Traditional toycos are increasingly treading on consumer electronics’ turf to bring tweens back to the toy aisle
If you followed reports that popped up all over the news during Q4 2005, it seemed like consumer media outlets were convinced the toy biz’s tangle with technology and consumer electronics (CE) signified either the end of the industry as we know it, or its complete rebirth. Headlines such as ‘Toys can’t match tech in contest to sell to kids’ were everywhere, breathlessly describing how kids were getting older younger and their thirst for high-tech CE devices such as the iPod and Sony’s PSP were siphoning sales from an ailing toy industry – forcing toy manufacturers suddenly to go high tech to attract tween consumers or go home.
Well, such reports must seem greatly exaggerated to many long-time industry members and observers. The encroachment of CE on the toy aisle is just one factor contributing to the industry’s less-than-stellar performance in the last few years, and it’s arguably not the biggest. Matters such as shrinking shelf space and tight retail margins (made even slimmer by the now-annual U.S. mass-merchant Q4 price wars), and the rising cost of oil and currency fluctuations driving up the cost of manufacturing are what keep many toyco execs awake at night now. And age compression? Its existence and what to do about it has been debated within the industry for a decade.
That said, there’s no denying that an industry built on keeping children engaged and amused can ignore this generation of kids’ unprecedented comfort level with (and craving for) hi-tech devices. While toycos have been adding electronic bells and whistles to playthings for more than 30 years (Baby Alive, anyone?), in the last few a new breed, toytronics, has emerged. Not a traditional toy, yet not a full-on CE device, toytronics are gaining ground at U.S. retail outlets. Sales for many items such as Hasbro’s VideoNow and the iZ from Zizzle have been outstanding, but can the comparatively flyweight US$20-billion toy industry really expect to beat the super heavyweight US$125-billion CE trade at its own game in the long run? When does it make sense to try and what role does traditional toy innovation have to play in all this? Let’s take a look.
Hot fuss – youth electronics sales take off
Final year-end numbers weren’t available at press time, but Port Washington, New York’s The NPD Group estimates that the youth CE category will end up generating sales between US$600 million and US$700 million at U.S. retail in 2005. When you contrast its value with big traditional toy super categories such as dolls (around US$2.5 billion) and even action figures & accessories (relatively flat at US$1.2 billion), youth CE looks like it has some way to go before it gets close to overtaking the toy biz. What seems to have worked everyone into a lather is youth CE sales shot up somewhere between 36% and 40% (according to several estimates making the rounds last year) in 2004.
That kind of growth, especially when compared to toysales’ overall 3% dip that same year, must have made getting into the youth CE market an even more dazzling prospect for toycos in 2005. ‘When we hit Toy Wishes in October, there was just such a huge number of these item introductions,’ NPD entertainment industry analyst Anita Frazier says. She notes Hasbro, the second-largest U.S. toyco, produced functioning products such as VideoNow, VuGo and i-Dog MP3 player-compatible speakers at reasonable price points through its Tiger Electronics brand. ‘It’s a natural reaction on the part of toy manufacturers,’ she says. ‘Given that they see how much kids are interacting with CE.’
Certainly, youth CE products are carving out a space for themselves at retail. In 2005, giants Wal-Mart and Target made room for kids electronics departments. Target gave its section a snazzy moniker Tech Toys, and specialty chain Toys ‘R’ Us also got in on the act. It’s something of a priority for Denver, Colorado-based on-line toy shop etoys.com, which experienced sales growth of more than 50% in 2005.
Etoys.com began featuring an electronics section on its homepage this past fall, and senior VP of merchandising Fred Hurley for parentco eToys Direct is looking to quadruple the section’s SKU selection in the next two years. Right now the site carries Tiger Electronic products, as well as DVD and MP3 players manufactured by CE companies. Delving further into the MP3 player and accessories category is a big focus for Hurley. ‘We could add 200 to 300 MP3 accessories tomorrow,’ he says. Of course, he’s sourcing much of this MP3 gear from CE manufacturers, not toycos.
And it’s gotten to the point where toycos have just in the last year dropped the word ‘toy’ from their names entirely. For example, emboldened by its success with uber robot Robosapien (sales have surpassed the 2.5-million unit mark since its ’04 launch), creator WowWee Toys is simply WowWee. ‘We’re looking at ourselves as more of a CE company,’ director of marketing Amy Weltman says.
WowWee not only attended the Consumer Electronics Show in Las Vegas last month to drum up more CE business, but it’s also launching new models this year with tech so advanced, they make Robosapien seem a little quaint. The two-foot tall Robosapien Media (SRP US$300 to US$350) features speakers, a USB port and screen to upload and view video. It also plays MP3 files and has a customizable personality in addition to possessing all the capabilities of RS models that preceded it.
Even the house that Bratz built, MGA Entertainment, is shying away from the term ‘toy company’ these days. ‘We’re in the kids business, not the toy business,’ says CEO Isaac Larian. Having successfully introduced a Bratz MP3 player and video camera – built using open, non-proprietary specs – to the market in 2005, Larian’s looking to up the CE portion of MGA’s sales. He estimates CE product sales will jump 15% to make up between 25% and 30% of the company’s total revenues by year’s end.
Integrating CE tech with toys
But what of companies that still clearly identify themselves as toy makers first? Certainly, Hasbro’s been a pioneer in making inroads with CE. The toy giant has been able to produce scaled-down versions of grown-up CE devices for kids, making them both user friendly and affordable. The 1999 launch of the Hit Clips system, featuring a music player and separate proprietary chips preloaded with songs, showed the company it was on to something with tween consumers. And this foresight was confirmed with its 2003 introduction of VideoNow, which sold more than 1.2 million portable video players and 4.5 million device-specific video disks within six months of its retail debut.
Tiger Electronics has since produced several versions of VideoNow and in Q4 2005 it came out with VuGo (SRP US$119), another proprietary portable gadget. VuGo has 128MB of memory and holds up to 60 minutes of video. Animated content from Cartoon Network and Nickelodeon is available for download at US$1.99 per clip on the vugo.com website. The multimedia device, keeping in line with adult-skewing and much costlier units such as the video-enabled iPod (starting at US$299), also holds digital photos, and its files are managed via computer software. While he wouldn’t divulge figures, Jeff Jackson, VP of marketing at Tiger Electronics, says sales of VuGo have so far met the company’s goals.
Jackson adds beyond their lower price points, what should make these video players a more appealing purchase for parents than their full-fledged CE counterparts is the proprietary format. Content is essentially guaranteed to be appropriate for kids, as Hasbro only licenses child-friendly fare for these products, such as SpongeBob SquarePants and music videos from the likes of tween sensation Hilary Duff. Video download sites selling content for use on portable CE devices, Jackson points out, can’t make that kind of claim.
Certainly, Hasbro has a success on its hands with this lineup and several toycos have followed in its footsteps, most notably Mattel with its JuiceBox video player and Vidster video camera offerings. What remains to be seen, however, is how viable this approach will be in the long run.
Adopting CE – A strategy built to last?
Taking on the US$125-billion CE industry for market share in the kids space may be more than the toy industry has bargained for. CE is a notoriously cutthroat business at retail, with prices on new gadgets plummeting at break-neck speeds. NPD’s Frazier says while the numbers weren’t final, she expects the youth electronics category will at best post moderate gains (somewhere around 7%) for 2005, and it didn’t get close to seeing the double-digit leap it made in 2004. The bloom may already be off the rose.
As incredible as it may seem to toy manufacturers who have just gone through the Q4 price wars, profit margins on CE devices are even lower than they are on toys. Additionally, Frazier says about 70% of all youth consumer electronics sales occur during the crucial Christmas season, as compared to roughly 50% for toys in general. For toycos walking that CE line, there could be even more pressure to cut margins to move big volumes of toytronic product in order to make ends meet, already pushing them even farther into commodity pricing territory.
Witness the DVD market. It only took portable DVD players a few years to come down under the US$100 mark. And once a technology hits that tipping point, it won’t be long before it’s competitive with the kid-friendly versions, with fewer features and lower quality being manufactured by toycos. When that happens, will parents be willing to shell out for proprietary content if they’ve already purchased the DVD version and can get their kids a full-fledged CE device for not much more money?
‘One of the issues VideoNow is going to have (even though it’s still doing pretty well),’ eToys’ Hurley says, ‘is as real portable DVD players come down in price and the world is your library in terms of content, why would you want a VideoNow when the [content offering] isn’t as broad?’ During his visit to last month’s Hong Kong Toy Fair, he saw multimedia portable players poised to hit the U.S. market later this year at price points under US$80, likely giving toycos in this space more than a little competition.
Disney Consumer Products didn’t want to face this dilemma. Instead of licensing its IPs to toy manufacturers working in this space, it has aggressively set out to develop full-fledged CE products. The resulting entertainment devices will retail for prices in between premium and generic brands and will accept universal tech formats (i.e. DVDs, MP3s). Therefore, content purchased for the household DVD player can also be used on the Disney model. DCP’s answer to the spell the iPod cast on kids across the nation was the Mix Stick – a non-proprietary MP3 player. At US$49.99, the Mix Stick is capable of playing digital downloads like any other MP3 device, but it also plays industry-standard MMC memory cards preloaded with tunes called Mix Clips.
DCP VP of electronics, Chris Heatherly says the initial batch of Mix Sticks that retailed exclusively at Target over Christmas sold out, and plans are in the works to expand the line into other modes of portable entertainment. ‘We didn’t spend any time or effort trying to out-engineer [MP3 component manufacturers] to make a chip that does the same thing,’ he says. ‘Those companies are the best at what they do and they get cheaper all the time.’
Similarly, president of Deerfield Beach, Florida-based Play Along Toys Jay Foreman says his company wouldn’t attempt to take on the likes of Apple. In fact, he’s not looking at CE at all. ‘It’s beyond the grasp of the traditional toy business to be legitimately competitive on a long term basis,’ he says. ‘Smaller companies don’t have the finances to invest in the type of infrastructure needed to go after Microsoft, Intel and Motorola.’
Traditional toys – Down but not out
In the end, 4Kids Entertainment CEO Al Kahn says the notion the CE invasion will bulldoze the traditional toy market is a bit crazy and overblown. ‘You have to remember that there’s a two to six demo that’s going to play with traditional dolls and trucks, and that doesn’t go away.’ Frazier agrees. ‘Fifty percent of sales are for toys designed for kids five and under… I see it as sweet spot for the toy industry,’ she says.
But even beyond the preschool demo, there’s still an opportunity to reach older kids through non-CE means. Play Along, for one, had a hit this past holiday with the most basic of toys, plush – make that plush for tween boys. Boys can write all over Doodle Monster with a special pen, plunk him in the washing machine and start from scratch when he’s dry. Foreman says industry types were skeptical of the concept at first, but the squishy stuffed animal ended up selling out over the holidays at retailers including Wal-Mart, Target, Kmart and KB Toys. He says the girl-skewing Doodle Bear line of plush (SRP $US15 to US$25, depending on the model) that gave birth to Doodle Monster is on track to generate US$50 million at State-side retailers in 2006.
Even Zizzle – the year-old toyco that burst onto the market this past fall with its toytronic MP3 player-compatible iZ speaker – has set its sights on the rather traditional action figure category for its next move. The ’06 Pirates of the Caribbean line based on the Disney movie franchise has 3 ¾-inch action figures and a 2.5-foot long Black Pearl pirate ship play set at its core. Chief marketing officer Marc Rosenberg says the toyco had to up the ante with action figures and has come out with a line of nearly collectible quality, featuring very intricate sculpting.
Kelly Gilmore, senior VP, global toys and themed entertainment at Warner Bros. Consumer Products, says she’s certainly not turning her back on traditional toys as a licensor. To capture kids more-than-splintered attention these days, the item at hand has to be compelling and expand play value. She points to Playmates Battle Dice as a good example of a toy that does just that for the action figure game category.
Finally, not every object designed to amuse kids lends itself to being teched out. ‘I think technology and electronics have value in toys if it enables or improves a play pattern or allows for personalization or customization you didn’t have before,’ John Friend, Cartoon Network Enterprises senior VP, explains. ‘You don’t want to label slap [a device] for the sake of saying, ‘Hey, it’s electronic.”