Toys & Movies: Always? Never? Sometimes! - the risk of obtaining licenses for toys from the entertainment industry - Brief Article

It hasn't been a good few years for the toy industry. The industry's giants--manufacturers and retailers alike -- have all suffered, and dozens of smaller companies have been dragged down with them.

The greatest problem is a steadily shrinking age demographic, or age compression in industry argot. Kids used to buy or get toys until music and sports (and boys and girls) took over their lives around the time hormones began to kick in. With videogames, cable TV, the Internet and instant messaging all reaching in, children are ever more sophisticated and ever less likely to play with toys, dolls, board games and the other paraphernalia which has helped define American childhood since the end of World War II.

But a changing marketplace alone hasn't caused all the woes. Some of the pain has been self-inflicted and nowhere more so than in the reckless race for high-priced entertainment licenses.

Toy industry gossip ordinarily focuses on the size of the minimum royalty guarantee paid by the toy maker to the entertainment giant. In fact, that's only a fraction of the cost of a license, especially when the much-touted property turns out to be a dud. Product development costs can equal the guarantee, as can the expense of building inventory. Creating and buying kid-directed advertising to stimulate interest in the product also adds to the budget. And, when all else fails, markdown money to retailers adds insult to significant injury.

Simple arithmetic tells us that the larger the guarantee the larger the production of toys must be to cover that contractual minimum, and with it all other related costs. Once the spiral begins, it's hard to get out.

Hasbro, by way of one prominent example, thought it found the keys to the kingdom when licenses for Batman, Jurassic Park and the early revival of Star Wars all produced unprecedented sales. Who needed expensive R&D units when Jim Black could read a script and decide with a high degree of accuracy a movie's "toyetic" potential?

Ironically, Hasbro has long been the developer or acquirer of toy brands and franchises as deep and diverse as GI Joe, Tonka, Nerf, Mr. Potato Head, Monopoly, Playskool, Super Soaker, Candyland and Furby, among others. Yet, like a novice gambler enjoying success at the casino, Hasbro (and, truth be told, all of its U.S. competition to some degree) began to invest ever more heavily on outside entertainment properties.

By the time LucasFilm began the bidding for Star Wars toy rights, Hasbro made clear there was nothing it wouldn't do to become the licensee for the three new movies in development. Unfortunately Hasbro's archrival, Mattel, which had enjoyed monumental success with licenses for (some of) Disney's animated films also couldn't stop raising its paddle at the auction. When the smoke cleared, Hasbro ended up guaranteeing royalty payments to LucasFilm of $450 million, which ballooned to around $650 million with its purchase of Galoob Toys and its eye-popping Star Wars guarantee. If such economics could ever work, it would require the toys to defy the age compression problem and sell at record levels for several years running.

When Star Wars Episode 1: The Phantom Menace failed to connect with a new generation of filmgoers, toy sales melted. Gigantic inventories were liquidated and massive product development, tooling and ad expenses were written off. Hasbro has been wobbling ever since with division shut downs and the termination of possibly the best toy team ever assembled.

Remarkably, the Star Wars nightmare wasn't the first time an entertainment license nearly put Hasbro out of business. In Toy Wars, the 1998 book profiling Hasbro, its leaders, history and conflicts, author G. Wayne Miller recounted how Hasbro came close to bankruptcy when the 1963 license for the Disney movie Flubber resulted in a total product recall, product liability lawsuits and huge losses. The CEO at the time, we are told, returned the company to profitability but remained wary of licenses for the rest of his career.

Despite the trauma of Star Wars and other failed entertainment licenses, the lesson isn't to avoid licensing on principle, but to utilize it strategically. At the right price, licenses can help reach a target or fill a gap in the line. Surely, no license is worth betting the company or controlling its destiny, but a stable of promising licenses married to clever, innovative products is still worth the risk that any license--or new product--brings.

Seth M. Siegel is co-chairman of The Beanstalk Group, N.Y., a worldwide licensing agency whose clients include Harley-Davidson, Coca-Cola and AT&T.

COPYRIGHT 2001 BPI Communications, Inc.
COPYRIGHT 2001 Gale Group