Disney (NYSE:DIS) acquired Lucasfilm for a shade over $4 billion in cash and stock three years ago. After having experienced much success with its previous acquisitions of Pixar and Marvel, this purchase seemed like a slam dunk. As we close in on the first new Star Wars film release under Disney control, I think analysts at the time may have underestimated just how great of a buy this was by CEO Bob Iger and company. The first indicator of how successful this franchise can be for the House of Mouse will be a new video game to be released in mid-November.
Focus on fewer, better games
With the proliferation of online games, downloadable content, and constant over-the-air updates, the business of video games has changed drastically. Even companies such as Take-Two Interactive, which has made billions on physical sales of games in its Grand Theft Auto series, have increased revenue through downloads and additional paid content.
Activision Blizzard has built nearly an entire best-of-breed video game company on the back of a few franchises, huge recurring revenue streams from memberships, and insanely high-margin downloadable add-ons. This model has allowed for revenue to more than triple over the past decade and for its operating margin to expand from 1.22% to more than 28% over the same period.
Pundits are expecting a huge release from Star Wars Battlefront, with retail sales estimates of more than $700 million. While most of this revenue will go to the publisher, Electronic Arts, it is estimated that Disney will receive well over $100 million in royalty payments if sales estimates are correct. Previously, Star Wars games have been generally poorly conceived and executed. This was a blunder for a series with such an entrenched and passionate fan base. A quality product combined with a deeply loyal group of consumers creates the kind of bottom-line-driving sensations that we saw with Frozen, or with Activision's Call of Duty series. If EA can deliver a smash hit with its new game, it portends very well for Disney.
Precursor and future tie-ins
Disney is a licensing machine. There isn't a company on Earth that has as many beloved characters in as many disparate genres as Disney does. This breadth allows the company to be involved in myriad different consumer-facing businesses. Sales and reviews from this game will provide one data point that will allow the company to tweak its future behavior and allocation of resources. For many companies, the success or failure of Battlefront might make or break their entire earnings report. Disney has the film release later this year, as well as billions of dollars of product tie-ins. And this is only one franchise among many for a company with over $50 billion in annual sales.
If the game is a smash success, it bodes very well for the adoption of other Star Wars products, including the $149.99 BB-8 Droid app-enabled toy pictured to the left. If it fizzles and underperforms, it gives Disney advance warning that some things need to be tweaked. This may be creative, marketing, or simply which lines of business to be invested in at all. This is powerful information and one that gives a conglomerate such as Disney a decided advantage over many of its competitors.
Disney has consistently taken the long-term view and I envision it being a core part of my portfolio for decades to come. One benefit of taking this view is that success and failure needn't be measured in near-term profits. If the game performs well, Disney can implement a similar strategy with its Marvel characters such as The Avengers, or The Guardians of the Galaxy. If not, it knows not to waste money on other games. While Disney has already included Marvel in its Infinity games, according to Marvel Games producer Mike Jones, "[console game] projects are in the works."
Battlefront, even if it exceeds expectations, is not a needle-mover for Disney. Nevertheless, it reflects the information feedback that Disney has. This information is priceless. It is a competitive advantage that, along with Disney's IP and great management, should help the company provide sizable returns for its shareholders for decades to come.
Don't be scared off by Disney's $180 billion-plus market cap or its image as a stodgy consumer-goods company. This is one of the very best companies on the market today, a relatively safe place for your investing dollars, and one that I think can outperform the market. If you haven't yet, I would recommend looking at Disney shares for your portfolio.