A slew of new IP is capturing the imagination, eyes and spare time of kids around the globe. And a quick stroll through the show floor at Licensing Show in June told the story. In short, apps and viral properties have arrived on the licensing scene with a vengeance. Led by a flock of ill-tempered fowl, licensing agents, licensees and finally retailers are coming to recognize the potential revenue bonanza associated with exploiting characters derived from interactive games and viral videos that are currently resonating in popular culture.

“There is a tsunami of change going on in the world of licensed brands,” says Larry Seidman, co-founder and CEO of San Anselmo, California-based Dimensional Branding Group. The company has the rights to broker promotional deals and partnerships for Rovio Entertainment’s blockbuster app Angry Birds.

It’s certainly not the first time these types of characters have attempted to crack into the US licensing market. For every Angry Birds, there are likely a half-dozen Crazy Frogs. (The animated amphibian from the beginning of the decade starred in UK mobile adverts and hopped in and out of US retail faster than you could say “ribbit.”) But it seems, even with risk-averse retailers, non-traditional IP may have finally arrived. With an estimated 3.5 billion internet-enabled mobile phones currently roaming the globe—a number expected to swell to an estimated 20 billion by 2020—the distribution platform is now ubiquitous enough to drive an IP. And it is no wonder that retailers are looking beyond traditional licensing source material like movies, TV and publishing properties to stock their shelves.

Debra Joester, president of New York-based agency The Joester Loria Group, agrees that there was something new afoot at this year’s show. “This seems to be the year that viral characters and properties have really found momentum and critical mass,” she contends.

However, as the industry wades into the somewhat uncharted water of merchandising viral characters and apps, caution is still necessary. It’s yet to be determined, for example, whether or not virtual worlds and apps lend themselves to the traditional licensing categories that feature films or TV properties do. Will characters that lack a traditional narrative create the emotional bond with consumers that is essential to establishing a long-term franchise and continued revenue? And while all evidence points to retail interest in this new crop of IP, the licensing industry must meet the challenge of developing long-term strategies for these would-be brands or be faced with fielding a successive string of flash-in-the-pan properties.

A cat-and-bird tale
The uncontested champion in this space thus far is an import from Espoo, Finland. Rovio Entertainment’s Angry Birds literally catapulted onto the scene in 2009, and the IP’s physics-based mobile game that consists of propelling round birds into ramshackle structures has inarguably changed the mobile entertainment landscape. No traditional advertising or marketing accompanied the initial launch, but less than two years later different versions of the game have been downloaded more than 300 million times. Rovio’s stated goal is to reach the billion-download threshold over the next couple years. Notably, there were reports published in August that said the company was in the process of raising more capital on a valuation sitting at approximately US$1.2 billion.

“Angry Birds is blazing the trail for the other guys,” says Marc Mostman, partner at Calabasas, California-based Striker Entertainment. (The company has secured the licensing rights for the property in North America.) “It’s gone from being an app to being a relevant pop culture phenomenon,” he says.

Mostman admits that the response was tepid at best when Striker first brought the IP to Licensing Show in 2009. But undeterred by the initial lukewarm reception, Striker begain crafting a merch strategy that hinged on picking two key apparel licensees targeting specialty retail to test the waters in late 2010.

“We needed to make sure that there was an audience for the licensed products,” says Mostman. “The demographic is hard to pinpoint so we started with men’s and junior sizes.”

The response since the initial lines hit retail has been overwhelming, and Striker is managing a licensee list that seemingly grows every day and now includes heavy hitters like Mattel and niche players like marketing program designer TCC, as well as a major promotional partnership with Twentieth Century Fox.

Despite current pressures from retailers and manufacturers to enter into more categories and produce more products, Striker and Rovio are attempting to steer away from indiscriminate label-slapping, instead developing products to complement new Angry Birds content being created for other mediums.

“We have mostly lifestyle products now,” says Mostman. “We will be doing a big back-to-school program and then we will roll out other categories into mass by spring 2012.”

Interestingly, the 2012 mass-market rollout will likely coincide with the release of content that features a more traditional narrative. Rovio recently purchased an animation company and inked a significant publishing deal that is expected to evolve the Angry Birds brand.

“Their intention is to publish stories,” says Mostman, who believes that Angry Bird’s creators will answer the market’s desire for narrative, not just with updates and new game content as they have been doing since the 2009 launch, but also with traditional storytelling.

“They look at the Disney empire as a model,” Mostman says. “It’s not a ‘here today, gone tomorrow’ thing. The game itself has a level of engagement and a connection that is the envy of other licensors [right now]. That is what will be built upon.”

As for securing retail commitments to place app-inspired products on shelves, consider that last year’s news for Rovio and Striker. “Retailers are now coming to us,” he says, pointing to a number of lines already performing at speciality retailer Hot Topic, including t-shirts and plush.

Another notable player in the apps space can tell a similar success story. Without the benefit of big marketing spend, Palo Alto, California-based Outfit7 launched a number of bestselling apps under its Talking Friends banner. The most popular of the bunch is Talking Tom Cat and the group of apps have been downloaded 150 million times since their release just 12 months ago. (That number encompasses both free downloads and paid ones that range from US$1.99 to US$2.99 apiece.) The app is essentially a mimic machine, where the animated character (12 in all) repeats what is said to it.

“It took a couple of years before people didn’t bat an eye,” says Paul Baldwin, chief marketing officer for the company. “There was a transitional period for retailers, but they have now realized where people are spending their time these days.”

Talking Friends is taking a similar tact to Angry Birds, with an initial specialty-targeted softline category launch that includes sleepwear, t-shirts and plush this fall. (Agent The Beanstalk Group is repping the IP globally.)

But Baldwin is cognizant of the precarious position the family of characters are in as they move forward into a traditional licensing program. The apps’ base appeal lies in the customizability of the on-screen animal. Having the cat, for example, mirror a preschooler’s declaration that “I love Marconi” might be the user’s absolute favorite part of the experience, but how is it possible to translate that interaction to stand-alone products?

“We are aware of that aspect,” says Baldwin. “That is why we are looking at a company like Pixar as our model. We are building characters that are going to be around for decades. So we know that means creating different storylines, different environments and more and more content.”

So far, crafting new content for the Friends has meant doing something different than what traditional publishing- or movie-based franchises do, namely churning out storylines to propel sequels.

“We have released different seasonal downloads and have added content like musical instruments and toys, like a yo-yo, into the apps,” says Baldwin. “For us, storylines might translate into new environments. It’s a different way of thinking about story.”

However, like Angry Birds, Talking Friends is expected to travel the tried-and-true narrative route in the future as the licensing program begins to expand into other categories and heads for mass-market retail. “We just announced a relationship with William Morris,” Baldwin says, referring to the renowned Hollywood talent agency. “We think there will be quite a bit of appeal for the characters in TV and movies because our level of connection with the audience is quite strong.”

Join the club
It’s fair to say that Club Penguin is one of the world’s most popular kid-targeted virtual worlds, and it has been dealing with the same licensing dilemmas newer apps and virtual IP now face since its 2005 launch.

Chris Heatherly, VP of product development and franchises for Disney Online Studios, heads Club Penguin’s operations. (Its parent company purchased the virtual world in 2007 for a reported US$350 million.) He believes that it’s not a question of sustaining an IP without narrative, only that the very term narrative has come to mean something else in the new space.

“We have a very strong narrative,” Heatherly says. “The difference for me is not that one medium like film is a storytelling medium and one like online is not. It’s more about how you tell the story. We have a narrative that continues to engage kids in real time.”

Heatherly adds that the most successful features of the Club Penguin site have used the suggestions made by kid subscribers to build additional games and storylines, or lore, that continue to keep the subscription-based service vibrant.

“Early on, for example, we added a Ninja costume online and then we took it down for various reasons. We noticed that the kids themselves took the idea and started blogging about it. When we re-introduced [the costume], we used some of their ideas and it became a very successful game.”

Heatherly says that from a merchandising and licensing standpoint, the Club Penguin brand has realized success primarily through its master toy license with Jakks Pacific, where plush sales drive the category. Club Penguin Plush Puffles have found shelf space at major retailers like Toys ‘R’ Us and Target. And Heatherly says that retailers’ willingness to stock goods inspired by the virtual world has led to significant expansion plans for the US line into other categories like fashion and accessories that are expected to hit mid and mass retailers by the holiday season.

However, Heatherly has a word of advice for all virtual worlds and game apps looking to head into the consumer products space. “The hard part is that the toys have to be as fun to play with and as interesting as the virtual world or game,” he contends. “Otherwise you have is a souvenir-based business and that isn’t sustainable.” He points to Club Penguin’s use of codes in its plush lines that can unlock other online content as a key way of meeting this challenge.

New paradigm or the exception?
Licensing vet Joester is currently representing the virtual property Annoying Orange, an IP that started as a viral video and currently has nine million Facebook friends, 700 million views on YouTube, weekly content output on its own YouTube channel and a traditional animated program in the works. She asserts that Annoying Orange is different from the apps and online games that have been discussed here because it “most definitely has a narrative.”

Joester does allow, though, that the time might be right for non-traditional properties to get their due at retail. The question, one that only time will answer, revolves around the sustainability of these IPs. Joester believes that a strong narrative is still necessary to cement a relationship between a consumer and a brand, but perhaps technology and character-first IP are changing the paradigm.

“In the past we have seen videogames that have an enormous following experiencing relatively narrow success in the [licensing] space,” she says. “But there is no denying something like Angry Birds right now. From time to time, you will always find exceptions to the character/narrative rule…Retailers and manufacturers are definitely looking for something new.”