It doesn’t seem all that long ago that Greg and I were discussing how Disney Interactive Studios was on the cusp of joining some of the big boys in the video game publishing business. Fresh off E3, where the DIS booth was abuzz with activity and many quality-looking titles on display, and followed up with a family gaming press event in Toronto that reinforced the sheer breadth of titles that DIS was lining up, it seemed that it was only a matter of time before we mentioned DIS in the same vein as EA, Activision, THQ, Take2, Ubisoft, and the other major players.

I mean, look at some of the titles that were coming through the DIS banner: Split/Second, Toy Story 3 (with its excellent Toy Box mode), TRON: Evolution, Epic Mickey (our E3 Game Of The Show), Guilty Party, Pirates of the Caribbean: Armada of the Damned, various Sing It games, and mini-game collections for a number of popular Disney Channel shows.  There was something for core gamers, kids, and families alike.

Fast forward roughly six months later. Armada of the Damned was cancelled and the studio, Propaganda Games (also responsible for Tron: Evolution) shut down. Epic Mickey developer Junction Point just got hit with layoffs. In fact, Joystiq reported that these are part of a “first round” of layoffs that might be 250 deep. Some believe it might even go deeper than that.

So what happened? Well, maybe the first sign of trouble came when Disney acquired Playdom, a maker of social games, for $563 million dollars. That’s a pretty significant chunk of change, especially for a division that lost nearly $300 million the previous fiscal year. Next thing you know, the president of Disney Interactive Media (Steve Wadsworth) steps down from his position. That in itself might not have been a big deal, but when his replacements as co-presidents just happened to come from the newly-acquired shiny new toy Playdom, it doesn’t take somebody with an MBA to sense what people in the business world call a “paradigm shift.” And I’m not talking about the Final Fantasy XIII battle mechanism either, nerds.

Of course, you could try to read between the lines with all these moves and guess which way the winds are blowing. Or your parent company can announce fiscal year results that show that the Interactive Media division lost another $234 million dollars, the only division that didn’t make money. And then the CEO of said parent company (The Walt Disney Company) can basically come out and say things like, “It’s our goal not only to be profitable, but obviously to get there by shifting our investment and reducing our investment, too.” What kind of shifts and reductions you might ask? “We probably will end up investing less on the console side than we have because of the shift we’re seeing in consumption.” Ruh roh. “Consumers are obviously spending time playing games — from casual games online to mobile apps to social networking to console — and we felt all along that we need to be where the consumers are.”

If you just threw up in your mouth a little bit, you’re not alone. But the fact is that huge multi-billion dollar companies don’t get to be where they are by continuing to invest in money-losing ventures over a period of time. The Walt Disney Company are marketing masters (ever been to a Disney theme park? The steak is average at best, but the sizzle is unsurpassed perhaps anywhere in the world) and they obviously see something in this casual and social gaming thing that looks lucrative. Not what “core” gamers may necessarily want to hear, but the results unfortunately are speaking for themselves right now. The thing is that now we’re starting to see real tangible effects on console gaming that were being hinted at earlier. In a big way.

Is Disney being short-sighted here? We are talking about a HALF BILLION DOLLAR investment in a gaming space that frankly is still in its infancy and may not be fully understood yet. Social gaming, for all we know, could be a fad that flames out in a couple of years when all the casual gamers get tired of tending to their Farmville crops, etc. Or it could be here to stay, much to the chagrin of “core” gamers who see this style of gaming moving in on “their” territory and taking attention and resources away from potentially great console titles. If it’s here to stay, and Disney got in on the ground floor, then the division turns a profit, and relatively quickly. It’s a high risk-reward scenario, but when the status quo wasn’t working for them, can you really blame them for looking elsewhere?

How did this happen? Well, the obvious answer is that their anticipated titles didn’t sell as well as hoped. Split/Second, for example, which was a great arcade racer with a fantastic original concept that I really enjoyed didn’t even get to a million sold, according to VGChartz. Now, releasing it virtually at the same time as other highly anticipated racers Blur and ModNation Racers probably didn’t help. Oh, and it had to compete with a small title you may have heard of called Red Dead Redemption in the same week. Guilty Party sold just over 200k, which is a disappointment given that it was one of the best family-oriented titles of the year (and our top pick). Epic Mickey actually did well, hitting almost 1.7 million in sales so far. However, given the install base of the Wii and the hype surrounding the project, that number probably fell well short of Disney expectations.

Here’s part of the problem: Disney Interactive didn’t do itself any favours either with some of their decisions. Split/Second got killed partly by its release date. Epic Mickey,  hindsight being 20-20 and all, likely should never have been a Wii exclusive. Yes, the controls would have had to have been different on the PS3 and 360 given the paint/thinner shooting mechanic, but it was doable. I think at this point we have to acknowledge that the Wii simply is NOT a good place for third party core gaming experiences to reside. Epic Mickey is not a kid or family game. Yes, it has the E rating from the ESRB. But it’s strictly single player, quite frankly is a bit dark at times, and doesn’t lend itself to being controlled by younger kids that easily. It’s a core game. The fact that it will likely be a multi-million seller on the Wii is a testament to the quality of the game and license itself, camera issues notwithstanding.

So Disney didn’t necessarily help themselves. But maybe part of all of this is just the nature of the beast. Core games are getting more costly and complex to develop. It’s not like all other publishers are raking in the cash either, with many reporting losses in various quarters. Even the bigger publishers continue to shutter studios. The economy hasn’t been great obviously, but even in a so-called “recovery”, we’re still seeing layoffs. Heck, gaming sales were slightly DOWN in 2010, according to NPD Group. Perhaps Disney is seeing some writing on the wall that the gaming industry, specifically console and PC gaming, is going through some contraction right now and needs to shift their focus elsewhere on more potentially profitable ventures like the growing social gaming space. After all, gaming is not their main business.

By the way, here’s a bone for the conspiracy theorists out there, just for fun. Who is the biggest single-person holder of Disney stock? Strap on your tinfoil hats, you have your homework.

So what’s next for Disney? They’re not going to pull entirely out of the gaming business. We’ll still likely see movie tie-ins and console games that are relatively cheap to develop and can bring in decent coin. Think more Sing It titles and minigame compilations for certain Disney properties. There will also be more social-style games coming out, consistent with the direction obviously signalled by their actions and words. In fact, I have to believe that there’s a potentially lucrative idea that involves social gaming with Disney licensed characters in somebody’s brain at The Walt Disney Company. Think Farmville-style play with popular Disney characters. That could be a potential gold mine if the right idea is hatched.

It looks like the days of the AAA-style big budget console games from Disney Interactive are pretty much gone. Our original visions of an up and coming game publishing company that was ambitiously serving many types of gamers are history. It’s a sad reality of today’s gaming industry, and a bit of disappointment that all that promise will go unfulfilled. Core gamers will be the ones most left out in the cold, while casual, social, and family gamers will still get some love, but that last group probably shouldn’t expect too much more original IP like Guilty Party.  In the end, Disney Interactive Studios’ run as a tier one gaming publisher was kind of like Space Mountain at the Magic Kingdom. Lots of buildup and hype, far too short, kind of fun while it lasted, but never quite like you thought it would be.