Along the risk continuum of entertainment properties, the film trilogy sits squarely in the middle. It is not as subject to the truncated selling windows of the one-off movie, but neither can it boast a hit TV show’s year-round media exposure, which drives merchandise sales. As such, it represents a moderate gamble for shell-shocked licensees and retailers who are wary of the quick-burn rate of film properties. As with any property, the success or failure of a trilogy’s merchandise program hinges upon the licensor’s ability to manage the program effectively. Flood the marketplace with too much product that doesn’t sell, and you harm the long-term appeal of your property; release too little, and you risk missing your selling opportunity. Sounds simple? It’s not. Sticking to the conservative road often means licensors have to turn away huge advances from licensees eager to tie in, in order to benefit the staying power of the property. As the licensors of the two trilogies in the case studies below attest, the trick to successfully merchandising the trilogy lies in keeping consumers constantly hungry for more product.
Lord of the Rings
Licensor: New Line Cinema
Entertainment: New Line Cinema is producing the live-action films based on Tolkien’s books The Fellowship of the Ring, The Two Towers and The Return of The King. All of the films, which will be rated PG-13 in the U.S., have been shot and went into post-production in late December. New Line plans to release the films during fourth quarter over the next three years, starting with The Fellowship of the Ring in 2001, The Two Towers in 2002 and The Return of the King in 2003.
An instant cult classic when it was released in the mid-1950s, Tolkien’s sprawling epic about Middle Earth, a mythical world full of dwarf-like creatures on a quest for magical rings, has been translated into 25 languages. To date, the books have sold over 50 million copies, no doubt spawning equally as many fan websites. In 1978, Ralph Bakshi directed a rotoscope-animated film adaptation of the first two books, which was released theatrically to mixed reviews. Last spring, New Line offered a sneak-peek snippet of The Fellowship of the Ring on the Net, and the mini-trailer was downloaded 1.7 million times in the first 24 hours.
To protect the integrity of LOTR for the duration of the trilogy and beyond, New Line will launch with a relatively modest amount of licensed product for the first film, with the goal of broadening the program for the second and third films. ‘We’re taking a slow-build,’ says David Imhoff, executive VP of worldwide licensing and merchandising at New Line. ‘In some respects, the merchandise program for movie two could be the peak, and our goal would be to try to equal it for movie three,’ he says.
Though Imhoff declined to say the total number of licensees that would be on-board for the first film, in mid-December, New Line had signed deals for all of its core categories: master toy (Toy Biz); interactive (Electronic Arts); publishing (Houghton-Mifflin and HarperCollins); apparel (Giant, Jem, C-Life); trading cards (Topps); collectible card games (Decipher); calendars and stationery (Cedco, Mead); gift (Applause); electronic construction toys (Playmates) and Halloween costumes (Rubies). Each key licensee signed on for all three films, which allows for ample lead time to develop high-quality products. ‘We’ve been able to deliver a movie franchise from day one. It’s not a matter of us saying to the licensees, `honest, there will be a second movie.’ There are already three movies in the can,’ says Melvin Thomas, joint managing director at The Licensing Company, New Line’s U.K. agent for the property.
It’s also a situation designed to make licensees feel less compelled to maximize profits on the first film and, thus, over-produce. ‘Essentially, we’re doing a four-year program, so we’d be out of our minds to put everything out on the first film,’ says New Line’s Imhoff. Nonetheless, the licensor has taken steps to ensure that its partners are committed to the strategy. Imhoff stopped short of saying that production limits for merch had been written into licensee contracts, but would say that deals were structured so that ‘licensees are absolutely incentivized to work with us to grow the business from movie one to movie two.’
Equally important as controlling the amount of movie one product that is released, is who the product will be geared to. Though all three films are rated PG-13, the bulk of the merchandise for the first movie will be targeted to kids seven and up, the demo which Imhoff says will comprise the core audience for the movies. That will change, though. New Line had received several offers from companies wanting to create merch for the four to seven set for the first movie, but Imhoff decided against it, believing that it would result in overexposing the property too early. Instead, New Line’s plan is to let the Q4 release of movie one build awareness among older consumers and then use the LOTR DVD/video release six months later to percolate interest among the younger demo. It’s the Austin Powers effect, says Imhoff. Though it began as a teen property, Austin Powers became a huge hit with younger kids when it was released on video, which was how most of them initially saw it. Imhoff believes the same phenomenon will occur for LOTR, but on a greater scale. ‘Those younger kids are going to be there for the second movie, and we’ll have product ready for them,’ says Imhoff.
New Line’s retail strategy will also play a key role in calibrating consumer awareness for Lord of the Rings. In terms of distribution, New Line will launch with separate programs for mass and specialty channels. Product from licensees like Toy Biz and Giant, for example, whose accounts are primarily mass-market retailers, will be available exclusively in the channel where they do the most business. Additionally, LOTR collectible toy, gift, book and stationery merch will also be available exclusively through booksellers-such as Barnes & Noble and Borders-for older consumers who are fans of the books first and foremost. The purpose of differentiating distribution, says TLC’s Thomas, is to guard against overkill, so that consumers won’t feel as if they’re being bombarded by an aisle’s worth of Lord of the Rings merchandise every time they walk into a store.
The majority of LOTR merch will reach stores four to six weeks before The Fellowship of the Ring’s December theatrical release; however, some teaser product (likely action figures from Toy Biz) will hit stores in July. The early release of product is designed to dovetail on the film’s marketing campaign, which will be in full swing by summer. That campaign kicks off this month with the debut of the movie trailer and will be followed by LOTR TV specials, an ad launch and other initiatives that will hit during the first two quarters of this year.
In late Q1 2002, licensees will release new merch with the first film’s DVD/video release. The programs for films two and three will follow the same schedule. ‘Our goal is to put out an array of merchandise that will sell through in 2001, refresh it for the DVD release in May/June 2002, then retire the entire line by the summer. Then we’ll return with a new line for movie two,’ says Imhoff.
‘The only criterion we are looking at on movie one,’ says TLC’s Thomas, ‘is that in January, the product sells through well enough for retailers not to cut prices on it. If that happens, it will leave a good taste in both the retailer’s and the consumer’s mouths, so that when movie two comes through, they’ll be back at the tills buying more.’
Star Wars Prequel Trilogy
Licensor: Lucas Licensing
Entertainment: Lucas released the first movie in the prequel series Star Wars: Episode 1: The Phantom Menace in May `99. The next installment, entitled (are you sitting down?) Episode 2, is currently in post-production and will reach theaters in May 2002. Described by Lucas as a love story, the movie is set 10 years after Episode 1 and features a 19-year-old Anakin Skywalker.
The trilogy to end all trilogies, George Lucas’s sci-fi odyssey about good versus evil in a far-off galaxy was the first property to establish the event pic as a major force in entertainment licensing. Collectively, the first trilogy movies (Star Wars, The Empire Strikes Back and Return of the Jedi) tallied US$2.25 billion worldwide at the box office, generating twice that much in sales of toys and other licensed products. In May `99, Lucas launched with one of the largest merchandise programs ever assembled for a movie, extending the Star Wars brand from toys and toothbrushes to everything in between. To date, the Phantom Menace program has yielded US$2 billion in worldwide merchandise sales.
Though the sheer volume of product that was available for The Phantom Menace has led many to charge that Lucas’s licensing and merchandising strategy on Episode 1 was all about maximizing profit, Kerry Phelan, executive director of domestic marketing and licensing at Lucas Licensing, disagrees. ‘Obviously, Star Wars has one of the largest collector fan bases in the world. The starting point for our strategy was, and is, to satisfy that fan base,’ says Phelan, who was not working at Lucas at the time the program was put together.
Nevertheless, Phelan concedes that despite the program’s many successes, too much product that didn’t take with consumers made it into the marketplace.
By now, the story of how Episode 1 became something of a merchandising menace has become part of industry lore: In 1998, a then-foundering toy industry hungry for a hit viewed Star Wars as its savior. Licensees flocked to Lucas’s California ranch willing to pay 20% royalty rates and exorbitant advances for rights. Equally convinced of the program’s can’t-miss appeal, retailers anticipated Star Wars merchandise to fly off the shelves from the film’s May 19 release date through to Christmas. The hype machine had kicked into full gear, and expectations grew exponentially. The result: Licensees over-produced, retailers over-ordered, and, for the most part, consumers had stopped buying Phantom Menace merch by the fall. By Q4, retailers were marking down Star Wars product in an effort to minimize their losses. So how did the program for the Phantom Menace get away on Lucas?
‘One of the dilemmas we faced with Episode 1 is that we didn’t know how high was up. We deliberately didn’t set expectations [in terms of the number of licensees we signed] because after a 20-year absence from the market, we didn’t know [how high that number should be],’ says Phelan. For Episodes 2 and 3, Lucas will implement a decidedly more focused program.
For Lucas, that means shedding those licenses that didn’t work, primarily outside of its cornerstone categories of toy, video game and publishing. Lucas is also looking to cut back its largest category, toys, which is comprised of several licensees in addition to master toy Hasbro. (Phelan declined to discuss the names of the licensees that Lucas will not resign with because she has yet to inform them, and won’t do so until sometime later this month.) As for managing expectations, Lucas is relying on frequent interviews with its core licensees and retail partners to determine product thresholds for Episode 2. ‘The good thing is now we have benchmarks from Episode 1 to work with,’ says Phelan. Though she says she would prefer not to, Phelan hasn’t ruled out including clauses in licensee contracts that would limit the amount of product Lucas partners can produce. Phelan expects to have signed all of Lucas’s licensees for Episode 2 by this spring. At press time in December, categories that were still open in the U.S. included apparel, accessories, party goods, stationery and back-to-school.
On the retail side, Lucas will also pare back the number of channels where Star Wars product is distributed; instead, the company will concentrate on assembling programs for specialty and mass and reduce its presence at high-end, grocery and pharmacy retailers.
As for the merchandising launch of Episode 2, it appears as if the company will stick to the same itinerary as the first film, which saw retailers selling Phantom Menace product at the stroke of midnight on May 3, roughly two weeks prior to the film’s release in theaters. ‘The feedback we’ve gotten from retailers is that the `midnight madness’ launch was very effective,’ says Phelan.
Market consensus holds that the enormous amount of hype that preceded the release of the Phantom Menace ultimately eclipsed the merchandise program’s momentum. To prevent a similar situation from occurring again, Phelan is preaching prudence: ‘Moving forward, we need to manage the consumer and retail sales expectations so that they’re in line with the type of publicity coverage that we get. It should be easier for Episodes 2 and 3 because we have a better idea of what worked and what didn’t in `99.’