The video game industry has been yanking market share out from under toy companies for years. But rather than rolling over, the toy biz has opened up a new category that puts a simple and inexpensive spin on computer games, and it’s burning up the retail scene.

Plug-and-play systems essentially consist of a joystick or controller that plugs directly into the TV to run a collection of games. While industry tracker The NPD Group doesn’t survey the category separately, senior industry analyst for video games Richard Ow points to double-digit sales growth in both the arcade and family entertainment categories within the video game stream as indication that the toys have been picking up steam lately.

Anson Swoby, director of marketing for Jakks TV, says the plug-and-play category owes its success to the fact that it marries cool technology with a low price-point (US$19.99) that its core target of tech-loving kids can afford. But at the same time, many at-market titles are based on licenses from the glory days of eight-bit graphic consoles, and the retro appeal of brands like Intellivision and Atari draw in a lot of adults.

One of the first toycos to jump on the plug-and-play trend after it acquired ToyMax and its Activision-licensed system in 2002, Jakks is far and away the market leader. In the last year and a half, the category has grown to account for 15% of the toyco’s total sales, which in turn were up by 49% in Q2 over the same quarter last year. The Jakks TV Games line currently has 12 SKUs on the market, including retro titles from Namco (Pac-Man) and Atari, and SpongeBob SquarePants and Disney TV Games joysticks.

But Jakks isn’t stopping there. Rolling out now for the holiday season are an EA Sports collection (featuring Madden NFL and NHL), Spider-Man and World Poker Tournament. And in 2005, the company will release at least a dozen more SKUs, adding brands like Star Wars and Justice League to its entertainment roster.

Now Jakks is actively scouting for licenses to support a second generation of plug-and-play technology that will start to hit the market at the end of this year.

Swoby says the licensing blitz is part of a campaign to make sure Jakks’ line remains head and shoulders above a wave of competition that’s starting to build. And putting a big marketing push behind its launches is also key. ‘We spent millions of dollars in the spring on TV and are doing that again right now.’

Staking out marketshare in Jakks’ shadow isn’t easy, but L.A.-based Toy Quest has found that offering play-driving accessories is a solid point of difference. Several of its plug-and-play SKUs (retailing for US$49.99 each) rely on motion-sensor technology rather than a traditional joystick. The company’s top-selling game, Spider-Man 2 N-Vision, has ankle and wrist bands that translate punching and kicking motions into in-game fighting moves, while Power Rangers Dino Thunder: Thunder Action comes with a saber that transforms into a gun.

With nine games on the market this year, including TLC’s Monster Garage and a sports assortment featuring baseball, golf and snowboarding, Toy Quest associate marketing manager Josh Wiechbrodt says the company plans to triple the size of its plug-and-play line next year. ‘This year, sales have probably quadrupled,’ he says. ‘It’s not a very crowded market now, but things could change drastically over the next two months. We think the category will at least double by end of this year alone.’

Fighting the urge to get in before the inevitable market crush that usually follows intense category heat, New York’s Techno Source is going slowly and focusing on creating solid product that will have staying power. ‘We could easily put out 20 plug-and-plays this year based on the interest we have seen,’ says CEO Eric Levin. ‘But like any market that matures that quickly, there’s going to be some roadkill.’

Over the last year, TS has shipped more than a million units of its 10- and 25-game Intellivision collections (US$9.99 to US$19.99), following up last month with the launch of the Crayola My First TV Play system for preschoolers. Techno Source is actively pursuing new licenses now, with four deals almost done and discussions beginning with four other potential partners. For 2005, Levin says the company will bring out at least five more SKUs, including Coleco’s Head to Head (Techno Source’s first foray into two-player gaming), one or two more Intellivision titles and a licensed casino game.

Levin credits much of Techno Source’s plug-and-play success (the company’s sales in the category have increased by high double digits) to the category’s ability to cross over into new retail channels including Bed Bath & Beyond, QVC and in-store try-me displays that will be in every Walgreen’s store this holiday season.

Likewise, in addition to the usual mass-market consumer electronics biggies, Jakks TV Games have penetrated video game chains such as Electronics Boutique, Saks department stores, Walgreen’s and even hip clothing retailer Urban Outfitters.

But as plug-and-play works its way through a natural evolution from the Atari generation’s eight-bit graphics to the 16-bit world of systems like Sega Genesis, an interesting dynamic appears to be on the horizon. At some point, they’ll inevitably bump up against the current crop of consoles. Levin predicts that once higher-tech capabilities push plug-and-plays beyond the US$50 price threshold, they run the risk of losing their main points of appeal – simplicity and affordability – and could end up competing with Nintendo and Sony.

What’s more, as the specs for plug-and-plays become more advanced, toycos will have to abandon retro licenses and start developing proprietary games that meet the new technical parameters and don’t break the bank for their consumers.

Keeping price-points in the US$20 realm is something Jakks is focusing on as well. Though the company is revamping its plug-and-play technology this year with upgraded memory capacity, multi-player features, pause buttons and 16-bit graphics, suggested retail prices won’t budge. Swoby says the company is also going after different demographic niches this year, targeting preschoolers with a new product line called TV Games Kids, which will include Dora the Explorer and Care Bears titles in 2005.