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  • William Prevor

Was discontinuing Disney Infinity a mistake?

Over this past summer Disney made the shocking announcement that it was cancelling the Disney Infinity game series. This came as a surprise to almost everyone and appeared to be just as much of a surprise to the people working on the game.

Now the question that was immediately posed by almost everyone was why this happened? In Disney's first quarter earnings statement of 2016 when concerning Consumer Products and Interactive Media Disney stated:

"The increases at Merchandise Licensing and Publishing were due to higher licensing revenues from the performance of Star Wars merchandise and the timing of minimum guarantee shortfall recognition at Merchandise Licensing. At Games, growth was due to higher licensing revenue from the success of Star Wars: Battlefront, partially offset by lower Disney Infinity results. The decrease from Disney Infinity was due to higher inventory reserves and lower unit sales volume. The decrease at Retail was due to lower comparable store sales and margins in Europe and North America as well as at our online business in North America, reflecting strong sales of merchandise based on Frozen in the prior-year quarter, partially offset by current quarter sales of Star Wars merchandise."

This did not look good for Disney Infinity but the company still had faith and behind the scenes was trying to deal with the issue. However all of that changed on May 10th, 2016 when Disney released its 2nd quarter earnings which stated:

"Consumer Products & Interactive Media revenues for the quarter decreased 2% to $1.2 billion and segment operating income decreased 8% to $357 million. Lower operating income was primarily due to the impact of foreign currency translation due to the strengthening of the U.S. dollar against major currencies, lower operating margins and comparable store sales at our retail business and lower results for Infinity. These decreases were partially offset by higher licensing revenues."

Now with two quarter earnings reports saying that Disney Infinity was declining in profitability the Disney higher ups looked at it and on that very same day announced the decision to discontinue Disney Infinity. So the specific reasons Disney Infinity was cancelled was because of declining sales and profits, which brought into question the future viability of “Toys to Life” as a category -- combined with the risk Disney was assuming due to the substantial inventory being held of Disney Infinity Starter Packs and Figures.

I am sure Disney executives tried to find a way to save the game but nothing worked out and the realities of declining sales and profits and risks and costs inherent in maintaining inventory ultimately led to this decision. Looked at quarter to quarter, doubtless it was the decision that made the most sense.

Now the question I pose is was this a mistake? Disney Infinity, I believe, was valuable to Disney in many ways -- some not related to the profits and loss that would show up on the Disney infinity ledger. I think it was valuable to the company to have children playing with Disney characters frequently and keeping the company and its characters in the forefront of their collective minds. The intense familiarity with Disney characters that Disney infinity engendered made these children more likely to want to visit a park, go on a cruise, buy more Disney merchandise, and go see Disney movies.

Disney also made smart marketing decisions with Disney Infinity as it often released figures from new movies prior to the movies release which meant that children, even if they did not purchase the figure, would see it in the store and in advertising – this visibility meant children would want to see the movie to see if they wanted to buy the figure or just because they were more familiar with the character than they would have been had Disney Infinity not existed.

This game very much worked as a marketing tool for the Disney Company helping it advertise new movies and remind consumers of older releases that they could stream or buy merchandise related to the movie. I would say that canceling Disney infinity was a huge mistake that Disney should not have made. They have lost a huge marketing asset that is unparalleled in its reach and intensity.

The issue raised here is two-fold:

First, what are the incentives for Disney executives to do things that, long-term, will benefit the company but, in the short term, will cost the company. Suppose that we knew for a fact that Disney Infinity would lose money for each of the next twenty years, but suppose we also knew that after twenty years the intense loyalty that interacting with Disney Infinity characters would engender, would lead to sales and profits that made those losses well worthwhile. If we knew these things for a fact – would the Disney executive team be willing to sustain the losses? In many cases individual compensation is tied to profits and stock price right now. What incentive does a Disney executive retiring in five years have to make investments that won’t pay off for twenty years?

Second, in a multi-product line company such as Disney, how does the executive team measure value creation and properly allocate costs. Maybe Disney Infinity was always profitable, and would continue to be profitable, but the profitability was showing up not on the line item called “Disney infinity” but on the sales and profits realized in movies, music, theme parks and merchandising as the intense engagement with Disney Infinity and the characters in the game, led to higher movie, merchandise, music and other sales.

Disney Infinity is gone now and the company will have to go on with the ramifications of that decision. On a personal level, I would like to thank all the creators of the game but most especially John Blackburn who I had the pleasure of meeting and who gave me a very magical experience that I cannot thank him enough for.

I think the loss of Disney infinity is substantial and can only hope that it will lead Disney executives to reassess how they think about profit and loss in a multi-channel company. Exploring this issue is at the core of what is all about. So thank you for reading.

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