie or TV material.

"Launching our first new

intellectual property will be a sign of our maturity," says Hopper.

Though completely new games are a risky proposition for Disney, Hopper says the Burbank, Calif., company wants to do more with its brand.

Disney says it will invest $130 million in game development this year, up from $100 million last year. In five to seven years, the company hopes to put in $300 million to $350 million. This year the unit will publish 20 titles compared with last year's 16.

Disney Interactive now has about 600 employees worldwide, an increase from the 120 it employed about three years ago. Revenue for fiscal 2006 was approximately $500 million, compared with about $370 million the year before.

Shares of Disney closed Friday's session cents at $35.14. The stock has been up 7% in the three months since Nov. 24 and jumped 27% in a year.

Currently, about 80% of the division's titles are based on existing Disney content, with 20% of division spending going toward new intellectual property.

When Disney relaunched its Web site earlier this month, it put a

Spectrobes

teaser on its page. That resulted in 450,000 views in one day, says Hopper, who cited the high number as an example of the power of the Disney brand.

"Something like this doesn't cost us money to do, but it is of tremendous value to us in reducing the risk," says Hopper.

Games Avast!

Disney Interactive has another much-anticipated game release in the works. In May, the company will debut its

Pirates of the Caribbean: At World's End

game for all major consoles, including

Sony's

(SNE) - Get Report

PS3, Nintendo's Wii,

Microsoft's

(MSFT) - Get Report

Xbox 360 and the PC.

For independent video-game publishers, a more powerful Disney game division could be discomforting.

Disney says growth in its game division will come from publishing more games rather than from existing licensing arrangements it has with publishers.

Electronics Arts

(ERTS)

, for instance, licenses the ESPN brand from Disney to produce a range of games under its EA Sports franchise, which brings in a significant chunk of revenue for EA.

That relationship is unlikely to be jeopardized for a while, assures Hopper. "Sports games are a specialized business where EA has significant expertise and is clearly the leader," he says. "Our focus will be on pieces not licensed out."

EA might not have to worry yet, but some of the other publishers who focus on developing content beyond hard-core gamers, such as family-friendly content, could be in trouble. "Disney's strength has been children's content," says Billy Pidgeon, a games analyst with researcher IDC.

Thus, says Pidgeon, a company such as THQ that depends on Disney content will be most affected by the entertainment giant's new focus.

THQ rode the coattails of the animated movie

Cars

-- the No. 2 overall console title ranking in the U.S. for calendar 2006 -- to a

third-quarter sales rise of 33% to $475.7 million, from $357.8 million a year ago.

Hopper says most of the current licensing relationships with publishers will continue. "We are not a threat to other publishers," he says. "This is a growth industry, and we are still talking to just 15% or 20% of the population."

In fiscal 2006, nearly half of Disney Interactive revenue was from self-published products, while the rest came from licensing Disney IP to other publishers.

The EA/ESPN agreement is not included in the division's revenue, but its licensing agreements with other publishers such as THQ and

Square Enix

are.

Video-game publishers might be OK for now, but some may eventually find themselves banished from the Magic Kingdom.