The DeanBeat: Just how far is Disney retreating in the game business?

If you only read the headlines this week, you might conclude that Disney’s decision to shut its Infinity toy-game business means that it’s exiting the console game business. Or that toys-to-life genre of physical toys and digital games is dead. Or that Disney will only use external studios to make its games now. You might very well conclude that Mickey Mouse has given up on gaming altogether.

But none of those things are true. Disney shut down the 250-person Avalanche studio in Salt Lake City and laid off another 50 people supporting it. It will roll out two more Infinity playsets, and then it will be done with toys-to-life. But that still leaves Activision’s Skylanders, Nintendo’s Amiibo, and Warner Bros.’ Lego Dimensions as major players in the billion-dollar-plus category that only got its start in 2011.

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The end of Disney Infinity is, for sure, a sizable retreat for a company that is the finest example of “transmedia,” or entertainment properties that move across different media. But Disney’s presence in the game business has always wavered or crested in cycles. Now, while so many other companies are thriving, Disney is having a hard time again. It makes you wonder. We are supposed to be in the golden age of gaming. How can this be?

The contradiction is hard to believe. Disney has some of the most valuable franchises in the world. They dominate the box office, TV, toys, books, and comics. But in gaming, Disney is an also-ran. It’s hard to get a feel for the size of Disney in games, but market researcher Newzoo examined the top 25 public game companies in November. In 2014, Newzoo calculated that Disney was No. 15 on the top 25, unchanged from its position in 2011.

But it’s tough to operate a business with a lot of moving parts, and Disney had a lot of those. If something goes wrong, it can kill even the simplest business. This time, Disney cited high development costs and slowing growth in the toys-to-life market.

Activision has deservedly captured a lot of the profits in toys-to-life, largely because its Toys For Bob pioneered the category with Skylanders: Spyro’s Adventure in 2011. In the words of PayPal cofounder Peter Thiel, this was an innovation that took the market from “zero to one.” It was a vertical leap upward. Those who copy an idea take the market in a horizontal direction, or zero to N. That’s never a good competitive position, as rivals compete the profits down to zero. If you want to survive in a category, you can keep moving horizontally. But if you really want to thrive in a business, you have to invent a new business, Thiel believes.

John Vignocchi, one of the leaders of the Disney Infinity effort, wrote on his Facebook page this week, “When looked back upon, I hope @DisneyInfinity is remembered and celebrated for being the best darn video game we’ve ever made at Disney. I’d like to think that we contributed to the legacy of Disney in some way and created memories for you, your friends and family with our game.”

But sometimes that kind of glorious passion and effort isn’t enough.

Try as it might to do things a little different, Disney didn’t invent this toys-to-life category. It was simply filling out the market with other products, in a horizontal direction. It tried very hard to distinguish its toy-game hybrid with Disney’s brands, but in the end, consumers got tired of this kind of product a lot sooner than everybody thought. Market researcher NPD Group noted that, year-over-year, even Skylanders shrank revenues 47 percent in the U.S. The economics weren’t viable in the category, and it was probably smart for Disney to exit when it did.

The shift to licensing could give Disney an option it didn’t have before of working with a competitor. Michael Pachter of Wedbush Securities believes Disney could license a publisher like EA to make Infinity titles, so that the platform lives on for existing fans.

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“Based on Disney’s statements about moving more towards licensing model, I could see a scenario where Disney licenses their characters for Lego Dimensions,” said Liam Callahan, an analyst at market researcher NPD Group. “It would make sense for Warner Bros. as they would have an even broader set of characters to vary gameplay, and they already have many of the Star Wars characters designed as Lego mini-figures for previous Lego video games. For Disney, this would be a way to minimize risk, but still capitalize on their IP in the console space for a younger demographic outside of games like Star Wars: Battlefront.”

But that doesn’t really capture Disney’s growth in some other areas. Electronic Arts reported this week that it has shipped in more than 14 million copies of Star Wars Battlefront. Since the Mouse House owns Lucas, Disney gets the royalties from EA on the Star Wars games. At retail, that’s something like $840 million, and Disney gets a slice of that revenue. Disney also has a relationship with Square Enix in the Kingdom Hearts series of console games, and more of those are on the way. This is where Disney can still participate in games as a licensor.

Marvel also has a presence in gaming as a licensor. It licensed Marvel characters for use in the Lego Marvel Avengers console game. And it also has major partnerships with Gazillion (maker of the PC online game Marvel Heroes 2016, which is headed to Asia) and South Korea’s Netmarble, maker of the mobile game Marvel Future Fight. . And here’s a little news. Disney’s own in-house development studio just published Marvel Avengers Alliance 2 on mobile. And Kabam recently launched Marvel: Contest of Champions, a top-grossing mobile game in the West, in the Chinese market. And the game went to the top of the downloads list in China.

Peter Phillips, executive vice president at Marvel Entertainment, said at our GamesBeat Summit 2016 event (before the Infinity decision was announced) that Marvel can insert story material related to its latest films — like Captain America: Civil War — into its mobile and online games.

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“We’ll have things that give a nod to that film, whether it’s characters, costumes, or storylines, especially since it pits key characters from the roster of the Avengers against each other. You’ll see that in a lot of the games we have on the marketplace,” Phillips said.

A movie might last for a couple of hours and give you a short “touch point” with a Disney brand. But mobile offers the chance to touch the consumer for hundreds of hours, Phillips said. And if consumers stay engaged with a brand, they eventually spend money on that brand.

Disney also has a big mobile game business, with five internal game studios run by Chris Heatherly. Disney originally acquired the smartphone game business, and then it restructured a couple of years ago.

“We worked on fewer, higher-quality games. That strategy’s started to pay off,” Heatherly told me in an interview back in March. “We rebooted the business. Our rank has seen an impact. I’m not as worried about rank or market share as I am about the quality of the stuff we’re putting out there and whether we’re engaging fans and making stuff people want to pay for. One of the problems we had in the past with our strategy was trying to be big for the sake of being big. A studio like Pixar puts out one movie a year. We’re not going to make one a year, but that’s the discipline we want to have.”

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An now it has a number of hit titles such as Star Wars Commander, Disney Crossy Road, Star Wars: Galaxy of Heroes, Disney Tsum Tsum, Frozen Free Fall, Inside Out, and Club Penguin. Disney Mobile is using a mixed model of licensing in some cases and developing titles with internal studios in others. Mobile is worth an investment in part because we spend so much time with our mobile devices. Heatherly noted that Disney had 10 top-grossing mobile titles in the past year.

It is sad to see the talented team get laid off. But it’s a little too early to shed tears for Disney’s exit from video games. Disney is not in such a bad position after all. If companies like EA, Square Enix, Kabam, Netmarble, Gazillion, and even Disney Mobile itself continue to make hits, then Disney will have a very big game business. Disney is an underdog in games, but don’t count it out yet.