Disney (NYSE:DIS) founded Disney Interactive in 2008. From the second this segment was put into operation, it has been a burden on Disney's overall business. Between 2008 and 2012, Disney Interactive lost a total of $1.31 billion and never turned a profit on an annual basis.
That may be changing. When Disney reported its fourth quarter 2013 financial results on Nov. 7, the interactive segment turned a profit of $16 million. This marked only the second time this segment has been in the black since Disney began tracking the interactive segment separately when reporting financial results. Despite this quarterly profit, for the fiscal year ending on Sept. 28, 2013, Disney Interactive lost $87 million. This was up from a $216 million loss for the 2012 fiscal year.
What is the driver behind this turnaround in the interactive segment? Disney credits the sale of more than one million Infinity starter packs globally since the video game launched in August. President and CEO Robert Iger addressed the performance of the company's newest video game on the conference call, remarking that retailers and Disney alike are excited about the possibilities the holiday season holds for Infinity. He noted the strong performance of starter packs and individual figures alike, and remarked that all indications suggest the strong demand for Infinity will continue.
Infinity, what is that?
You keep hearing me reference this Infinity game, but you may be wondering which Disney movie this game is attached to. Traditionally, after the release of a major movie Disney releases a video game to capitalize on the excitement surrounding the movie. Yet, there haven't been any Disney movies out recently that have been named Infinity. What gives?
This time around instead of releasing a new game with every movie, Disney has decided that it will sell one central game. With the release of each new movie Disney will sell figures of the new characters so that players can travel to those particular worlds.
Therefore, with the sale of every starter kit Disney establishes a revenue stream that is likely to pay dividends every time another Disney movie comes out. Under this new system, the starter pack costs somewhere around $60-$90 while each figure costs roughly $12. Thus, every time a new movie comes out kids are only begging their parents for a $12 figure instead of a $40-$60 video game, which increases the chances that they will get it.
Perhaps Disney has finally cracked the code to making money in the video game industry. Yet many do not give all the credit to Disney. In 2011, two years before Infinity, Activision (NASDAQ: ATVI) released its Skylanders game.
Skylanders is a near mirror image of Infinity. Both use starter packs, which include a portal and a couple of figures to establish a future revenue stream and then rely on the sale of additional figures to generate secondary revenue. The only real difference is that Skylanders uses lesser-known characters such as Spyro, while Disney offers beloved characters such as Jack Sparrow. If you were a 10 year old kid which would you rather play with, a dragon you have never heard about or the pirate you have come to know and love? The choice seems rather obvious.
Disney didn't invent this brilliant method, it merely perfected it and used its well-known characters as a leg over the competition.
The Foolish takeaway
For Disney, this could finally be the big break which transforms its interactive segment into a profiting, flourishing business. At the very least, the segment should stop losing $200-$300 million a year. For Activision, Infinity could mean major trouble. In 2012 alone, the Skylanders series generated more than $1 billion in sales for Activision, roughly a fifth of the overall company's $4.98 billion in sales. While at the moment there are no indications that Skylanders sales are weakening, you can only believe it is a matter of time before more players make the switch.
Ryan Guenette has no position in any stocks mentioned. The Motley Fool recommends Activision Blizzard and Walt Disney. The Motley Fool owns shares of Activision Blizzard and Walt Disney. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.