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Analysis: Disney goes to Infinity to turn around gaming unit

Robert Iger, chairman and CEO of The Walt Disney Company, arrives at the 85th Academy Awards in Hollywood, California February 24, 2013. REU
Robert Iger, chairman and CEO of The Walt Disney Company, arrives at the 85th Academy Awards in Hollywood, California February 24, 2013. REU

By Lisa Richwine and Malathi Nayak

(Reuters) - When Walt Disney Co introduced its latest video game, Infinity, to the gaming faithful this week at the annual E3 gaming conference, it rented a Los Angeles movie theater to show 30-minute clips of upcoming films and hosted a party with the glitz it usually reserves for its blockbuster movie wannabes.

It shows just how much the company is counting on Infinity - whose players can for the first time mix together characters from Disney's different franchises - to help turn around one part of the media giant that stubbornly refuses to turn a profit.

Since it was created in 2008, Disney's interactive division, which houses its video game and online properties, has chalked up losses in 13 of its 14 quarters, compiling $1.1 billion in total operating losses in that time.

The division will likely not turn a profit this fiscal year ending September 30 as a result of the company delaying Infinity by two months, Disney CEO Bob Iger told analysts on an earnings call in May.

"We believe in Infinity," Iger said during the call. "We think it will be a great product and it's going to drive profitability."

It took more than three years and around 200 people to create Infinity, according to John Blackburn, who heads Avalanche Software, the Disney-owned studio that created the game. Disney would not say how much it spent to create the game, which is scheduled for release on August 18.

In the game, players can pit characters from Disney or Pixar movies against each other, such as a race between the super-charged racecar Lighting McQueen from "Cars" and quick-footed 10-year old superhero Dash from "The Incredibles."

It is Disney's answer to Activision Blizzard's Skylanders games, which lets players collect action figures that they can send on virtual action-adventure quests in a magical world called Skylands. The game was one of 2012's top-selling games with more than $1 billion worldwide in retail sales.

The launch will test Disney's vaunted marketing troops, who can crank out hit movies and flashy theme park rides but have yet to work their magic to create many gaming hits. One reason is that most of its characters are more popular with girls than boys, who make up the majority of game players.

Disney also invested heavily in console games, only to see sales of traditional boxed games decline and consumers flock instead to games played on cell phones or social networks like Facebook.

To revamp the interactive unit, Iger in 2010 tapped former Yahoo Inc executive James Pitaro and John Pleasants, head of the social games maker Playdom that Disney had acquired for $563 million, as co-presidents.

Pitaro and Pleasants cut costs through layoffs, redesigned the Disney.com website, and encouraged their creators to develop new characters. They had a minor hit with an alligator named Swampy that stars in the mobile game "Where's My Water?" that has been downloaded more than 200 million times.

Pleasants jettisoned many of the console projects. He told the interactive team that a narrow focus on two to three core titles would be better than working on 75 or more titles, according to Blackburn.

"We have really tipped the scales in a very different way," Pleasants said in an interview, "trying to get our development dollars and our energy focused on where the river is running fastest and where the growth is."

The unit's losses narrowed to $54 million last quarter, about half of where they were when Pleasants and Pitaro started.

Industry experts mostly approve of Disney's strategy. Targeting the company's mainstay market of 6- to 12-year-olds allows it to take advantage of the built-in fan base for its characters and to promote them with its movies, TV shows and theme park rides.

Disney will release two movies from which it gets game characters - "Monsters University" on June 21 and "The Lone Ranger" on July 3 - in the months before the Infinity launch.

It does, though, need to fend off Activision, the dominant force in the same video game world in which Infinity hopes to compete.

"You never want to discount the ability of Disney to sell stuff branded with their characters," said Cowen & Co analyst Doug Creutz, "but I do think it will be an uphill climb."

(Reporting by Lisa Richwine and; Malathi Nayak; Edited by Ronald Grover and Richard Chang)

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