There are many different reasons to make licensed products right now (appeal to a younger demographic, bigger sales and name recognition, to name a few). Licensing dominates the toy conversation, especially this year with new outings for Frozen, Lion King, Aladdin, Toy Story, Secret Life of Pets and UglyDolls poised to hit the box office. But the kidtech world has always been slightly more hesitant to get in on the licensing love. Instead, companies prefer to test the waters with innovative offers and may be scared off by low margins and even higher prices for consumers.

Is it a missed opportunity? Twenty-five percent of US children’s products aimed at kids under 14 are licensed, according to market research firm The NPD Group. This accounted for a quarter (or US$17 billion) of total US unit sales in Q4 2017. And considering that sales in the youth electronics toy category were up 3% in 2018, even as overall toy sales fell 2%, licensed tech toys might just be a match made in bottom-line heaven.

So, which is the better strategy? There’s no clear answer, but two kidtech companies that have taken drastically different approaches to the industry could provide some inspiration.

After selling millions of BB-8 toys (pictured above)—not to mention creating real-life R2-D2s, a Lightning McQueen car and a talking Spider-Man—robotic toymaker Sphero announced in December that it was getting out of the licensing game. Instead, the Boulder, Colorado-based techco announced it would shift focus to its own educational IPs.

Many in the industry were surprised: Sphero had been a leader in the industry, jumping on the BB-8 trend ahead of Star Wars: The Force Awakens and making it the must-have toy of 2015…and 2016…and even 2017. Not only that, but Sphero had been part of the Disney Accelerator program, which helps new and innovative tech companies get off the ground, offering mentors and even licensing agreements.

Ultimately, the margins were too small to be sustainable, says David Millage, VP of education at Sphero. Even though the app-enabled toys cost upwards of US$150 (some reaching as high as US$350), the margins are much better when a company creates new characters and owns them. Leaving licensing was the best thing to do for the health of the business, he says.

Millage declined to share details on Sphero’s profit margins, but in December 2018 the company laid off 45 employees following lackluster holiday sales. CEO Paul Berberian told media at the time that the licensed goods were not only labor-intensive and costly to produce, but the nature of toys based on movie characters also meant the technology didn’t have a very long shelf life.

By comparison, original educational IPs tend to be more easily tied to product release cycles that the company can control.
“In any licensing agreement, you are betting a certain amount of sales for the license of the intellectual property on the brand and everything that it carries,” says Millage. “So you’re betting on more volume versus higher margins. In some cases it was good, in some cases it wasn’t. Fortunately for us, the education business was growing, and we can obviously control our margins and costs a lot more there.”

That’s not to say the licensing deals weren’t beneficial for the techco. While Sphero was raking in the cash from those deals, it spent years working behind the scenes to build up its educational products and form partnerships with schools. In fact, Millage joined the company four years ago, specifically leaving Apple (where he was senior manager of education content) to lead the robotmaker’s school-focused push.

“We want to be great in the classroom, but we want to do it with our own intellectual property,” says Millage.

Even though Sphero left licensing behind, Millage notes that the company learned a lot from the experience. Thanks to putting out four new Disney products in 2017, Sphero was able to pick up a lot of hardware knowledge—about how to manufacture the tech and how to take it to market. The experience also helped the team develop new hardware and control systems, and build expertise in those areas very quickly.

The robotmaker shifted focus to products baring its own name, like the Sphero Mini

Now the company has rolled out a whole new portfolio that includes self-titled offerings (the Sphero, Sphero Bolt, Sphero Mini (pictured directly above) and Sphero SPRK+), as well as the recently acquired musical toy Specdrums and the crowd-funded robot car RVR (all ranging from US$50 for a Mini to US$250 for the RVR). And that’s not to mention a whole whack of content and software to make those toys come alive. Today, Sphero is the number-one robot in US education, according to Millage, having sold more than four million units.

“We’ve learned so much through building these licensed products and these character-driven products, that we feel like we can create our own products now,” says Millage.

Check back tomorrow for the other side of the debate: Why Wowwee is moving into more licensed deals.