Rough skies may be ahead for Activision's 'Skylanders'

Five years ago, Activision created another multi-billion dollar empire with "Skylanders" — a brilliant fusion of video games and real world toys that immediately captivated players of all ages and engaged young players like nothing at the time.

Imitators were inevitable, of course — and it wasn't long before Disney entered the market with its own take on the category, which had, by then, been labeled "toys to life," after the figurine toys that could be placed on a peripheral and then became a part of the onscreen action. Last year, Warner Bros. and Lego jointly entered the fray as well.

The category was a generous one to the bottom line. The "Skylanders" series has topped $3 billion in sales, with over 250 million toys sold to date. And "Disney Infinity" topped $1 billion.

Skylanders: Trap Team

But on May 10, Disney shocked the industry, announcing it was ceasing all work on future "Disney Infinity" games — and shut down the studio responsible for the series, affecting 300 workers. And that led to questions.

If "Infinity," which most analysts believe outsold "Skylanders" and "Lego Dimensions" last year (Disney doesn't break out sales of the game) wasn't seen as a viable long-term revenue generator, what did that say about the long-term health of the toys-to-life category?

Analysts say the outlook isn't great.

"I think we're way past peak," says John Taylor of of Arcadia Research Corp. "Don't look at the aggregate numbers. Look at the new vs. new — the appetite for new releases. We're trailing by something like 50 percent — maybe its 40 percent, but we're down big time. It seems like much of the magic of this idea has already been pretty much executed on. Kids got the idea and it feels like both collectors and kids are beginning to move on to something else."

Activision and Warner Bros./Lego remain bullish, though. This fall, "Skylanders Imaginators" will hit shelves, letting kids create their own in-game Skylanders characters. And "Lego Dimensions" will add expansion packs based on 16 entertainment properties, including "Ghostbusters," "Harry Potter" and "E.T."

"Lego Dimensions is a significant part of our LEGO videogames portfolio, and we are excited to offer fans many more iconic entertainment franchises combined with new, enhanced ways to play," said David Haddad, president of Warner Bros. Interactive Entertainment in a statement.

The secret to games development
The secret to games development

With Disney's withdrawal from the field, one school of thought maintains "Skylanders" (and, to a lesser extent, "Lego Dimensions") should benefit after a slowdown in sales last year.

Not everyone's convinced, though.

"I'm not expecting year over year growth," says Eric Handler, senior equity analyst at MKM Partners. "I think if they could be stable, that would be seen as a big positive."

One thing that could work to the series' advantage? The looming launch of a Skylanders TV show — "Skylanders Academy" — which is set to debut later this year.

"It's probably three or four years too late, but if they're the only survivor in this space, it may be there's a chance to grow the business again," says Handler. "The TV show sustains brand awareness and gives life to a brand. Beyblades was a very hot product for a while — and that was because they had a TV show that shows people the brand and what it was. And I think you need that for Skylanders."

Read MoreMicrosoft's new plan for XBox

While some have compared toys to life games to the "Guitar Hero"/"Rock Band" bubble, which saw a rapid rise and fall, analysts say the comparison isn't that simple. Plastic guitars and drum kits not only took up a lot more space, they weren't toys kids could play with independently. As a result, music games were skewed at a notably older audience. (There's also a collector market for some of these toys — with some selling for over $1,000 on eBay.)

One company that seems to be, if not immune from the toys to life slowdown, then removed from it is Nintendo. The company's Amiibo figures continue to sell well. The company sold 40 million in the first nine months — and since it uses the figurines differently than other titles in the space (tying one or two to a specific title), it's a bit less dependent on coming up with a big new idea each year.

"Amiibo is the exception," says Taylor. "The fan boy base for Nintendo is legendary for supporting anything and everything that Nintendo does. It seems Amiibo is going to remain part of the landscape. The other guys are much more iteration-dependent. With Amiibos there's not generation one two or three like there is with Skylanders."