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GAMES—Disney’s Interactive Game Unit Is Small but Profitable

Despite The Walt Disney Co.’s declining revenues in most divisions and an economic slowdown antagonized by terrorist attacks, analysts say its video-game software maker, Buena Vista Game Entertainment Studio, could see sharply higher sales this Christmas and continued growth in 2002 and 2003. “Even with what’s happening in Afghanistan, people are going out and buying these games,” said Sharon Williams, an analyst with A.G. Edwards Inc., who cautiously predicted sales of new video games could match last year’s holiday season record of roughly $6 billion industry-wide. Already, Disney is trotting out “Disney’s Extremely Goofy Skateboarding,” a CD-ROM for children, one of a slew of new titles that will be issued in time for the holiday rush. Jan Smith, the unit’s new president, said Disney plans to build on its brand and expand into Web-based games that allow players to compete against each other on wireless phones or hand-held devices. Buena Vista Game Entertainment Studio had been part of Disney’s under-performing Consumer Products Division. But last month it was spun off into its own division headed by a separate management team with plans to expand its gaming products for PCs, television, wireless telephones, digital set top boxes and hand-held wireless devices. The spin-off seems to be an attempt to separate what is a very promising business from a division that has experienced a sharp drop in sales at its 478 Disney Stores 128 of which are scheduled to close over the next three years. The unit makes games based on Disney characters, like Winnie the Pooh and Mickey Mouse, and educational programs for children, many of which are being readied for release this holiday season. “Christmas is a traditionally good time for game makers and we could see some huge numbers, not only for Disney, but the other game makers,” said Shawn Milne, an analyst with securities underwriter SoundView Technology Group Inc., who predicts the unit could triple sales by 2003. Disney’s interactive unit had been the brightest spot for Consumer Products by posting $23 million in growth last year at a time when the division reported a 6-percent revenue decline of $166 million. The unit had net income of $455 million on $2.6 billion in total revenue in 2000. Although Disney won’t say how much revenue its interactive unit generated last year since it was lumped with the rest of the Consumer Products Division, analysts estimate it grossed around $100 million a drop in the bucket compared to the $25.4 billion in revenue Disney collected last year. The $750 million bath Disney took this year with its now-defunct Go.com Web portal gave the company reason to reassess its online strategy and its video game business, Milne said. “If you include software and hardware, it’s a $20 billion-a-year industry and by 2005 it’ll be $35 billion, so it’s an important area that they’re getting into,” he said. Early sales of video games for Disney and others give some analysts reason for optimism during the holiday period. Perhaps as a preview of the holiday rush for new video games, Toysrus.com officials said last week that its pre-order allotment of Nintendo Co.’s GameCube video consoles sold out in four minutes. Last month, Microsoft Corp.’s Xbox consoles were also sold out within minutes by the on-line retailer, a subsidiary of Toys R Us Inc. While some game makers have toned down some of their more violent games as a result of the public’s heightened sensibilities over the Sept. 11 attacks, spokespeople for Disney and Calabasas-based THQ Inc. said none of their games were affected because they don’t sell violence-related themes. Milne said video game sales now are being fueled by people who have canceled travel plans and are looking for diversions closer to home like video games. “It’s a case of what’s hurting the airline industry is helping game makers, and that could go on into Christmas,” he said. Although U.S. military retaliation for the Sept. 11 terrorist attacks in New York and Washington, D.C. could adversely impact the economy, analysts said video game makers would see a boost in sales this holiday season. “So far, sales in the sector have rebounded significantly since the attacks, but we’re not in the critical part of the season just yet,” he said. While Milne would not predict how much of a boost Disney’s interactive unit would get during the holidays, it’s clear that the holiday season is the most lucrative period for video game makers by far. Top video game software maker, San Francisco-based Electronic Arts Inc., grossed $640 million during the quarter ending Dec. 30, 2000, or nearly half of its $1.3 billion in total sales last year. THQ grossed $190.9 million during that same quarter, or more than half of its $347 million in total revenue in 2000.

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