The mobile industry is seeing a big boom with millions of smartphones and tablets based on Apple’s (NASDAQ:AAPL) iOS and Google’s (NASDAQ:GOOG) Android operating systems sold worldwide each year. Along with that are the budding ecosystems of apps dominated by games. Interestingly, three of Disney’s (NYSE:DIS) games have topped the chart for paid Apple apps recently.  But does this booming mobile gaming market guarantee a significant value add for Disney? We believe that this is more of a consumer engagement and cross-marketing play rather than a revenue growth strategy for Disney.
A typical gaming app sells for $0.99 per download on Apple’s app store. Even if we assume that Disney’s games are downloaded about 50 million times a year, which is quite optimistic, Disney would earn close to $35 million in annual revenues, after accounting for Apple’s cut. Given that its consumer products and video gaming businesses together earn more than $4 billion annually, the incremental benefit is limited on a relative basis. In fact, the profits from the gaming division are negative, implying that Disney is actually losing money in this business. Then, why push for it?
We believe that given the huge distribution channel that has opened up due to the popularity of iOS and Android devices, Disney is pushing its games to better engage its consumers. This provides cross marketing opportunities for Disney’s other businesses and keeps the brand image stable in consumers’ minds. For example, Disney could easily promote its movies, consumer products and theme parks via games.
Our price estimate for Disney stands at $51.50, implying a premium of little less than 10% to the market price.Notes: