Disney's Gaming Heart

One of Disney's (NYSE: DIS  ) most potent arsenals in its portfolio of operating segments is the consumer products division. Although the last several years have been up and down for Disney and its merchandising endeavors, the recent divestiture of the Disney stores is certain to have a positive impact going forward, especially in terms of returns on invested capital.

I believe video games will be an important piece of the ancillary puzzle. Anyone who has a Lizzie McGuire fan in the house knows how challenging it was to get her Nintendo Gameboy Advance game this past Christmas; same goes for the title based on That's So Raven. THQ (Nasdaq: THQI  ) enriched both itself and Mickey's wallet with games based on Disney's and Pixar's (Nasdaq: PIXR  ) The Incredibles and Finding Nemo. Licensing and/or publishing video games is a great business with solid growth potential; both Disney Interactive and Buena Vista Games will do well in this area.

All of this leads me to the franchise Kingdom Hearts, which currently comprises two games on two separate platforms -- Sony's (NYSE: SNE  ) PlayStation 2 and Gameboy Advance -- and is the result of a successful venture between Disney Interactive and Square Enix. According to a press release on the latter company's website, the Kingdom Hearts game for the Sony system has sold 4 million copies worldwide since its release in September 2002, while the Gameboy Advance title -- called Kingdom Hearts: Chain Of Memories, released this past November in Japan and the following month in North America -- has shipped 1 million copies. Those are pretty impressive stats -- and they are only set to get better.

Kingdom Hearts II is expected to be released later this year. On an anecdotal basis, I can tell you that kids love this game -- and when I say kids, I mean teenagers and up. I can also tell you that there is great anticipation for the next installment; this bodes well for brand promotion. I've never actually played either game, but I know that the world of Disney and its myriad colorful characters are on prominent display.

There's been a lot of talk about 2005 being the year of consolidation in the video game industry, and there is plenty of speculation on major purchases by large entities. I hope Disney isn't one of them; I don't want the company -- in which I own shares -- to be an acquirer, except for very small studios, which might be cheap and rife with intellectual capital. Other than that, Disney should focus on licensing and co-developing its games and strive to maximize monetary advances and royalty structures on the deals.

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Fool contributor Steven Mallas owns shares of Disney. The Fool has a disclosure policy.


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