The licensing rights to George Lucas’ three new Star Wars prequel films will be awarded in the weeks to come, and some industry insiders argue that sky-high bids for plastic figures of Lucasfilm’s Luke Skywalker and accompanying characters will alter licensing industry prices forever.
In an August 19 article in the Wall Street Journal, ‘Toy makers offer the moon for new Star Wars licenses,’ Mattel was rumored to have upped the ante to US$1 billion, with royalty offers up to 20 percent for the characters. The numbers quoted, while not unheard of, are raising some eyebrows in the industry.
Although the Star Wars franchise had been languishing for years, soaring licensing bids reflect the dramatic resurgence of the franchise after the Star Wars trilogy re-release earlier this year.
While some insiders feel that the Star Wars dealÑstill in negotiation between Lucasfilm and current license holders Hasbro and Galoob Toys and would-be newcomer MattelÑis an isolated case, others forecast a dangerous trend in which increased guarantees and royalty rates raise the stakes of toy licensing across the board. This, they predict, could result in a new conservatism in an industry that was once considered relatively low risk.
‘I don’t think people look at a deal like this as an isolated case. If people hear someone gets 20 percent, they try to get 22 percent,’ says Keith Cohn, vice president of marketing at Equity Toys. ‘I think this is going to make it expensive for everybody. Rarely in life does the price of anything go down.
‘Traditionally, the thing marketers like about licensing is the fact that it is safer, because you could capitalize on other people’s equity. Ultimately, things like this could price many players out of the marketplace,’ he says.
Toy analyst Sean McGowan at New York-based Gerard Klauer Mattison disputes the figures cited in the articleÑand the deal’s projected impact.
‘I don’t think you can look at prices on Star Wars and say this represents what is happening in the industry,’ he notes. ‘I don’t believe that Mattel did [offer US$1 billion].’
McGowan also disputes that the 20 percent royalty rates quoted in the article are precedent setting.
‘Royalty rates on some of the Power Rangers licenses were higher. There’s never one unified royalty rate, but Power Rangers got 25 percent to 30 percent on their licensing agreements.’
While the 20 percent figure seems daunting to many insiders, McGowan says Disney licenses typically command 14 to 15 percent royalty rates. Also, many joint ventures today are established as gross profit splits, and thus enjoy profit margins approaching the 20 percent mark, according to McGowan.
‘We’re beginning to see more and more joint ventures, which often result in a high royalty rate,’ he notes, adding that there’s not much difference between a 50/50 gross profit, which is relatively common, and a 20 percent royalty rate.
Cohn disagrees. ‘Five years ago, if you got 10 percent [royalty rate] and made 10 percent profit pretax, you were happy.’
Cohn says guaranteed rates as high as those rumored in the Star Wars deal are also a dangerous precedent. ‘If it doesn’t meet sales expectations and you have a shortfall, then you are out the money.’
Insiders also wonder whether Lucasfilm’s criteria in awarding the licenses have been fairly represented in the press.
‘First and foremost, they’ll look at who can do the best job,’ says Cohn. ‘Number two will be their loyalties to people who have been with them for awhile.’ Cohn believes that money would be the third consideration, because all three players would probably be willing to come up with whatever price Lucasfilm names.
McGowan takes a more skeptical view. ‘I find it amusing that Lucasfilm wants people to believe it doesn’t just come down to the money.’ He predicts that Lucasfilm will sell the licenses to the highest bidder, then use the revenue toward production of the new feature films.