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4Kids trades up in the TCG market

With TCG-cum-online game Chaotic due out in Q2, New York's 4Kids Entertainment is gearing up to revolutionize the trading card category on a number of levels this year, starting with its business model. The company, which has traditionally conducted its card business via licensee Upper Deck Entertainment, is launching two new subsidiaries to cut out the middleman and retain more of the profits from the property.
January 1, 2007

With TCG-cum-online game Chaotic due out in Q2, New York’s 4Kids Entertainment is gearing up to revolutionize the trading card category on a number of levels this year, starting with its business model. The company, which has traditionally conducted its card business via licensee Upper Deck Entertainment, is launching two new subsidiaries to cut out the middleman and retain more of the profits from the property.

This marks the first time 4Kids has tried its hand at manufacturing, and it may be indicative of the way the company plans to operate in the future. ‘The role of the licensor is changing,’ explains 4Kids chairman and CEO Al Kahn. ‘The licensees don’t drive the train anymore; they are at the behest of the retailers, to a large extent. So the licensor has to do a lot more in terms of promotion, advertising and retail strategies. And the traditional licensing model of just getting royalties, in some cases, negatively impacts a property owner’s ability to do what they need to do.’

Upper Deck currently holds trading card licenses to Yu-Gi-Oh! and Winx Club (which 4Kids manages in the U.S. for Italian owner Rainbow), and Kahn sees no need to change this relationship. But once the digital trading card platform has been perfected with Chaotic, the plan is to tap into it perennially. ‘Basically, we’re going to license the crap out of it,’ says Kahn. While it’s very possible the new companies will open up to third-party licenses down the road, for the time being, they’ll focus on a handful of new 4Kids properties that have been developed specifically to play into the new technology and patents.

Former Upper Deck VP of business development Bryan Gannon will head up both TC Digital Games and TC Websites as president and CEO. While TC Websites beta-tests the massive portal that supports Chaotic’s online game component, TC Digital Games is busy working with distributors, who control a lot of the retail space devoted to trading cards at mass.

According to NPD toy industry analyst Anita Frazier, the trading card market does about 10% of its total business in the games category, which racked up sales of US$2.1 billion in 2005. Carlsbad, California-based Upper Deck (with top-selling property Yu-Gi-Oh! in its stable) and Wizards of the Coast out of Renton, Washington currently dominate the landscape, and it remains to be seen what impact 4Kids’ entry will have on these category veterans. ‘Obviously, when you put something new on the shelf, unless you add more pegs, you’re going to have to reduce something else,’ says Kahn. ‘That will be the retailer’s decision.’

One advantage 4Kids may have in negotiations with buyers is that Chaotic allows retailers to profit from online gaming, albeit indirectly. ‘Most retailers, if they’re honest, are very upset about online games because they don’t make any money from them,’ says Kahn. But with Chaotic (whose cards are embedded with codes that drive online gameplay), they’ll get the margins associated with the sale of starter kits, booster packs and coded ancillary products like toys, and they’ll generate goodwill from having provided consumers with added value. Once kids buy the Chaotic cards, the cost of online gaming is free, which is a big deal for this less-than-flush demo, considering that some subscription-based online games cost as much as US$20 a month.

Chaotic was originally launched in 2001 by a toyco called Dracco Company, which operates out of Copenhagen, Denmark. The pan-Scandinavian program ran for two and a half years and racked up sales of US$54 million. More than 67% of the physical cards were uploaded for online gameplay, and the website had more than two million users at its peak – which is huge, considering the population of Scandinavia is just 24 million.

4Kids has spent the past two years retooling the art to skew a little older and testing the gameplay with boys nine to 14. The rollout plan for Chaotic gets into full swing this month with the 4Kids.TV launch of a same-name animated series whose purpose is to teach kids how to play the game. A co-pro with Vancouver, Canada’s Bardel Entertainment, the show stars two boys who discover a secret portal in the trading card game they’ve been playing. They use it to enter the world of Perim, a parallel universe where the unique codes on their cards are scans of real creatures and battle gear that they use to collect more codes and advance in the game.

The cards themselves will hit card retailers in the spring, building into a summer mass-market entry with some major promotions scheduled for back-to-school. The plan is to license Chaotic in other product categories, and 4Kids is in talks with many potential partners. But the company wants to make sure the TV series, TCG and website gain traction before expanding the property.

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