Disney's digital video business is more than Maker Studios, the YouTube network it agreed to buy in March for $950 million.
But until Disney bought Maker, the entertainment giant was relatively quiet in web video. That business mostly belonged to Disney Interactive, the smallest of the company's five business lines and primarily a video game business at that. Game sales and subscriptions accounted for 74% of the $268 million in revenue that Disney Interactive generated in the first quarter of this year.
Three of the division's last four quarters were profitable, according to the company, but it hasn't been easy. Disney Interactive has eliminated hundreds of gaming jobs in the past year. In March the division laid off 700 more employees -- more than a quarter of its workforce.
When Disney announced the Maker deal a couple weeks after the layoffs, it said the YouTube network would not be rolled into Disney Interactive, which manages roughly a dozen of Disney's own YouTube channels. Instead Maker would operate as a separate business under Disney CFO Jay Rasulo.
The arrangement surprised many in the digital video industry because Disney Interactive houses the company's previous digital-media acquisitions, like parenting site Babble and social-game developer Playdom. It prompted questions over how Maker and Disney Interactive will co-exist, and speculation as to whether Disney Interactive's video business would eventually be shut down.
"I can tell you there's lots of conversations across all five lines of businesses of Disney's about where and how to partner with Maker," said Josh Mattison, VP-alliances and sponsorships at Disney Interactive. "There's no question that at some point there will be partnerships happening between Disney Interactive and Maker, but the specifics of those are yet to be ironed out."
One thing has settled: Disney Interactive remains in the video business for now and perhaps more than it ever was. On Wednesday it will premiere its latest original series, "Citizen Kid." Sponsored by the Milk Processor Education Program, called MilkPEP for short, the program's weekly videos will profile notable kids, like a girl who runs a lemonade stand to raise money to fight child slavery.
The Citizen Kid series with MilkPEP isn't Disney Interactive's first sponsored video programming. Earlier this year it premiered a short film sponsored by Google Play, the search giant's digital-media marketplace. And last year it ran an animated series based on the Disneyland ride It's a Small World that was sponsored by Rosetta Stone.
But the sponsored video push is part of a larger strategy shift for Disney Interactive's ad sales organization. The division has moved away from standard media sales like display advertising, a punishing business with downward pressure on ad rates, in favor of larger sponsorship deals. Mr. Mattison said the ad sales team's new modus operandi is "very deliberately working with less partners, very deliberately working with partners who are interested in doing things like 'Citizen Kid' that are content-driven and distributed across lots of different platforms."
Such a move isn't uncommon for media companies struggling to maintain profitability. Earlier this year YouTube network Machinima laid off some of its ad sales staff and transitioned the remaining employees to focus on more lucrative sponsorship deals instead of signing some pre-roll placements.
"Our orientation is definitely less around the transactional advertising business and more around supporting the brands that have a long, deep and broad relationship with Disney," Mr. Mattison said.
There are plenty of rival web publishers also trying to sell sponsorships for original web video. But the competition may not be as fierce as in online display ads, and the inventory isn't easily pulled into automated auctions that pit publishers against each other to offer the lowest price.
Marketers have cooled on display ads online as well. MilkPEP's marketing director Victor Zaborsky said Mr. Mattison had briefed him on Disney Interactive's plans to change its advertising business and welcomed them. "The shift away from display advertising to a more endemic content approach felt completely natural to us," he said. "A lot of CPG companies and other marketers are looking for the same thing."