Licensors forced to dig deeper in 2001

Everyone knows licensed toys took a hit in 2000. But now toycos are saying they've had it with risky entertainment licenses, and they might really mean it this time. Below we look at what licensors can do to stay in the...
February 1, 2001

Everyone knows licensed toys took a hit in 2000. But now toycos are saying they’ve had it with risky entertainment licenses, and they might really mean it this time. Below we look at what licensors can do to stay in the game.

Many may remember 2000 as the year the love-hate relationship between licensors and toycos hit its lowest point. It was the year the CEOs of the world’s two largest toycos, Mattel and Hasbro, proclaimed publicly that each was planning to reduce its reliance on entertainment licensing, but that merely underscored what licensors already knew to be true. These days, only properties that walk, talk and smell like a runaway hit from the get-go are getting a sniff from the majors.

For licensors not blessed with an instant franchise or a proven evergreen, this latest market reality is forcing them to find creative ways to build equity for their properties. The strategies they’ve settled on run the gamut: From how they choose which properties to license, to how they structure the actual deals.

One strategy licensors are being forced to adopt is to be more selective than ever before about which properties they even put on the table. Whereas four years ago, Saban Entertainment could float 10 new properties to gauge retail support, at last fall’s Saban Summit, the company presented just one major property, the Mexican-wrestler superhero show Los Luchadores. The drop-off is a reflection of the current industry climate, says Elie Dekel, president of Saban Consumer Products, who blames the last two years of mega-hit merchandise programs (Star Wars, Pokémon) for conditioning toycos to focus exclusively on the big-cheese properties.

‘Forget about a home run-everyone is looking for an out-of-the-park grand slam,’ says Dekel. ‘That gobbles up resources, whether it’s shelf space, ad support or a licensor’s ability to diversify. It forces everyone involved-from the licensor, to the licensee, to the retailer-to try that much harder to select the one or two properties they feel will be the breakthrough hits.’

When it comes to TV, these days toycos aren’t interested unless the show is stripped. That creates a problem for studios because there are only so many timeslots, even in an era of multiple kids nets. ‘You only have so many times up at bat,’ says Dekel. ‘You really have to put your best batters in the lineup because you know everyone else is swinging for the fences too.’

Sid Kaufman, executive VP of worldwide licensing at Canadian toonco Nelvana, says his company isn’t scaling back on property pitches, but the more conservative mindset of the toycos is forcing him to find alternative methods for getting merch to market. For instance, Nelvana is sourcing the toys itself for its PBS Bookworm Bunch show Elliot the Moose, and in other cases, it’s granting limited exclusive licenses to retailers.

The challenge of attracting toy licensees is even more problematic for licensors pitching theatrical properties. While retailers say they aren’t supporting fewer properties, they are wading into new programs more slowly. ‘We’re only supporting the core categories, and once we see some increase on sales, we’ll add other categories,’ says Mike Tabakin, director of licensing, sales promotion and partnership marketing at Toys `R’ Us. This wait-and-see tactic may work for TV shows, but features, with their short selling windows of four to six weeks, don’t have time to slowly grow merch programs at retail, so they’re not getting wide support from stores.

The quick burn rate of most films combined with the underwhelming performance of several recent offerings has made the prospect of supporting a theatrical pic about as appealing as buying stock in a startup. In response, licensors are tweaking the risk-reward ratio of their film properties so that they’re more favorable to potential licensees. For Nick’s new original property Jimmy Neutron, the net will launch with a movie for holiday 2001 and follow up with a TV show in 2002, a tactic Warner Bros. is also using for theatrical original Osmosis Jones.

‘It’s challenging for movies because the selling window can be short depending on how the movie does,’ says Leigh Ann Brodsky, senior VP of consumer products at Nick. Promising a follow-up TV show elevates the venture from short burn to possible long-term franchise.

Similarly, for its Lord of The Rings movies, New Line Cinema decided to shoot all three of the films back to back as a way of reassuring licensees that they weren’t buying into a one-off proposition. ‘It’s not like we’re saying to our licensees that if movie one does well, we’ll shoot movie two,’ says David Imhoff, executive VP of worldwide licensing and merchandising at New Line. ‘They’re already in the can.’

While the big entertainment franchises like Harry Potter or Star Wars will always garner attention from the majors, Hasbro and Mattel’s more judicious approach to entertainment licensing is having an unintentional side-effect: It’s creating more opportunities for smaller toycos like Toronto-based Spin Master to snap up big, but potentially more risky, films. On the whole, deals with studios are becoming more ‘licensee-friendly,’ says Adam Beder, Spin Master’s director of licensing, adding that the current licensing climate is a complete reversal from as recently as 10 months ago.

‘Licensors are more negotiable now than they have been ever before,’ agrees Kevin Sayers, marketing manager at mid-size Toronto-based toyco Irwin Toys. How negotiable are they? Everything, apparently, is up for grabs.

‘Today, you can structure deals where the amount you pay in guarantees and when you pay it is tied to the performance of a show. A year ago, that type of deal would have been difficult to work out,’ says one toyco source, who requested anonymity. There’s also movement on royalties. Another toyco pursuing a master toy deal for a new animated show slated to strip on one of the big five U.S. kidnets later this year offered to pay only a 7% royalty, a notch below the 8% to 12% royalty range the majority of stripped shows have garnered over the last couple of years. ‘They’re taking the deal under consideration. In the past, they would have said this is the royalty rate we want and that’s that,’ says the source.

That licensors are becoming more flexible isn’t a total surprise. There was evidence as early as a year ago that the tide was turning, when Warner announced it had named Mattel lead toy licensee for the Harry Potter book series and film adaptations. That deal saw Mattel pay a 15% royalty rate and a minimum guarantee of US$20 million, plus options that would allow Warner to buy US$3 million of Mattel’s shares below market price. The terms were well below the 20% royalty and US$600 million guarantee plus stock options that Hasbro handed over to Lucas for master toy rights to Star Wars. Continuing with the downward trend, in June, Toy Biz agreed to pay a US$15 million guarantee and a 14% royalty to New Line for the Lord of the Rings master toy license, according to industry sources.

Beyond sweetening deals for potential licensees, another strategy licensors are pursuing is to focus more energy on developing higher-quality toys. Some studios hire toy industry veterans to help licensees envision how toys based on their properties might look and function. This year for example, Nelvana added the new position of director of product development, joining the ranks of other licensors such as Nickelodeon and 4Kids Entertainment, which maintain similar staff in-house. ‘The execution of your character or property in the product has to be seamless. We’re trying to be there to support our licensees in that respect,’ says Nelvana’s Kaufman.

Other companies are taking it a step further and tweaking their properties at the concept stage to ensure that they lend themselves to toys. ‘When I look at a potential property, I have to believe that we have terrifically strong toy component that will translate into a successful license. For most of our competitors, that’s not what they look at,’ says Al Kahn, chairman, CEO and director at 4Kids.

Kahn is confident that his 4Kids’ latest offering Cubix, a half-hour CGI show that will air on Kids WB! on Saturday mornings in March, contains a strong toy component. The show is set 30 to 40 years in the future when robots are as common as toasters, which dovetails nicely with the current robo-toy trend. Also, the show will feature hundreds of different robots, which Kahn says master toy Trendmasters will be able to develop into hundreds of collectible toys.

For other studios, changing TV concepts to add toyetic appeal is putting the creative cart before the horse. ‘Anything we air has to be a great TV show first and foremost. There are plenty of shows that we won’t merchandise because they don’t have a toyetic appeal. But we have to work with what’s on our schedule,’ says Nick’s Brodsky.

Still, coming off a year like 2000, it seemed that some licensors had trouble showing Nick’s restraint. ‘I’m constantly amazed by the number of movies and TV shows that end up as merchandise,’ says Spin Master’s Beder. ‘I think people in the industry lose sight of what it is about a film or TV show that would lend itself to translate into effective, marketable merchandise. There often isn’t a connection between the entertainment’s story line and play value of the toy.’

4Kids’ Kahn agrees: ‘If you look back, what all successful licenses have in common from a toy perspective is that kids could really get into their world. Kids have to want to emulate the main characters. Kids see themselves being Ash and tapping into all of these Pokémon that have superpowers. Ultimately, it’s a question of how heroic the main characters are.’

While having a successful entertainment vehicle is important and can certainly help drive sales, it’s not a given that hits will spawn toys that kids want. ‘Men in Black was a terrific movie,’ says Kahn, ‘but the toy application wasn’t that strong because the two characters weren’t characters that kids wanted to emulate.’ Even with Dr. Seuss, he adds, you have to ask yourself, ‘where’s the toy component?’

Indeed, while How the Grinch Stole Christmas tallied more than US$225 million by late December, the toys Playmates produced haven’t mirrored that domestic B.O. success. According to a source at one of the five largest toy retailers, the toys have sold fair to good, but show no signs of selling through completely. And in the toy biz, where a hit is only a hit when product is short, that makes the Grinch toys a disappointment.

So, what’s the solution? Is it plausible to think that studios won’t merchandise their properties if they discover they lack the requisite toyetic elements? Not likely. As long as there are toycos willing to step up to the plate, licensors will continue to seek toy deals for their properties, says Spin Master’s Beder.

Even the majors, for all their stern talk of late, aren’t willing to heed their own words, says Felicia Rae Kantor, a VP in the equity research department at investment banking firm Lehman Bros. In late September, weeks before Hasbro said it would cut back its licensing business to help fatten its bottom line, it announced a major multiyear agreement with Disney for toy rights to its theatrical properties. That deal, Kantor says, came on the heels of two years of dubious success with the company’s Star Wars and-perhaps surprisingly-Pokémon licenses.

‘If you do a cost-benefit analysis of the Pokémon license, it didn’t pan out. Hasbro lost US$100 million last year in the boys toys category, and most of that was coming from Pokémon,’ says Kantor. What’s more, Kantor estimates that 80% of Hasbro’s revenues in 2000 were derived from sales of its own evergreen (nonlicensed) toy brands, a number she thinks has increased over the last couple of years.

So, why does Hasbro bother to solicit licenses if they’re money-losing propositions? Simple: Announcing splashy deals with high-profile entertainment properties has historically goosed the value of Hasbro’s stock, Kantor says. ‘Look at a stock chart when Hasbro announced the Star

Wars deal or other major licensing agreements. The stock price spikes. That’s what it trades on.’

Kantor holds out more hope for Mattel curtailing its dependence on licensing. She bases her opinion on the fact that the company has already scaled back its deal with Disney, which saw it shed the riskier theatrical toy rights (which Hasbro picked up), but retain rights to Disney’s more stable TV and classic character properties.

Ultimately, whether toycos make good on their tough talk may not matter. This time next year, there’s a good chance the concern over stingy toycos will be a distant memory in the minds of licensors. Even if just one of Harry Potter, Lord of the Rings or Monsters Inc. becomes a breakaway franchise, the industry focus will shift to talk of escalating royalties and guarantees. For now, anyway, the toycos’ calls for austerity measures is already sounding hollow to many.

‘It’s a joke,’ says TRU’s Mike Tabakin. ‘There isn’t an entertainment studio in the world putting a gun to any manufacturer’s head and saying: `You have to support this property or else.’ It’s like Major League Baseball-no one forced the Texas Rangers to pay Alex Gonzales US$250 million. If they didn’t want to pay it, they wouldn’t.’

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