Days after Disney Interactive Studios launched "Spectrobes" for the Nintendo DS hand-held game system this spring, it discovered that fans had posted hacks to the video game on the Web. But instead of calling their colleagues in the legal department, the Disney executives were thrilled.
"Nobody goes to that amount of trouble to decode something unless they really liked it," said Graham Hopper, a Walt Disney Co. executive vice president and general manager of its game studio in Glendale.
"Spectrobes" awoke Disney to the possibility that it could become a bigger force in the rapidly growing game industry, which reached $12.5 billion in U.S. revenue last year. Disney is investing $130 million in games this year and plans to nearly triple that spending in the next five to seven years.
The company is outlining its new game strategy today in Santa Monica at the E3 Media & Business Summit, the industry's annual get-together.
This year's affair is much smaller and more sedate than those of years past, but dozens of video game companies including Nintendo Co., Sony Corp. and Electronic Arts Inc. showed off their latest products Wednesday.
Nintendo, whose Wii console features a wireless controller that players swing through the air to affect on-screen action, unveiled another product to get gamers off the couch: The Wii Balance Board, a new controller that resembles a step-aerobics platform. Players standing on the device can lean from side to side to block virtual soccer balls or swivel their hips to spin Hula-Hoops in a game called "Wii Fit."
"It was the most innovative game I've seen at E3 so far," said Billy Pidgeon, an analyst with IDC.
Sony followed up Monday's announcement that it would shave $100 off the price of its PlayStation 3 console by showcasing edgy games that would be available only on the PS3, including "Gran Turismo 5" and "Metal Gear Solid 4: Guns of the Patriots." Sony also introduced a slimmer, lighter version of its PlayStation Portable hand-held console.
EA, which has built its business on game franchises such as "Medal of Honor" that appeal to hard-core players, struck a different note this year by highlighting its casual games, which the industry views as bargain-bin games because they're usually sold for little money or given away free.
But EA, like Disney, sees opportunity in casual and kids' games.
"We want to be the clear leader in casual games," said Kathy Vrabeck, president of EA's casual entertainment business. "It will be the fastest-growing area of the company."
Disney's renewed focus on video games will be on display today, when the company plans to announce an online community called D-Gamer.
The service, which is slated to launch next spring alongside the company's release of the "Chronicles of Narnia: Prince Caspian" movie and games next year, will let kids build their own characters and socialize around Disney's games.
Since launching in 1994, Disney Interactive has been content to quietly grow revenue by licensing its brands to other game publishers while developing a handful of its own kid-friendly titles.
Now, under Chief Executive Robert Iger, the company has identified games as a key strategic business that's poised for double-digit growth for years to come.
"The company is confident about the future of the video games business," Hopper said. "It's an area where we can see new intellectual property being birthed that can translate to other areas of the company."
Disney has sold 800,000 copies of "Spectrobes," making it one of the best-selling titles for the Nintendo DS. In it, players hunt for fossilized space creatures and revive them by yelling, "Wake up!" into the console's built-in microphone.
Disney is devoting a fifth of the increased spending to creating new franchises like "Spectrobes" that could eventually become their own television shows or theme park attractions.
Currently, 40% of Disney Interactive's annual revenue of $500 million comes from games it publishes, while the rest comes from licensing its brands to other game companies. Hopper said Disney wanted to grow the share of revenue derived from internally developed titles.
To do that, it plans to pursue talented game makers and acquire development studios.
It already has 700 developers in four studios in Glendale; Salt Lake City; Brighton, England; and Vancouver, Canada.
Disney needs that talent to ramp up its game and shrug off the reputation that kids' titles are too lightweight.
"Kids today are sophisticated gamers," Hopper said. "It's our job to provide safe content, but with the sophistication they expect."
Disney isn't likely to overtake industry leaders EA, which had $3.1 billion in sales last year, or Activision Inc., which had revenue of $1.5 billion in the last fiscal year. EA is based in Redwood City, Calif. Activision is based in Santa Monica.
But the company is leading with its strengths by focusing on family-oriented games for the wildly popular Nintendo DS hand-held and Wii consoles, IDC analyst Pidgeon said.
"They have the content and they're focusing on the right platforms," he said.
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Top 10 titles
Most popular video games in U.S. this year, through May
1. Pokemon Diamond Version, Nintendo
2. Play with Remote, Nintendo
3. God of War II, Sony
4. Pokemon Pearl Version, Nintendo
5. Guitar Hero 2 with Guitar, Red Octane
6. Guitar Hero 2 with Guitar, for the Xbox, Red Octane
7. Crackdown, Microsoft
8. Diddy Kong Racing, Nintendo
9. Legend of Zelda: Twilight Princess, Nintendo
10. Lost Planet: Extreme Condition, Capcom USA
Source: NPD Group