On February 25, 2022, Hasbro (HAS 1.59%) COO Chris Cocks leveled up to become the company's CEO.
Prior to that date, Cocks had served as president of the company's red-hot Wizards of the Coast (WotC) business, the division responsible for such hits as Dungeons & Dragons (D&D) and Magic: The Gathering (MtG). And he's done a phenomenal job with both divisions. Over the past two years alone, data from S&P Global Market Intelligence confirms that WotC grew its revenues 72.5%, to $1.4 billion -- twice Hasbro's overall 36% revenue growth rate. What's more, overall Hasbro profits grew only 17% over the period -- but WotC profits skyrocketed 85%.
So, does WotC sound like the kind of business that you'd double down on, if you were Hasbro's CEO? Especially if you were personally responsible for the growth in that division? Of course it does.
And as it turns out, this is exactly what Hasbro is doing.
Image source: Author photo.
Playing 4D digital D&D
Last month, if you recall, an activist investor in Hasbro urged the company to spin off and divest WotC as a way to unlock shareholder value in Hasbro stock. Hasbro declined, and not just that, but last week Hasbro announced it will expand its exposure to Dungeons & Dragons by buying D&D Beyond from its parent company Fandom and officially bringing D&D Beyond under the WotC corporate umbrella.
Players of the popular role-playing game may have thought D&D Beyond was already a Hasbro property, but it wasn't, being rather a subsidiary of Fandom and a sub-sub-subsidiary of private equity firm TPG Capital. D&D Beyond built its business as a distributor of licenses to various WotC rulebooks, game modules, and other resources in "digitized" form and also provided other online tools for playing the game.
As it turned out, these tools proved especially valuable in the midst of a global pandemic that had millions of people working, and playing, from home. Now, with the world slowly returning to normal, it's logical to assume that D&D Beyond is slowing down after a period of hypergrowth -- a fact that may have given Hasbro an opportunity to negotiate a nice price to acquire the property: just $146.3 million.
Why buy a reseller?
Why would Hasbro want to own D&D Beyond outright? Over the past four years, explains the company, D&D Beyond has:
- Grown to a staff of 80 creators.
- Attracted a fan base of 10 million users.
- Contributed to millions of campaigns played.
- Built a database of millions of characters.
All of these are impressive numbers -- but the last may be the most important.
Consider: Tying 10 million Dungeons & Dragons players a bit closer to the company by bringing tools that they already use in-house may help boost customer loyalty. But bringing in-house the millions of characters that those users have devoted hours (days, weeks, and years) to developing and playing and getting attached to all creates a huge "sunk cost" that benefits Hasbro. It creates a strong disincentive to players for later switching to use some other online toolset for playing D&D.
And in fact, Hasbro spoke directly to this, assuring its customers that "we have no plans to stop supporting D&D Beyond. The purchases you've made, the characters you've created, and the campaigns you've run aren't going anywhere." All of that time and effort will continue to live on, on WotC servers.
What it means in dollars and cents
Now, was $146.3 million a fair price to pay? I think so. Although at its most basic level, D&D Beyond is free to use, the company charges for "tiers" of service costing up to $6 a month -- $72 a year, or potentially as much as $720 million across a field of 10 million customers. Precisely how much revenue D&D Beyond actually collected hasn't been disclosed, but Hasbro confirms that "the royalty paid to Hasbro by D&D Beyond" for the right to resell licenses to Hasbro properties "has represented a significant contribution to the fastest growing source of revenue for DUNGEONS & DRAGONS."
Going forward, Hasbro will get to keep all of that money. It will have the ability to hike prices and make even more money. And with D&D Beyond's technology in-house, Hasbro should be able to duplicate the successful platform to support other role-playing games, potentially creating even more revenue streams.
No wonder, then, that Hasbro was able to assure investors: Not only will the $146.3 payment to acquire D&D Beyond "be immaterial to revenue and earnings per share in 2022," but it will be "accretive to earnings per share in fiscal year 2023 and beyond."
Thanks to this acquisition, Hasbro has the potential to grow to level 20...and Beyond.
