An Epic deal for Disney

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In our year-end piece for The Signal, we had predicted that 2024 could be the year that Disney goes big on gaming. Lo and behold, it’s happening. Disney has announced that it’ll collaborate with Epic Games, the maker of Fortnite, for an “expansive and open games and entertainment universe.” Not only this, the company is also buying up equity in Epic Games for a cool $1.5 billion. What does the deal signify? To know that and more, read on as we discuss Disney’s strategy in the world of gaming. 

History

Disney isn’t new to gaming. The company has been trying to crack the gaming market for more than four decades now. Back in 1981, Disney launched its first game, Mickey Mouse. It was made by Atari and was launched on the Nintendo Wide Screen. Subsequently, it worked with other Japanese game developers like Atari and Sega. Alongside these collaborations, Disney was also trying to develop games on its own. It made a Mickey & Minnie game in 1988.

The ‘90s was the decade of mass production for the company. It launched games almost every year, some made on its own but the rest mostly licensed to Japanese developers. Such was its belief in games that Disney even opened an arcade world for all its titles. Called DisneyQuest, these arenas were supposed to be built in big cities so as to widen the audience base for its games and in doing so, lure them into the world of its IPs. Unfortunately, DisneyQuest didn’t work out, but that didn’t stop Disney’s gaming ambitions.

At the turn of the 21st century, Disney moved a large chunk of its game development in-house. It created a new vertical, Disney Interactive. For a while, things were okay. The vertical went on an acquisition spree and did produce tons of games. Some of these, like Disney Infinity, did well and the vertical was profitable. But it wasn’t anything special. And so, in 2016, Disney decided to shut down its Disney Interactive once and for all. In an earnings call in 2019, then CEO Bob Iger had this to say about the decision:

Quite a devastating admission by a CEO to make. Anyway, with nowhere else to turn, Disney decided to turn the clock back and went full steam ahead with licensing. Within just three years of shutting down the in-house developer, the company got its biggest hit. Kingdom Hearts III, made by Square Enix, which was released in 2019 and shipped five million copies. It was one of the highest-selling game that year. 

Present and future

Even when Disney Interactive existed, it didn’t stop the company from licensing its IPs. The company had signed a decade-long exclusive deal with EA for its Star Wars property. That deal made EA $3 billion in revenue, and of course some of it came Disney’s way. Once licensing became the norm, it opened the floodgates for equally rewarding deals. Like Bethesda acquiring the rights to make an Indiana Jones game or Ubisoft working on an Avatar game. Disney’s biggest success though, came through Marvel Studios.

While Marvel movies were bombing at the box office, Marvel Games titles were climbing the popularity charts. By 2020, Marvel was the largest brand for mobile games in the US, the world’s biggest mobile game market. Games like Marvel Strike Force and Marvel Snap broke several revenue records. With consoles, Marvel’s partnership with Insomniac also proved extremely successful. Spiderman games for both PS-4 and PS-5 are two of the highest-selling games in the world.  

By Disney’s own admission, licensing has been great. Nine Disney games franchises have each grossed more than $1 billion in sales. Disney owns three of the top five brands in the US mobile games market. In this context, the deal with Epic Games makes sense as it follows a proven strategy for earning lots of money. But it’s the equity part of the deal that raises some questions.

Epic has been a vocal proponent of the metaverse and has continued to build on that promise. Disney meanwhile has had to shut its own metaverse vertical, dubbed “the next great storytelling frontier”, after the company was pushed to make cost cuts across the board. Does that make this deal a back channel into that area for Disney? Moreover, there’s also the question of Apple. Disney has a pretty solid relationship with it but Epic, not so much. The developer had sued Apple for its anti-competitive policies on its App Store, a claim that didn’t hold in court. Disney, on the other hand, is one of those rare big companies to support a dedicated app for Apple’s latest Vision Pro device. Will there be any effect on Disney-Apple relations? 

Pivoting from an extremely successful model to an older model that didn’t work doesn’t really make sense. Which makes me wonder whether this is all just a smokescreen. Bob Iger has been under enormous pressure of late by activist shareholders who want him gone. The Epic deal buys Iger some time; he gets to appear like he’s working on a new strategy, which will increase Disney's share price in the short term (which has happened btw). Because if Iger genuinely wants to go back to the old model, why not just outright buy Epic? Or for that matter, EA, a developer whose sale has long been linked to Disney. In any case, gaming is increasingly becoming an ecosystem play, with a tight mix of hardware and software. A standalone developer acquisition won’t cut it today. 

⚡️Quick Singles

👟💰🆕: Indian cricketer Virat Kohli will part ways with Puma, ending an eight-year association with the German footwear brand, CNBC-TV18 reported. The report added that Kohli will switch over to Agilitas, a sports footwear company founded by former Puma India managing director Abhishek Ganguly last year. The deal could involve Kohli not merely endorsing Agilitas, but also investing in the company, which raised $62 million in two rounds last year. Puma India rubbished the report, with Ganguly’s successor Karthik Balagopalan holding firm on Puma’s “long-standing” relationship with Kohli.

📺🏈🆕: Legacy media giants Disney (ESPN), Fox, and Warner Bros. Discovery (WBD) will come together to launch a new sports streaming service. The yet-to-be-named service will launch later this year, and could be priced at $40. The ownership of the company is somewhat similar to Hulu, with equal stake between the three companies, with revenue split based on their respective deals with cable services, The Athletic reported. Other options include bundling with existing services, particularly for Disney (Disney+) and WBD (Max). The service is slated to offer content from all major American sports leagues. ESPN is also launching its own standalone service by 2025.

🟦⚽❌: Football could see the introduction of “blue cards”, where a player could be sent off for ten minutes. The new rule was mooted by the sport’s rule-making body, the International Football Association Board (Ifab), and will be recommended for trials on Friday. The blue cards, per Ifab, will be shown to players for dissent and cynical fouls, both of which are currently governed by referee discretion. The suggestion has seen lukewarm reception from various federations, including Fifa, which is not in favour of trialling these sin-bins in elite competitions. Ditto for Uefa, whose president called the rule “death for football.”

💰🏏🇮🇳: The Board of Control for Cricket in India (BCCI) has set a total base price of ₹2,700 crore ($325 million) for the Indian Premier League’s six associate and three special partnership slots for the next five editions of the tournament. At the very least, the associate sponsorship of the IPL is expected to fetch the BCCI  ₹1,950 crore or $234.9 million (₹65 crore base price per sponsor for five years), while the special partnership (purple and orange caps + strategic timeouts), could earn the board a minimum of ₹750 crore ($90 million) over five years. The previous editions saw the participation of India’s startup unicorns such as Cred and Dream11 for these partnerships.

🆕⚽🇮🇹: Italy’s top footballing division—Serie A—has bagged a new naming rights sponsor in Enilive, a mobility division of energy company Eni. The new three-year partnership, which will commence in the 2024-25 season, will end Serie A’s 25-year association with Italian mobile company Telecom Mobile Italia (TIM). The deal, Football Italia reported, was worth €22 million ($23.6 million) for three years, with an option to extend an additional two years. This, the report added, was marginally higher than TIM’s offer, worth €19 million ($20.4 million), a €4 million ($4.3 million) increase from the earlier arrangement. Additionally, Coppa Italia’s incumbent sponsor, the Italian high-speed train company Frecciarossa, has renewed its contract for another three years.

🟡✈️💰: Chennai Super Kings (CSK), the defending champions of the IPL, have unveiled Etihad as their new sponsor ahead of the 2024 season. The deal includes back-of-shirt sponsorship, events, and platform integration, besides exclusive deals for CSK fans. Etihad was previously the principal sponsor for the Mumbai Indians from 2014, when it was an equity partner of the now-defunct Jet Airways. CSK captain Mahendra Singh Dhoni may sport a new bat sticker—Prime Sports—in the upcoming season. The sticker is reportedly a tribute to his childhood friend’s sports shop, which had supported Dhoni during his early cricketing days.

📖 Weekend Reading

How Manchester City became the most popular Premier League team in America [The Athletic]

How Nikola Jokić became the world’s best basketball player [The New Yorker]

Kansas City Stars, With Help From Taylor Swift, Are Advertising Champs [The New York Times]

Fake Man United News: Tracking down the people making thousands out of fictitious stories [The Athletic]

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