Paring Down and Powering Up: Portfolio licensing deals streamline merch strategies

Like most property owners, Marvel Entertainment used to approach licensing on a per-property basis. But dealing with a library of 5,000 characters, this system resulted in a bewildering number of relationships and led to untold duplications and inefficiencies. 'Everybody was competing with everybody,' says Tim Rothwell, president of Marvel's consumer products group. 'It was just confusing!'
November 1, 2005

Like most property owners, Marvel Entertainment used to approach licensing on a per-property basis. But dealing with a library of 5,000 characters, this system resulted in a bewildering number of relationships and led to untold duplications and inefficiencies. ‘Everybody was competing with everybody,’ says Tim Rothwell, president of Marvel’s consumer products group. ‘It was just confusing!’

Rothwell joined the company in 2003 and decided that a more cohesive approach was in order. The entertainment company made a move to consolidate its consumer products licensing strategy, granting rights for more characters to fewer companies and sending licensees packing. In the apparel category, for example, Marvel down-sized from 15 partners to two.

The change has been overwhelmingly positive and is ultimately improving the bottom line, says Rothwell. Under this new business model, wholesale prices are more robust because there isn’t as much unnecessary competition in the marketplace. ‘We don’t have as many licensees going out there trying to kill each other,’ he explains. Furthermore, product innovation is better because licensees are more likely to invest in R&D when they know they’re in a stronger position with the licensor and, by extension, the retailer.

But the proof is in the pudding, as they say. In 2004, the licensing division contributed 41.5% of Marvel Entertainment’s net sales, earning US$173.8 million in domestic revenue. This compares to less than 20% in 2002.

And Marvel isn’t alone. Over the past 18 months, licensors have been striking portfolio-wide deals with increasing regularity. In fact, as licensors get stronger and amass more characters and brands in their entertainment arsenals, the one-property-at-a-time approach can seem increasingly quaint and outdated. Portfolio deals forge a stronger connection between licensor and licensee. And at a time when tiered royalty rates, lower advances/guarantees and limited shelf space are the order of the day, there’s a persuasive argument to be made for licensors to stop putting category licensees in direct competition.

Landing on the same page

‘I see a lot of it across the industry,’ says Jamie Cygielman, HIT Entertainment’s senior VP of consumer products. ‘It makes sense for both the manufacturer and the content provider, as well as the retailer down the line, because it results in increased transactions.’

HIT has signed a number of portfolio licenses, including one with Hallmark, which moved from producing party goods and stationery for just Thomas the Tank Engine to making products for five HIT properties. Then there’s the company’s more recent deal with toyco Jakks Pacific, whose Plug It In & Play TV Games covering the entire HIT stable will debut in fall ’06.

The appeal of these deals appears to be obvious – increased exposure for HIT’s preschool properties, and a one-stop shopping experience for retailers. But Cygielman says the pay-off goes even deeper. Portfolio deals permit licensors to plan farther out than traditional one-offs, creating more opportunities to dovetail product releases with TV and DVD launches, and ultimately generating more bang for the marketing buck at retail. Also, once product based on one property meets a licensor’s requirements, it’s a smoother process getting subsequent SKUs approved, tightening up timelines for delivering product to market.

Valuable time is saved over the length of the program, agrees Jennifer Richmond, Jakks Pacific’s senior VP of licensing and media. ‘We don’t have to keep going back to licensors for each individual property to negotiate [rights],’ she says. Over the course of a typical three-year deal (for the most part, portfolio-wide deals are about the same length as traditional one-offs), this type of arrangement helps free up significant chunks of time and manpower.

Playing it fast and loose

Beyond a reduction in workload for both parties, Richmond also favors this model for the increased flexibility it grants to the licensee. ‘It creates a much less risky situation,’ she says. By having a whole library of characters at its disposal, Jakks can react quickly to the ebb and flow of consumer tastes and accomodate retailers’ requests for exclusive product offerings.

Playmates Toys is currently working with several licensors on multi-property deals, and most recently licensed Marvel characters for its new Battle Dice line that’s launching in spring 2006. The flexibility these relationships lead to in terms of character usage and product assortment is what floats the Costa Mesa, California-based company’s boat.

Moreover, these kinds of agreements leave room for underdog characters to break out. ‘You may never have picked these characters up if you didn’t get a portfolio deal,’ says Herb Mitschele, director of licensing and international business development. This is especially true when a licensee secures international rights to a property as part of a worldwide deal. Often, he says, a character with no profile in the U.S. has a huge following in another country. He points to Sesame Street’s Ernie as an example of this phenomenon. Outside of the U.S., Bert’s buddy is far more popular than the current State-side fave, Elmo.

The flipside, however, is that licensors often put pressure on the licensee to build up a brand presence for those secondary characters that have failed to prove themselves at retail or that aren’t suited to the product category in question. For example, a licensee might have to include female characters in an action figure line because they’re part of the portfolio, and they generally don’t fare as well with the target boys demo.

It’s also worth noting that while portfolio-wide contracts don’t necessarily demand a product plan against every single property, these types of deals do demand a lot more planning when it comes to deciding which properties will get the nod for retail. According to LeapFrog director of licensing Melanie Bell, it’s very clear what the execution is going to be when you’re talking about a one-off license. The licensor and licensee have identified one property and one product, and both work within these two parameters. ‘When you’re looking at a portfolio deal, for both parties it’s really about asking, ‘Are we really going to tap into the entire portfolio in a meaningful way, and does this make more sense than doing a single-property execution?” she says. This isn’t an easy decision to make, but it determines whether both parties should move ahead on the deal or call it off, according to Bell.

Like Richmond, Bell believes time savings is the real upside. Licensees are spared the lengthy process generally involved in identifying and negotiating a property, securing a contract and then launching product for subsequent properties. ‘You’ve essentially gone through that process already, so you’re able to turn the switch on a property and produce much more quickly,’ says Bell.

The benefits for diverse portfolios

While these agreements may seem obvious for licensors with a fairly specific target demo, they also work for portfolios that include a broad cast of characters. This is particularly true with a large licensor such as Nickelodeon. Because it owns its characters and controls programming, Nick can help determine breakout hits simply by supporting one property over another, or by hosting special on-air events at key selling times throughout the year, says Sherice Torres, Nickelodeon & Viacom Consumer Products VP of hard goods.

Nick has forged several portfolio-wide agreements with big licensees, including Crayola and Fisher-Price. These deals work because they allow each partner to align retail and promotion plans in a much more cohesive way than one-off deals permit. ‘If we have one company that has rights to multiple characters, it’s not just trying to make its money on a single property,’ she says. ‘It has the incentive to line up with what your priorities are at any given time of the year.’

Though Torres says she’s not able to discuss pricing strategy, which is really up to the retailers and Nick’s licensees to formulate, she assumes these types of deals lead to more price stability at retail. Like Marvel discovered, when only one company handles a category, it eliminates the prospect of a bidding war come sell-in time.

Also on the retail front, Beth Goss, executive VP of Universal Studios Consumer Products Group, notes that multi-property licenses are more likely to breed long-term conversations with retailers than one-offs. Approaching retailers on a per-category basis provides licensors with a better understanding of a retailer’s needs and product performance.

Despite these benefits, USCPG isn’t embracing the strategy whole-hog and believes its diverse catalogue only suits portfolio deals in certain categories. Home fashion manufacturer Springs Industries got the nod to produce textiles and domestics late last year for upcoming films Curious George and King Kong, literary properties (Where the Wild Things Are, The Little Engine That Could), Sitting Ducks and The Fast and The Furious franchise. And Goss says there are a few more wide-reaching deals in the offing.

Categories that don’t work

As for categories where these deals make little sense? Novelties are one, as well as products with limited windows (such as back-to-school or holiday-driven items) and merchandise with shelf-space constraints. Even with a master toy, which seems like a natural fit, play patterns can be so property-specific that it’s sometimes not possible for one licensee to cover all the bases. HIT’s Cygielman, for example, says while RC2 makes Thomas and Bob toys, it wouldn’t necessarily be an ideal fit for HIT’s entire stable of properties.

Brian Dubinsky, president of L.A. toyco Toy Quest, agrees that some products don’t work for this deal model. For its part, Toy Quest has only applied it to smaller categories such as flashlights and books (both with Nick), while avoiding gendered toys and big-ticket items.

And Nick’s Torres is quick to point out that there’s still plenty of room to work with smaller licensees when it comes to making specialized products. ‘I don’t want to scare anyone away who thinks Nick only does master multi-property deals,’ she says. Because Nick licenses by category rather than by property, smaller companies have just as much going for them if they can prove their worth in a particular sphere. ‘We make some of our biggest deals with companies that started small,’ she says. In fact, smaller licensees are often the ones that have the breakthrough ideas that larger companies haven’t gotten around to because of their size and scope, notes Torres.

In the end, the closer relationship engendered by portfolio-wide arrangements is exactly what many licensees crave. ‘Whenever you’re doing more work with a licensor, you become more collaborative,’ says Dubinsky, adding that all parties, including retailers, share vital information about product potential and performance, resulting in a more powerful licensee standing in the overall equation.

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