Disney’s History in Gaming: Tim Sweeney’s Epic Games is Finally Showing The Way
Disney’s History in Gaming: Tim Sweeney’s Epic Games is Finally Showing The Way
Bits of Signum | 02.23.24
It has been widely reported that Disney invested $1.5 billion into Epic Games. As long-time observers and admirers of Epic, this is incredibly exciting. Content is King and Disney is the King of Content. CEO Bob Iger is already a beloved figurehead of Disney, and we believe that this move will be viewed as the prescient move in the entertainment history books. In many ways, this is not surprising as Epic has been showing Disney The Way for years. Among other ties, Epic participated in Disney’s accelerator in 2017, and Disney used Epic’s Unreal Engine in the production of the first season of “The Mandalorian” in 2018. Most importantly, the original vision of the metaverse that caught our interest (Tim’s vision) is perfect for Disney - imagine Fortnite as the enabler of multiple experiences, including all of Disney’s “theme park rides” - new economies bubbling up in new online spaces.
Even though we believe a Disney + Epic partnership is much larger and more valuable, it could be somewhat analogous to Disney’s Electronic Arts 10-year exclusive agreement on Star Wars in 2013. While Disney maintained the right to license Star Wars IP to lower budget, casual game studios, EA had the exclusive right on the AAA Star Wars game. We believe that Disney and Epic will be tied at the hip in building out Disney’s main 3D internet hub, while individual creators on Epic’s newer User Generated Content platform, UEFN, might work with Disney to license IP, in partnership with Epic, in making indie games - a win, win, win.
Epic Games’ history can be boiled down into much simpler words than Disney’s - a visionary leader started Epic Games in his garage in 1991, at the age of 21. Founder / CEO Tim Sweeney and his team, many of whom have stuck with the company for decades, have continued to execute on the strategy of creating a flywheel of production, technology and distribution that has the potential of disrupting the entire entertainment industry.
Production: Our thesis is that Fortnite will simply be one game on the larger playground, which includes the UEFN platform for creators. This first-of-its-kind Free to Play Fortnite has garnered engagement, the key metric used to value content, across a base of more than ~500 million accounts, depending on the public source, and at least ~70 million MAUs disclosed at the ‘State of Unreal’ in March 2023, before the explosion in engagement in Q423. (Will you be at GDC this year on 3.19? Please let us know!)
Technology: Epic’s game engine, Unreal Engine, which offers cutting-edge cinematic quality, is the horizontal superpower across the gaming industry, arming indie to AAA developers.
Distribution: Last week, Epic Games Store reported key metrics for 2023. MAU. were reported at 75 million in Dec 2023, +10% YoY from 68 million and players spent $950M in the store, up 16% yoy. The Epic Games Store total users was up by 40m to 270 million in 2023.
Epic embraces many of our key values -
Developers and creators are moving to the front of the line. Epic’s Tim Sweeney even takes on behemoths like Apple to empower game developers against skimming intermediaries.
Studio-level production tools are in the hands of 15 year olds. We used to say that millions of dollars continue to be thrown through TV sets into empty living rooms. It is now outdated to say ‘the audience has left the living room.’ This cohort didn’t even start in the living room - ask us about Epic’s UEFN as a response to this.
Social Media is inside games, where individual developers and creators will plough new value pathways in entertainment with UGC (User Generated Content) as their starting block. Again, see Epic’s UEFN and Roblox, which garner 3x the engagement of TikTok, and many multiples the engagement of Instagram. Facebook is effectively at zero engagement. Kudos to Bob Iger for listening to his team. Disney now has a shot of growing up from the inside, alongside their most important fans.
In Generative AI, we are at an incredibly exciting, Time 0, anything-goes moment of experimentation. Eventually, those who figure out how to respect IP rights, and bake it into the technology, will win. While AI models around the world freely rip off Mickey Mouse, Disney’s move to Epic not only gets them in the room, it creates a space for some win-win licensing deals - a carrot to creators, versus a stick to shut them down.
Entertainment and gaming will finally merge. Almost boring to note, video games have been generating more revenues than movies, TV and music combined for years. The audience has moved to games, also years ago. Handing studio-level production tools to people who view these spaces more like social media than gaming will result in the creation of valuable entertainment content, born in games, and ready to travel to other platforms.
Disney is not new to gaming
Disney’s history in games started in the 1970s, when Tim Sweeney was a child, and it deserves a good detangling. It is a story of politics and corporate dysfunction, and it is a good lesson in the power of individual leadership.
Warning on GPT Powered Apps - Disney did not create Pac Man
I have known bits and pieces of Disney Gaming over the years, even helping to orchestrate introductions of Disney’s gaming division to public market investors in the mid 2000s before they (again) reorganized it. So when I read AI Chat’s Chat GPT4’s explanation of the history of Disney in video games, however articulate, I knew it was wrong, which is scary. Here is the response with my comments in parentheses:
“Disney's foray into the video game industry can be traced back to the 1980s. (It was the 70’s but ok, this is close.) One of Disney's first video game ventures was through their partnership with Atari (correct), which led to the release of several games based on popular Disney franchises like "Tron" (true) and "Pac-Man" (huh??) in the early 1980s.” For the record, Pac Mac was not a Disney franchise. It was created by Toru Iwatani and developed and released by Namco, along with Midway Manufacturing.
This is a pretty big mistake given it is the highest revenue grossing arcade game in history, among other accolades. Disney isn’t really associated with the release of the iconic, dot-chomping, ghost-fearing yellow guy. It did have a successful foray in 2012 (more than 30 years later) when Disney XD became the US broadcaster for the series Pac Man and the Ghostly Adventures, from 2013-2016. It is also true that Disney had a partnership with Atari in the late 1970s, which churned out many never released games, including a Donald Duck speedboat game pictured above, along with a few that did reach the market.
Disney’s Long History in Games
All in, for more than four decades, Disney’s gaming history has flip flopped multiple times between game developer and licensor of IP. A condensed history of Disney in gaming -
According to the Disney Classics blog, the first Disney electronic game ever was a 1981 collaboration with Nintendo: Mickey Mouse on the gaming leader’s Wide-Screen Game & Watch.
In 1984, Disney partnered with Sierra On-Line on many games, including another feature of Donald Duck, in which Donald earned enough money to build a playground.
In 1988, Disney started its first official video game developer division, Walt Disney Computer Software, Inc (“WDCS”), a subsidiary of Walt Disney Consumer Products. The best description of the history that I have seen is here, painting a picture of a division mired in politics as soon as it showed any success. All in, the overall organization struggled to understand the value of gaming and the role that Disney would play in it.
The Jeffrey Katzenberg Decade
Jeffrey Katzenberg deserves more than a brief comment. Disney’s renowned Studio Head, who ultimately left Disney in 1994 to serve as Co-Founder & CEO of DreamWorks Animation, is credited for a complete turnaround of Disney’s feature animation unit. This is a fascinating time in the history of gaming generally. In thinking more about the history of gaming, one might argue that Disney, specifically Katzenberg, was responsible for the earliest successful attempt at today’s trend toward transmedia, or the bridge between gaming and Hollywood.
In addition to creating the first feature-length computer-animated film, Toy Story alongside Pixar, Katzenberg led some of Disney’s highest revenue grossing animated features - including The Great Mouse Detective (1986), Who Framed Roger Rabbit (1988), Oliver & Company (1988), The Little Mermaid (1989), Beauty and the Beast (1991), Aladdin (1992), and The Lion King (1994). Aladdin was a special example for gaming because Disney also delivered an incredibly successful, vertically-integrated film and game in a three-way partnership, led by Disney and Katzenberg, along with Sega and Virgin Interactive. Aladdin, the game, sold 4 million copies in 1994.
Based on the success of film-integrated games, from 1994 - 2002, WDCS, the game developer, was merged with Walt Disney Television and Telecommunications, and a film studio style approach was born in Disney Interactive.
Back to the bullets
In 2003, Disney spun out Buena Vista Games as a dedicated Disney games publisher division.
In 2007, Disney Interactive Studios officially launched, representing a foot-on-the-accelerator moment for Disney gaming.
2003 - 2009: Several game development studios were either built or bought - Propaganda Games, Climax Racing, Fall Line Studios, Junction Point Studios, Gamestar, Wideload Games.
2012: Disney acquired LucasArts, licensing the AAA Star Wars game to EA, and keeping the casual game rights in-house.
Disney Interactive Studios has lost more than $200 million per year from 2008–2012[36] during a period in which it closed many of the above studio acquisitions.
In 2016, Disney shut down Disney Infinity and Disney Interactive, its game publishing and development division, and moved back to a licensing-only model, which it has continued since that time.
As Disney has demonstrated, perhaps better than any other large player, gaming is a really hard business to get right. Despite this long and winding road, in the end, they might have ended up with the pot of gold at the end of the rainbow in Epic Games. If Content is King, and Disney is the King of Content, then perhaps Disney always expected that they would either build or buy the Queen of Gaming. Perhaps Disney’s pain in not being successful over 40 years, made this pot of gold even more apparent when faced with it.
Next Up - What is going on at Sora?
As described by many, including data scientist and ML engineer Ralph Brooks on X.com, “The Sora ‘30 year old spaceman’ has lips and a moustache that screams Unreal metahuman.”
OpenAI’s Sora videos are incredibly impressive, perhaps analogous to a game demo or a movie trailer. In gaming at least, it is well understood that the trailer may come out years in advance of the game. Still, we recognize that it is an understatement to say that AI time moves more quickly than game development time.
In our view, OpenAI’s Sora appears to be training its models on real videos, and they likely also used videos that used Unreal Engine. Short of a regulatory crackdown, it is difficult to think about what might slow the OpenAI freight train.
The Sora announcement resonated deeply it seems. Perhaps it is because we have all been comforted until now with the idea that ‘AI might take over operational tasks that should be executed by machines anyway, but it won't take away creativity.’
Sora appears to have many other unintended consequences that could invite regulatory oversight. Thanks to Nathaniel Whittemore and the AI Breakdown for pulling these out for us to see the pattern of increasing fear that people feel -
Social Media: If we thought Cambridge Analytica had a negative impact on social media, Sora could completely destroy any ability to know what is true and what is false. Also, I feel an urge to rush to social media to take down any pictures that include my kids.
Geopolitics: Watch this video - “The oppressors could become the oppressed, and the oppressed could become the oppressors.” One word - scary.
The Sixth Amendment Right to a Fair Trial: Using Sora, could it be fairly easy to manufacture evidence and wrongly convict? Does this disrupt our ability to maintain the Sixth Amendment?
We will continue to dig into Sora in an attempt to understand its impact on gaming. Please let me know if you would like to contribute to this research exercise? We will be back with more detail!