Disney Wanted Its Characters Gone From Character.AI: Now It’s Bidding $20M for Its Assets

Disney has agreed to serve as the initial bidder in a proposed $20 million (£15 million) deal involving certain Character.AI intellectual property and company claims, marking a remarkable turn in its relationship with the chatbot platform.

Just over a year ago, the entertainment giant sent the startup a cease-and-desist letter over its unauthorised use of Disney characters. Now, Character.AI has filed for Chapter 11 bankruptcy protection, raising questions about whether its popular platform can survive.

The deal is not an outright purchase of Character.AI. Disney Worldwide Services is the so-called stalking-horse bidder in a court-supervised sale, meaning other buyers can submit higher or better offers. The proposed arrangement covers a non-exclusive, perpetual licence to certain intellectual property and company claims, alongside transition services.

Character.AI's court filings put its assets and liabilities each in the range of $50 million (£38 million) to $100 million (£76 million). Reuters has reported that the company was losing approximately $8 million (£6.1 million) to $9 million (£6.8 million) a month despite attracting millions of users.

Character.AI chief executive Colin Adams explained in a statement: 'Over the past year, Character.ai has taken meaningful steps to sustain and improve its business in the face of significant legal, regulatory, and operational headwinds.

After a comprehensive review of the available alternatives, the board determined that this court-supervised sale process provides the Company with the best opportunity to maximize value for all stakeholders.'

Disney's Unexpected Character.AI Deal

In September 2025, Disney sent Character.AI a cease-and-desist letter demanding that it stop using Disney's copyrighted characters without permission. According to TechCrunch, Disney accused the startup of copyright infringement and exploiting the goodwill associated with its brands. Character.AI subsequently removed Disney characters from its search results.

The proposed deal marks a striking reversal, but Disney is not buying the entire company. Its $20 million (£15 million) offer covers a licence to certain intellectual property and certain company claims. The transaction remains subject to competing offers, and Disney is not guaranteed to secure the rights.

The sale process is expected to conclude in late November or early December 2026. Disney will also provide transition services using former Character.AI employees it hired, including the startup's former chief executive Karandeep Singh Anand.

Character.AI says its platform will remain operational during the proceedings, but it could be wound down if no suitable transaction allows the service to continue.

In a message to users, Adams explained: 'We hope that the sale process will yield an actionable proposal that will allow continued operations of the Character.ai platform. If such a bid is unavailable, however, the platform will be wound down.'

The Rise and Fall of Character.AI

Launched in late 2021 by former Google engineers Daniel De Freitas and Noam Shazeer, Character.AI allowed users to create and interact with personalised virtual characters while also developing its own AI models.

Shazeer co-authored the research paper that introduced the Transformer architecture, which underpins many modern generative AI systems.

Character.AI reached unicorn status in September 2022 following a $150 million (£114 million) funding round. At the time, it reported more than two billion messages exchanged with its chatbots over five months, with active users spending an average of more than two hours a day on the platform.

Mobile downloads exceeded 1.7 million in a single week in May 2023. However, the company changed direction in August 2024, when Google struck a $2.7 billion (£2.05 billion) licensing deal for its models and founders Shazeer and De Freitas returned to the technology giant.

Character.AI moved away from training its own foundational models to focus on its consumer platform. Even so, monthly active users reached 20 million by October 2024.

Legal Claims Put AI Safety Under Scrutiny

Character.AI has faced mounting legal and regulatory scrutiny over the potential risks of AI companions, particularly for children and vulnerable users.

The family of a 14-year-old Florida boy sued the company following his suicide, alleging that he had developed an unhealthy obsession with one of its chatbots. The allegations intensified debate over the responsibility of AI companies, but do not establish that the chatbot caused his death or that the lawsuit alone led to Character.AI's bankruptcy.

Texas authorities also launched an investigation into potential child safety and privacy violations. Other legal challenges followed, including allegations in Kentucky concerning self-harm and a case in Pennsylvania involving a chatbot allegedly presenting itself as a licensed doctor.

According to Reuters, Character.AI reached preliminary settlements in five private lawsuits in January 2026. The settlements had not been finalised or paid at the time of the bankruptcy filing.

The company has introduced stricter safety measures and restricted access for underage users. In June 2025, it appointed former Meta and Brex executive Karandeep Singh Anand as chief executive and later expanded into AI video creation, social feeds and interactive storytelling formats such as microdramas.

Soaring AI Costs Squeeze the Business

AI chatbots can be expensive to operate because every interaction requires computing resources. Heavy usage can therefore increase costs as well as engagement.

Reuters reported that Character.AI was losing approximately $8 million (£6.1 million) to $9 million (£6.8 million) a month while supporting around 12 million active users. The figure differs from the 20 million monthly active users reported in October 2024, reflecting estimates from different periods.

Despite raising more than $193 million (£147 million) from investors including Andreessen Horowitz (a16z), Lightspeed, SV Angel and Greycroft, Character.AI has struggled to overcome the costs of running its service and developing its technology.

Its predicament highlights a wider challenge for consumer AI companies: attracting users is not enough if the revenue generated cannot cover computing costs.

For Disney, the proposed deal offers a route to access selected intellectual property and company claims without acquiring the entire business. For Character.AI, it is an attempt to maximise value through bankruptcy proceedings.

The platform remains online for now, but Disney's involvement does not guarantee its survival. If no suitable buyer emerges to keep the core service running, Character.AI says it could still be wound down.