It was one merger with a profound effect on two worlds. In December, the world’s largest toy company acquired the world’s second largest consumer software company, and neither company’s market will ever be the same again.

Although Mattel will not confirm future plans for The Learning Company until the merger is finalized in March, there is every indication that the TLC brand will live on. However, analysts predict that the new TLC will be significantly different from the old one, especially when it comes to setting prices. ‘It remains to be seen, but the merger suggests that the intense pricing pressure that’s been going on in education should ease somewhat,’ says PC Data’s director of research, Roger Lanctot. ‘Mattel is not as promotional as most other publishers because it has an intense brand loyalty. Mattel’s products are `gotta-have’ kinds of products for its customers, so there’s no need to go to the outrageously steep rebates.’

Lanctot adds that there has been a flurry of merger activity in the educational software market over the last year, and less competition may mean the end of the net-to-zero rebates offered in 1998. These mergers and acquisitions include TLC’s takeover of Br¿derbund and Mindscape, as well as the recent acquisition of the software arm of Cendant Corporation by France’s Havas. Lanctot says this has reduced the number of major players from almost a dozen to five, leaving only Disney, Microsoft, Humongous Entertainment, Havas and TLC in the learning software category.

One of the key benefits TLC will reap from hooking up with Mattel is free access to the toy giant’s established brands, according to TLC’s chairman and CEO, Michael Perik. He noted when the merger was announced that TLC’s access to brands such as Fisher-Price, Barbie and Hot Wheels will enable the company to increase its offering of proprietary brands without paying more licensing fees. Lanctot adds that while TLC will benefit from brand access, Mattel will likewise benefit from TLC’s electronic media development expertise. ‘You could see all of Mattel’s products coming with CD-ROMs,’ he says. ‘I could see a situation where Mattel might become a kids portal on the Internet some time down the road. There really is no limit to what they could do with the kind of leverage they will have between their own properties and TLC’s ability to bring them to market.’

For Mattel, the US$3.8-billion acquisition of TLC is part of a long-term plan to move away from traditional toys, which have suffered declining sales, and move towards interactive toys, which have been taking off. Mattel’s chairman and CEO, Jill Barad, estimates that once the merger is finalized, over 30% of the combined earnings of the two companies will come from interactive sales.

The merger was also a major stepping stone in Mattel’s plan to move towards circumventing retailers and selling direct to customers. With 14% of TLC’s sales, totaling US$600 million, coming from direct-to-consumer sales before the merger, the acquisition puts Mattel well on its way to meeting Barad’s goal of growing direct sales to over $1 billion in three years. Barad also notes that with last June’s acquisition of Pleasant Company, Mattel has the infrastructure for the move to direct sales. ‘With Pleasant Company’s state-of-the-art systems and warehouse capacity, we now have the ability to handle an additional US$700 million in direct selling fulfillment,’ she announced. ‘To take advantage of this capability, direct-to-consumer catalogs for all of our brands will begin in 1999, with e-commerce ready for Internet transaction for all of them as well.’

Barad adds that the acquisition has given Mattel long-coveted access to the specialty toy market, thanks to TLC’s established distribution network, which includes such retailers as Noodle Kidoodle and Zany Brainy.

More than just another merger, it seems the union of Mattel and TLC is another indicator that the future of the toy business, in general, lies increasingly in the realm of electronics and new media. Over the past year, Hasbro, the world’s second largest toy company, has acquired the MicroProse software company, the Atari Video Game division of JTS Corporation and Tiger Electronics. As of press time, Hasbro also plans to acquire the games unit of Monarch Services.