The Final Infinity Stone

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TLDR;

1. Disney has struggled in the gaming sector, leading to a shift towards licensing rather than in-house development.

2. Disney partnered with Epic Games, investing $1.5 billion to create a new entertainment universe, leveraging Epic's tech and Disney's IP.

3. The partnership recognizes gaming platforms as modern social networks and entertainment hubs, essential for engaging younger audiences.

4. This collaboration aims to keep Disney IPs relevant between major releases, offering a platform for fan engagement and content testing.

5. Despite short-term benefits, the essay questions the long-term value for Disney and suggests dependency on an external platform could be a strategic disadvantage.

Disney is great at crafting stories and characters that people grow affection for. The company is also great at giving those stories global distribution, aggregating massive amounts of attention, and monetizing it all. 

But there is one sector of entertainment that's become the Achilles' heel. A limp.

The limp is becoming more pronounced as consumer behavior changes. Gaming.

Through the years, Disney tried various approaches to tap into gaming, in-house and externally, with variable success. It never managed to plant a solid beachhead. 2016 marked a final directional change as the company shuttered its self-publishing arm, Disney Interactive, and switched to licensing to third-party game developers.

Meanwhile, the gaming economy grew bigger than music and movies combined. Naturally, the biggest entertainment brand in the world needs a sustainable strategy for gaming.

Like Thanos searching for the Infinity Stones in Avengers, Bob Iger (Disney CEO) recently announced that he (hopefully?) found his.

Did he?

The Next Step

On February 7th, Disney put out a press release:

Like its streaming service, Disney+, the first big question to answer is: "Buy or build?" In that case, the company chose to build. In this case, they found something in between.

Disney briefly built a "Metaverse Department" a few years ago, then shuttered it again. It may signal that the company looked closely into building a platform for themselves.

Considering Disney's previous failed attempts at creating games in-house, it's understandable that they decided to find an external partner. Considering their earlier collaborations with Epic in Fortnite (skins and events for Marvel, etc.), they naturally continue this partnership.

Also, Disney already uses Unreal Engine (Epic Games' 3D engine) across the company, from theme parks to virtual production sets. In theory, this creates exciting cross-over opportunities.

Why Gaming is Important

The Disney/Epic partnership is not just about Disney getting into gaming. Open-world gaming like Fortnite and Roblox represents a meaningful generational consumer shift online. Time and money are increasingly spent online and in digital 3D spaces. The lines between gaming and hanging out online are blurring. Viewing these destinations as "gaming platforms" for "gamers" is a mistake. A better model is to consider them as new social networks and entertainment hubs.

Standing on the sidelines of this shift could become incredibly costly for a company like Disney. Revenue, marketing, and cultural significance: When the locus of attention shifts, all the other parts follow. Attention fuels the entire IP ecosystem of Disney. The younger consumer segments are essential for the company and are the segment that moves the fastest.

Disney has to keep up to keep its IP flywheel relevant. 

Flywheel Integration

I'm sure you've seen the Disney flywheel that illustrates how the company's various parts drive value to and capture it from other parts. It's intricate and fascinating.

Attention ebbs and flows. The primary attention (and revenue) magnets for Disney's new content in the form of movies and series. This flow is naturally staggered – years go between each Frozen movie, there are only a few Marvel movies per year, etc. It's due to the time it takes to produce, but also because they would over-saturate fans if they could go to the movie theatre for a new Marvel flick every week. Movies and series are the "big rocks" to attract attention and evolve the story worlds.

Disney can fill a meaningful gap with an immersive platform infused with the same characters and worlds fans love. They keep their IP fresh and top of mind for fans between the big rocks and through a less attention-intense format.

Think of it as a way to capture overflow attention. 

We can also imagine how the company can utilize this online destination to test new ideas and host virtual red-carpet events and similar activations.

A Second Fiddle?

Let me play devil's advocate for a little bit.

I'm curious to understand how this partnership is structured. The press release is intentionally vague:

"The Walt Disney Company and Epic Games will collaborate on an all-new games and entertainment universe(…)"

This "Disney metaverse" will be built using Epic technology and infrastructure, with Disney IP injected into it. But which company owns it? Does Tim Sweeney (Epic founder and majority shareholder) or Bob Iger ultimately control it?

The $1.5B Disney is investing in Epic might seem like a lot, but for reference, Disney bought Pixar in 2006 for $7.6B (≈$11.6B inflation-adjusted). The latest known valuation of Epic (from a 2023 investment round) was almost ≈$30B. Even if we consider a valuation haircut of 25%, it would put Disney at a 7% ownership stake. Hardly enough to be in control of anything, and far from a "this is our future" kind of bet.

It's interesting to compare this to Disney's streaming strategy. After years of licensing content to other platforms, the company recognized that streaming was becoming a primary distribution channel. It pulled its content from Netflix and built its own service, Disney+.

Primary motivation: direct consumer relationships and data.

Disney is already a little late to the "online 3D worlds are the new super destinations" party. As a public company, announcing to investors plans to sink billions into building an in-house "metaverse" to be released next decade would probably be a mouthful. Especially considering the company is still trying to make the in-house streaming project sustainable.

The partnership with Epic is a good move, considering the above. It requires limited capital and will yield tangible results fast. But it's good in the short term, and I'm more skeptical of the long-term value for Disney.

Contrary to streaming, where the thinking was, "This is core; we have to own it," this move signals that Disney cares about "gaming," but it's secondary.

As the world continues to move toward "digital first, higher fidelity," dependency on an outsourced "metaverse" may be a real disadvantage for Disney.

For Epic, this is a massive win across the board. They get higher leverage on existing infrastructure and can infuse their platform with the biggest IPs of the world to attract users and capture value from it all.

The Only Out

There are two outcomes for Disney:

1. It fails, leading the company into another wandering through the desert to figure out gaming

2. It succeeds.

I think the second option is more likely, and it leaves Disney in the awkward position of realizing too late that its second fiddle is actually a "first chair". Disney will then want to acquire Epic. The problem is that Epic's value has grown significantly, inflated by the success of injecting Disney IP into its ecosystem.

The short-term move for Disney potentially forces a second-order move that becomes much more expensive than it needs to be. And even if Disney would want to buy Epic in the future, there's no guarantee that Tim Sweeney would want to sell.

So, maybe this is Tim's infinity stone, not Bob's?