Disney Reptile Bet Fights $1.4 Billion Interactive Losses

John Pleasants, co-president of Walt Disney Co. (DIS)’s interactive unit, expressed concern after passing the crocodile exhibit at the company’s Animal Kingdom theme park in Orlando last year.

Disney was developing an iPhone application starring a toothy reptile named Swampy, and the crocs at the park didn’t strike him as very endearing.

“Are you sure it’s going to be cuddly?” Pleasants asked his mobile-games chief, Bart Decrem, in a phone call.

“Don’t worry about it,” Decrem recalled answering, saying he was confident the character would be accessible.

The Internet has been a jungle for entertainment companies and Disney, the world’s largest, is no exception. The Burbank, California-based firm has lost $1.39 billion in the past five years in its interactive media group, which develops games and website content. Its continuing commitment to the business was evident at the video-game industry’s E3 trade show in Los Angeles last week, with a booth as big as heavyweights Activision Blizzard Inc. (ATVI) and Electronic Arts Inc. (EA)’s.

Disney Chairman and Chief Executive Officer Robert Iger has said the interactive unit will be profitable next year in part because of a focus on games for social-networking sites such as Facebook Inc. (FB)’s and for mobile devices. Both are capturing a larger share of the $16.6 billion U.S. video-game market, according to researcher NPD Group Inc.

“We’re targeting 2013 as a year of profitability. It’s about time, because we’ve invested a fair amount,” Iger told attendees at a conference sponsored by Sanford C. Bernstein & Co. on May 30. “It’s a space that we should be in because the brands, we think, can perform well.”

‘Not There’

In the quarter ended March 31, the interactive unit lost $70 million, smaller than the $115 million loss a year earlier.

The division may lose $160 million in fiscal 2012, estimates Todd Juenger, an analyst with Bernstein in New York. While it may turn profitable at one point next year, he estimates a loss of $25 million for all of 2013.

“They have been able to grow their revenues and shrink their costs,” Juenger said in a telephone interview. “But they’re still not there yet.”

Disney’s Internet struggles began in the late 1990s, when it acquired search engine Infoseek Corp. in transactions totaling more than $1.5 billion. In 2001, the company recorded $878 million in charges to close its Go.com web portal, according to its annual report.

Outlays during the past five years include $350 million to buy the children’s gaming site Club Penguin in 2007 and $563.2 million for social game-maker Playdom in 2010. Pleasants, who ran Playdom, was named co-president of the interactive unit, with former Yahoo! Inc. (YHOO) executive James Pitaro.

Media Follies

Disney’s interactive experience mirrors that of media industry rivals Viacom Inc. (VIA), which lost $316 million in 2010 on Harmonix Music Systems, maker of the “Rock Band” video game, and News Corp. (NWSA), which sold the social-networking site Myspace last year for $545 million less than it paid.

“We made some obvious mistakes on the gaming side, initially with a focus on the console space, and clearly the whole gaming area has changed radically,” Iger told Bernstein conference attendees. “Our goal now and our strategy is to diversify our gaming efforts.”

Sales of mobile, social and other digital games represented 31 percent of the U.S. video game market last year, up from 20 percent in 2009, according to NPD.

“Marvel: Avengers Alliance,” a game the company launched in March, has 9.3 million monthly users, placing it 16th among Facebook games, according to Disney, which cited research from AppData.

Console Retreat

The company will limit its investment in console games to “very Disney-branded, Marvel-branded” titles, according to Iger. This year, the interactive unit will release six traditional video-game titles, down from 21 in 2009, according to the company and VGChartz.com, a research site.

At E3, Disney announced a November release date for “Disney Epic Mickey 2: The Power of Two,” for Sony Corp. (6758), Nintendo Co. and Microsoft Corp. (MSFT) game platforms.

Two mobile titles titles also made their debuts at E3: “Temple Run: Brave,” tied to this month’s Pixar film “Brave,” and “Where’s My Perry?,” which features a character from the Disney Channel cartoon “Phineas and Ferb.”

A mobile or a social game can be developed for $50,000 to $5 million, according to Michael Pachter, a video game industry analyst at Wedbush Securities Inc. in Los Angeles. That compares with $20 million for a multiple-console title, plus the added cost of distributing discs.

Design Costs

“Where’s My Water?,” the Disney game featuring Swampy the alligator, was designed in half a year by six developers for “a couple of hundred thousand dollars,” Decrem said in a telephone interview. A hit mobile game such as Rovio Entertainment’s “Angry Birds” can generate $100 million in revenue, he said, declining to release sales numbers for “Where’s My Water?”

“You can bring a complete experience to market at a fraction of the cost,” Decrem said of mobile technology. “It’s real money and it’s doubling every year.”

“Where’s My Water?” was introduced last September and is Disney’s biggest mobile hit so far. The game is sixth on the list of top-selling paid iPhone applications at Apple Inc. (AAPL)’s iTunes store and No. 4 for iPads. Players pay 99 cents to download the game and can purchase additional levels of play for $1.99.

With “Where’s My Water” showing early success, Decrem said he added more developers to the team, creating new chapters and incentive for players to spend on the game. Disney also threw resources behind the title, promoting it on the Disney Channel cable network and on the Disney.com website.

Swampy now has a line of T-shirts and stuffed animals at retailers such as Toys ``R'' Us Inc. (TOYS), and an animated Web series rolls out this year.

“This is one of Disney’s strengths,” Decrem said, “taking an alligator and making it adorable.”

To contact the reporter on this story: Christopher Palmeri in Los Angeles at cpalmeri1@bloomberg.net

To contact the editor responsible for this story: Anthony Palazzo at apalazzo@bloomberg.net

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