Behind Disney's Digital Shopping Spree

Four years ago, Bob Iger, the chief executive officer of Walt Disney (DIS), tried to build a cell-phone business. Disney created a family-oriented mobile service that included a global positioning system so parents could track their kids. Too few consumers signed up, and the company killed the operation after 15 months. Disney Interactive, the division that ran the ill-fated cell service, is still unprofitable. It lost $55 million last quarter.

Iger retains his enthusiasm for digital business and has switched strategies to buying rather than building. He wants to acquire social games and other online services that come with established customers and talented creators—and can help sell Disney's famous brands. "You don't get the kind of growth we want by building from the inside," he says.

Since paying $350 million for the kids' social network Club Penguin three years ago, Disney has purchased Wideload Games, whose founder helped create Microsoft's (MSFT) hit Halo franchise. Early last month, the entertainment giant acquired Tapulous, a publisher of music-related games for Apple's (AAPL) iPhone. On July 27, Disney made its biggest video game bet yet, agreeing to pay $563 million for privately held Playdom, the Mountain View (Calif.) maker of Sorority Life and Mobsters, which are played on Facebook, MySpace, and mobile phones. If Playdom meets performance targets over time, its founders and investors may receive an additional $200 million.

Sales Venue

Playdom specializes in games that sell virtual goods. In Mobsters, players try to build crime syndicates by buying—with real money—digital machine guns and henchmen. In Sorority Life, players buy clothing and

accessories as they climb a social ladder. Some 42 million people regularly play Playdom's games each month, according to Disney. Analyst Michael Pachter of Wedbush Morgan Securities says the purchase of Playdom will give Disney a potentially fast-growing venue to sell every Disney character and media brand from Mickey Mouse to Spider-Man to ESPN.

For example, when Disney releases the Pixar movie Cars 2 next June, it could promote the film by using its soundtrack in a Tapulous-made music game for mobile phones and weaving Cars 2 characters into Playdom games on Facebook. Disney plans to launch a virtual world based on Cars this month. That would be in addition to more traditional product tie-ins—plush-toy merchandise, games for Nintendo's Wii console, coverage on ABC and the Disney Channel, and theme park rides.

"I don't think they're looking for Playdom's revenues as much as they're looking for Playdom's knowhow" in working social games into the Disney mix, Pachter says. Playdom CEO John Pleasants is moving to Disney, where he will continue to oversee social game development and become an executive vice-president. He'll be working with Iger's point man for digital strategy, Steve Wadsworth, who has run Disney's Internet unit since 1999 and assumed video game oversight in 2008.

Iger says the buy-don't-build approach is what drove some earlier acquisitions. His $8.1 billion purchase of Pixar in 2006, for example, buttressed Disney's flagging animation division; the $4.2 billion acquisition of Marvel Entertainment last year gave the company iconic comic-book characters that appeal to boys. (Disney had been known more for cartoon princesses than superheroes.) Club Penguin was the company's first acquisition of a virtual world. The site's founders are busy running online worlds with monthly subscription fees and sales of virtual goods; they built the Cars site that will launch this month and are overseeing older ones like Pirates of the Caribbean Online.

Board Talent

Iger has some Internet talent on his board to lean on as he makes digital deals. Apple CEO Steve Jobs joined as a result of the Pixar acquisition and is Disney's largest shareholder. Disney was the first to sell TV shows and films on Apple's iTunes online media store. In March, Iger tapped Facebook Chief Operating Officer Sheryl Sandberg to become a director. Since then Disney has increased its presence on the social network and experimented with using it to sell tickets to the Pixar movie Toy Story 3.

It's been typical for big media companies to lose money online. News Corp.'s (NWS) digital media unit lost $150 million in the quarter ended in March. CBS (CBS) stopped breaking out results for interactive after that unit lost $41.3 million during the first nine months of 2009.

Could Disney's acquisitions put it on track to make some money online? "It's the right strategy for Disney to buy," says Gina Bianchini, a venture capitalist who co-founded the social network with Marc Andreessen. "And they are looking at some very savvy acquisitions."

The bottom line: Disney's Iger attempts to buy his way to digital success with the purchase of game maker Playdom.

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