Walt Disney Co. pulled the plug on its Infinity video-game business, which combines onscreen play with collectible toys, catching analysts by surprise and casting doubt on the health of that segment of the industry.
Disney announced the decision last week in a footnote to its second-quarter earnings, saying it incurred a $147 million charge for severance costs and to write off its investment in the business. The company will close its Salt Lake City game studio and cut about 300 jobs.
With the action, Disney is ending efforts to develop games on its own and will instead rely on licensees such as Electronic Arts Inc., which makes Star Wars titles. Disney launched Infinity with great fanfare in 2013. The decision is a big win for Activision Blizzard Inc., which pioneered so-called "toys to life" games with its Skylanders franchise.
"I'm really surprised that Disney couldn't make a big profit at this level," said Michael Pachter, a longtime video-game analyst at Wedbush Securities. "It's great news for Activision, as they are the last man standing in a market with more than $1 billion of annual demand."
Infinity allowed characters from many Disney classics to interact onscreen together, letting kids create adventures that put Star Wars or Toy Story characters like Buzz Lightyear on a mission in Cinderella's coach. Much like Skylanders, customer bought a base unit that connected to a console. Collectibles placed on the base showed up in the onscreen story.
Activision had forecast Skylanders sales to drop this year, despite plans to introduce a new game in the fourth quarter, because of more competition. The demise of Infinity may ease that pressure, said Matthew Kanterman, an analyst at Bloomberg Intelligence. Activision shares rose 1.8 percent to $37.06, while Disney dropped 4.3 percent to $102.03 after a disappointing earnings report.
Infinity did well at first, Disney Chief Executive Officer Bob Iger said on a conference call. The game helped lift Disney's interactive unit to its first annual profit of $116 million in 2014. But making and distributing toys and video-game equipment proved costly, Iger said, and the risk of getting stuck with unsold inventory is high.
"We did quite well with the first iteration of it, and we did OK with the second iteration," Iger said. "But that business is a changing business, and we did not have enough confidence in the business in terms of it being stable enough to stay in it from a self-publishing perspective."
Disney used to only license its characters for games before it began acquiring studios, such as Salt Lake City-based Avalanche Software, in the mid-2000s. After a string of disappointing games and soaring losses at its interactive division, the company began shuttering those studios, including Junction Point, maker of the "Epic Mickey" game in 2013. Disney also cut staff at the video game unit of Lucasfilm after that company's 2012 acquisition, choosing instead to license Star Wars characters to Electronic Arts.
That move has paid dividends for both parties. In EA's fiscal fourth quarter, which ended in March, mobile gaming revenue climbed 15 percent from a year earlier, fueled in part by "Star Wars: Galaxy of Heroes." The game developer plans to have at least one Star Wars release a year for the next three to four years.
Other gaming companies like Activision, Ubisoft Entertainment or Take-Two Interactive Software may seek licenses with Disney now that Infinity is ending, Kanterman said. In the long run, Disney may be better off getting out of game publishing, said Andy McNamara, editor-in-chief of Game Informer magazine.
"Larger traditional media companies have generally had trouble understanding the business and how to support and execute games," McNamara said. "Falling back to licensing is ultimately a good move."
The shutdown will be a blow to Utah's tech industry, which has earned the nickname "silicon slopes," said Matt Lusty, a spokesman for the Salt Lake Chamber, the state's biggest business association.
"Tech in Utah has been growing at a tremendous pace," Lusty said, adding he's "never excited" to hear that a business s closing.
It's also a disappointment to fans, as some said on Twitter. "Shame on who ever made this decision," LongChase wrote on Twitter. "I'll think twice b4 buying anything like this from Disney again!" "My daughter is so disappointed," Colleen Vanderlinden also wrote on social media. "Infinity is her favorite thing in the world right now. :("
Activision's success with Skylanders, which began with the first game in 2011, attracted other competitors, with mixed results. Nintendo Co. introduced its Amiibo games and characters in 2014 and is introducing new characters this year. Warner Bros. Interactive, which produces "Lego Dimensions," will have a new products out later this year.
The decision to close Infinity raises doubts about the health of the toys to life category, said Jon Erensen, research director at Gartner.
"That has been one of the areas of the video-games market that vendors have been counting on to grow sales," Erensen said. The question is if "this is just related to Disney or if we may see other vendors that have invested in those platforms have issues, if sales are slowing down."
Disney plans to have two final game releases, including three new characters from Alice Through the Looking Glass later this month and the "Finding Dory Playset" in June, John Blackburn, senior vice president and general manager of Infinity, said on the company's website.
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