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Disney / Playdom another hedge play?

|Includes: The Walt Disney Company (DIS), EA, GOOG

Disney's recent move to buy Playdom for a $500 million valuation (roughly 10x LTM revenue) is the latest sign that social networking games represent the future of the US casual interactive entertainment market.

Not long ago, one question was whether the US would follow the Korean market, which made use of that country's government-provided national broadband backbone by creating massive multi-player online role playing games played via desktop PCs.  The prognosticators were thinking purely in terms of bandwidth:  surely, console games are in danger as the US' broadband adoption increases in size.  Why wouldn't consumers move towards online PC games?

Facebook has made all these questions moot.  Certainly, the console market in the US remains strong, especially for hardcore gamers.  Maybe it is this market that is in danger of being eroded by MMORPGs, a la Korea.  But the huge pent-up demand by casual gamers has been released by the social networking platform Facebook, and now everyone is scrambling to get a piece of the action.

This is not to say that Disney didn't "overpay", as we say in average investor's terms.  Large media conglomerates are incentivized to acquire emerging technology platforms, sometimes merely as a hedging instrument.  Isn't that what Hulu essentially is?  Thus your purchase price may not be related to your standard accretion/dilution model.  Chalk it up to that old catch-all line item, Goodwill.  The question isn't, how accretive is an acquisition of Playdom?  It's more, how damaging will Playdom be to our existing business if we don't own it?

Another example was in the late 90s when the five largest studios banded together to form Movielink, a VOD company.  There was tons of capital invested in the project, the company officially launched in 2002, went nowhere, then was sold at a firesale to Blockbuster in 2007. 

Disney itself bought Infoseek to create the Go Network back in the 1990s.  That also went nowhere.  But Disney still remains the formidable corporation that it always was.  When you have deep pockets, buying an emerging technology platform at a huge multiple, whether it is ultimately justified or not, makes good business sense.




Disclosure: No positions