FORTUNE — While millions of gamers over the age of 18 know Activision for its Call of Duty franchise, which rakes in $1 billion every fall; the younger gaming demographic equates the game publisher with Skylanders. The hybrid toy-video game franchise raced past $2 billion in sales in a record 27 months at retail and is on the list of top 20 game franchises of all time. Activision has sold more than 175 million toys and in 2013 it was the top-selling action figure line in the world, outselling the top three action figure lines combined.
According to video game research firm Newzoo, game sales of Activision’s (ATVI) 2013 title Skylanders Swap Force sold about 3.9 million copies to date, slightly lower than the 2012 Skylanders Giants version at 4.65 million, which was comparable to Skylanders Spyro’s Adventure sales in 2011. Over half (53%) of Skylanders sales came from the U.S., 36% from Europe and 11% from the rest of the world. Skylanders Swap Force sold most on the Wii at 1.6 million units, followed by the Xbox 360 (0.9 million) and PS3 (0.7 million).
“Lifetime game sales to date are around 13.3 million units, which means that the franchise grosses more than half of its revenues from the toys,” said Peter Warman, CEO of Newzoo. “This is good for Activision as well as for Activision’s relationship with retail.”
The game franchise has captivated kids, their parents and even older gamers with cooperative action platform gameplay that grows with the introduction of new toys. Each Skylanders action figure introduces a virtual counterpart within the game world, through a physical portal. Come October 5, Skylanders: Trap Team will introduce a new interactive element to the game franchise, along with a new type of physical retail tie-in with 40 crystal traps, and over 50 new action figures.
“For the last three years we’ve been letting players bring toys to life inside the game, and this year we’re letting them defeat villains in the game world and then capture them in a crystal trap and bring them into the real world through the portal,” said Hirshberg, who was in New York City to reveal the new game to media. “When you choose you can actually take that trap crystal, put it back on the portal and release the villain back into Skylands. But this time he’s fighting for you. So it’s capturing evil and unleashing good. It’s a very cool mechanic, and when kids see it and hear the villain’s voice in the portal, they think it’s magical.”
Richard Barry, executive vice president and chief merchandising officer at Toys R Us, expects Skylanders: Trap Team to be the biggest launch ever for the franchise. The retailer is already taking pre-orders for the new game and will continue its exclusive line of Skylanders Legendary action figures.
“Since 2011 Activision has been able to reinvent toys and video games and crunch that together into an original franchise,” said Barry. “Skylanders: Swap Force was the most successful game sold at Toys R Us last year and biggest action figure line, as well.”
According to Michael Pachter, video game analyst for Wedbush Securities, Skylanders earned $250 million in revenue in 2011, $500 million in 2012 and $750 million in 2013.
“It’s likely going to sell close to $750 million again; Disney Infinity grew the overall addressable market, but will no doubt gain some share this year as new characters are introduced,” said Pachter. “Skylanders is a different type of game from Infinity. It’s primarily a fighting game, and is targeted at boys under 10, while Infinity is more of an action adventure game targeted at both boys and girls up to 12.”
Gaming is just the tip of the iceberg for the Skylanders franchise. To date, there are more than 175 licensed Skylanders products from birthday plates and cups to bed sheets to clothes and clocks. Activision is working with General Mills (GIS) to integrate Skylanders into its cereals – and the franchise even has the potential of getting its own cereal. McDonald’s (MCD) will continue its Happy Meal promotions with Skylanders for the second year in a row and Frito-Lay (PEP) will continue to integrate the video game characters into its products.
Despite competition from the Magic Kingdom in the form of Disney Infinity (and Disney Infinity: Marvel Super Heroes later this year), Activision has ruled the gaming and toy space since developer Toys For Bob unleashed the first game in 2011. Disney (DIS) sold 3.2 million copies of Disney Infinity last year, according to Newzoo.
“The fact that Skylanders has not been hurt by Disney Infinity could mean that the concept is so popular that there is room for two key players,” said Warman. “Another explanation could be that Skylanders appeals to a slightly older group of kids compared to Disney Infinity.”
“With the commercial success that Skylanders has achieved and the disruption that it’s brought two different industries, it was a matter of time before the competition got involved in the category,” said Hirshberg. “We have capable, great competition in every category, so that’s nothing new. In fact, Skylanders was sort of the anomaly for awhile in that we had the category to ourselves for a spell because we invented it.”
Activision has followed the pattern it established with Call of Duty by enlisting a second developer, Vicarious Visions, to create games like Skylanders: Swap Force in tandem with Toys For Bob, which came up with the idea and is behind Skylanders: Spyro’s Adventure, Skylanders: Giants and the new Skylanders: Trap Team game.
“Having multiple developers allows us to release a new game every year, but we’re taking two years to develop each game,” said Hirshberg. “We’ve seen this happen with other franchises like Call of Duty where multiple developers spur a great combination of both competition and collaboration.”
Skylanders is the rare video game that has followed the Hollywood model of licensing its brand across multiple merchandise lines and partnership promotions. But the one area that Activision has yet to explore is bringing the characters to Hollywood in a television series or movie.
“We get asked that question all the time, and it’s something we think about a lot and are talking about a lot, but there are no announcements as of yet,” said Hirshberg, when asked of the Hollywood potential for the global game franchise.
Not that the game maker needs any help with this franchise, which is fast closing in on the success of Call of Duty.