Disney Struggles to Make Its Free Gaming Apps Pay

November 17, 2013

Disney Struggles to Make Its Free Gaming Apps Pay

By BROOKS BARNES

LOS ANGELES — Two months ago, Disney released a sequel to Where’s My Water?, a hit smartphone game about a showering alligator. Hopes were high: Disney had pointed to the original game as evidence of overdue traction in mobile gaming. It flopped. For the Walt Disney Company — where theme parks, TV, merchandise and films deliver more than $6 billion in annual profit — the failure of one smartphone game, even an important one, has no financial consequence. But mobile games are a major growth opportunity, and analysts say Where’s My Water? 2 underscores the degree to which Disney is encountering new challenges in a shifting marketplace.In particular, mobile game publishers are rapidly moving from apps that cost 99 cents per download to free apps that make money by selling virtual goods and upgrades. This “freemium,” Zynga-style model can be much more profitable. Of the 100 highest-grossing iPhone games in September, analysts note, 94 percent were free with in-game purchases — titles like Candy Crush Saga from King, based in London.

Disney has found some new hits of this kind, including Star Wars: Tiny Death Star, a game that recently hit No. 1 on the Apple app store charts. (Players help the Empire complete its Alderaan-destroyer.)

But switching to the free model has by and large been difficult for Disney, analysts say, with Exhibit A the crucial Where’s My Water? franchise, which started as a paid download and became a free app with in-game purchases for the sequel. (After completing multiple free levels, players must either take a forced short rest or pay 99 cents to $16.99 for added play.)

The sequel was released on Sept. 12 and, despite lackluster reviews, became Apple’s No. 1 download that weekend. But the game languished at No. 180 on the iPhone top-grossing chart and No. 193 on iPad, according to App Annie, a mobile analytics firm. People were playing, but not paying.

“Free-to-play requires a different set of design muscles and all companies are struggling to adapt, Disney included,” said Joe Minton, co-chief executive of Digital Development Management, a video game talent agency.

Disney must step carefully because of its focus on young players. Consumer protection groups are concerned that children are being asked to buy things during the heat of game play; Apple recently settled a class-action lawsuit over in-app spending by children. A few child advocates question whether freemium games are appropriate at all for family entertainment companies, calling it a casino-style business in which most revenue comes from a relatively small number of big spenders.

If Disney can steer through this terrain, substantial profits await. Revenue from mobile app stores is expected to total $26 billion this year and grow to $77 billion by 2017, according to Gartner, a technology research firm. Adding to the lure, a quality mobile game can be made for as little as $500,000, analysts say, although marketing costs are climbing.

The company is clearly making headway in its overall games business — no small feat considering that gaming troubles have contributed to more than $1 billion in Disney Interactive losses in recent years. The company is now the No. 3 publisher of mobile games for Apple devices by downloads, behind Electronic Arts and Gameloft. Disney says it has 90 million monthly users of its gaming apps, providing a vital network of players to which it can market new offerings.

The Playdom social games division of Disney, which started out focused on Facebook but has shifted toward the mobile market, has had a difficult time finding hits. But Disney Infinity, an ambitious console-centered gaming and merchandising effort that blends video games and toys, has sold more than one million starter packs since its August release. Indeed, strong Infinity sales helped Disney Interactive narrow its loss for the last fiscal year to $87 million from $216 million, according to financial filings.

But every time Disney gains momentum in this business, it seems to blow a tire, analysts say. The company’s games chief, John Pleasants, and one of his senior lieutenants, John Spinale, resigned last week after Disney decided that its video game goals would be better served by a different management team. The president of Disney Interactive, James A. Pitaro, will now oversee gaming.

“Disney hasn’t been landing in quite the right spot, which is to put out mobile games — the more original the better — that are both popular and profitable,” said Mike Schramm, an analyst at Eedar, a video game research company. Other recent Disney releases that have fallen flat have included Stack Rabbit, a puzzle game about a hungry bunny, said Jon Jordan, editor at large at Pocket Gamer, an app news and review site.

“I’m confident that Disney will overcome the challenges, but the pressure is definitely on,” Mr. Jordan said.

In a statement, Mr. Pitaro lauded Disney’s “incredible progress with our mobile business,” adding that he was optimistic about games in development. One coming release is Marvel Run Jump Smash, focused on “Avengers” characters.

But Mr. Pitaro also noted Disney Mobile’s weakness, saying, “The next step is to translate our audience success into financial success.” Translation: People play Disney’s games — seven have hit No. 1 over the last year, as measured by downloads — but not enough of them are paying.

The profitability of the Where’s My Water? franchise is unknown. Disney, which released 22 gaming apps last year, does not provide financial information on specific titles. But the game series has been far and away Disney’s most important mobile franchise, generating roughly 240 million total downloads and spawning a line of merchandise. The company has mentioned the success of the first game on three earnings conference calls.

Christa Quarles, Disney Mobile’s general manager, said that the change in the Where’s My Water? franchise proved harder than expected.

“We struggled,” she said. “There are not a lot of examples of successful transitions from paid to free-to-play.”

She emphasized, however, that the company was not entirely unhappy with the game’s performance. “The number of downloads gave us solid confirmation that this is still a strong franchise,” she said, saying that Disney has made adjustments to Where’s My Water? 2 since its introduction.

“Now all the hard work happens after a game launches,” she said. “At that point you are analyzing terabytes of data — what works, what doesn’t, how can we improve the experience.”