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The Ever-Expanding Relationship between Video Games and the Toy Business

The Ever-Expanding Relationship between Video Games and the Toy Business: A Long-Term Lucrative Connection

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It’s taken me a few weeks to get around to writing this article due to the demands of work I have been doing for my clients recently. And every few days as I inadvertently delayed writing this, The Super Mario Bros movie kept grossing more and more at the box office!


At the time of writing, this movie spin-off from the long-term Nintendo gaming franchise has grossed more than $1.2billion at the global box office, is currently ranked as the 24th highest grossing movie globally of all time and currently sits at 15th highest grossing U.S. movie ever. Just to put this in context, globally speaking this iteration of one of everyone’s favourite video gaming franchises has outperformed such blockbusters as The Dark Knight, Frozen 2, Shrek 2 & Black Panther: Wakanda Forever. If you had to describe the box office success achieved so far by this instalment of Mario & Friends in one word, then that word would be MASSIVE!

Which is all well and good, but you could ask where the link to the Toy business is, well how about this – Jakks Pacific produced the Toy line for the Super Mario Bros movie, and shortly before the movie released their share price was under $14, whereas on the day of writing the share price sits above $22, meaning an increase in share price of more than 50% (!).

The reality here is that in effect this license has provided Jakks Pacific with a double whammy of an opportunity – firstly Jakks have been making Toys based on the gaming franchise for some time – nearly ten years from what I can find/remember. The gaming iterations of the franchise have offered significant licensing strength to make the Toy line a perennial feature of Jakks Pacific’s line, but then when you add a massive blockbuster movie event with all the eyes on screen and the marketing spend that goes with that, suddenly investors perceive that to merit a massive increase in the value of the company.

The interesting thing here though is that the link between gaming and Toys is hardly a new thing…

A LONG-TERM SYMBIOTIC RELATIONSHIP


The strong link between video gaming and Toys became apparent in the 1980s when mass adoption of home entertainment gaming systems first came to the fore. Classic video game franchises like Pac-Man and Donkey Kong transitioned into toys, bringing virtual characters into the hands of children everywhere in Toy format. This evolution created a strong connection between the two industries, with toy companies recognizing the potential of video game-inspired products.



Both Mattel & Hasbro were involved in the console gaming space in the 1980’s– Mattel’s Intellivision reportedly sold more than 3 million units and was at one point considered a serious threat to the market leading Atari 2600 console, although Atari’s machine sold 30 million units and was eventually the clear winner. Hasbro also had a console in development – the NEMO was in development around the mid to late ‘80s, but despite Hasbro’s reported hunger at the time to be in the business of video gaming and consoles, they eventually had to pull the plug reportedly due to the high demand for personal computers, which lead to a worldwide shortage in VRAM chips and a commercially unviable price point.


MOVING ONTO THE 1990s & NOUGHTIES

Toy industry behemoths Mattel and Hasbro didn’t stop there though. Around the time I joined the Toy business at the turn of the millennium, both Hasbro & Mattel were in the process of getting bloody noses from their forays into the gaming space. I remember working on consumer research projects for Hasbro Interactive 20+ years ago and can vaguely remember through the sands of time that the products were well programmed, fully functional and fun to play…but they lacked the tween/teen kudos which was and is often necessary in that space. Initially Hasbro Interactive was successful, and in a fairly short time became the No. 3 video games publisher. But after a while Hasbro struggled to keep the company profitable, and following the dotcom crash and the company’s widely reported woes of the early noughties the assets of Hasbro Interactive were sold off. Around the same time Mattel were also taking a beating on their The Learning Company business, eventually describing it as a loss-making distraction as they ditched the video gaming space and refocused on Toys.


LEGO TURNS INTERACTIVE


Whereas Hasbro & Mattel suffered via their involvement with video gaming in the noughties, Lego on the other hand rose like a metaphorical phoenix from the flames on the back of their partnership with the Star Wars franchise for among other things a console game in the mid noughties. It’s hard to believe today with Lego’s massive success in recent times, but Lego was struggling back then. One of the issues reported was that while parents loved Lego for the functional and developmental benefits it offered to children, the kids themselves didn’t find Lego that cool compared to other hot Toy products which had more ‘playground currency’. By partnering with Star Wars, and using video gaming as the touchpoint, Lego effectively made Lego ‘cool’ among kids as well as parents – this is truly the holy grail as far as the Toy industry is concerned, and Lego have never looked back since that point.

Now having given Lego great credit for using video gaming platforms to reinvigorate their mighty brand, it has been suggested that the one major strategic mistake Lego have made this century so far is to allow someone else to effectively ‘own’ 3d block building in the digital space. Minecraft has been a huge driver of both kids’ interaction and time commitment, but Minecraft as a Toy license has also been hugely successful – to the extent that Lego even hold the Minecraft license for several products themselves. More than ten years after launching, Minecraft is still getting c. 140 million monthly uses, which in turn is still driving Toy sales.

Skylanders: Video Game and Toys Fused Together


Back in 2011, Activision launched Skylanders – a new franchise which fused console gaming with physical Toys. The Toys could be played with offline of course, but then could be placed on the ‘Portal of Power’ to integrate the characters into the game. Commercially speaking, Skylanders were hugely successful with more than 175 Toys sold, and with total revenues in excess of $3billion. Skylanders will be remembered due to the level of success achieved and for the successful execution of a fused analogue/digital play experience. However, there was one fundamental business model disadvantage with Skylanders which eventually influenced the brand fading away from the market: when you look at console gaming & Toys, you can see two very different cost structures. Video games tend to have very high development costs i.e. just to put this in context, some estimates suggest that a major AAA title like Call of Duty can cost $250m to develop (!), but once developed, the physical inventory and distribution costs are relatively minimal for the publisher. With Toys the opposite applies – Toys are comparatively cheap to develop, in fact it costs peanuts to develop a new Toy versus a major video game, BUT the inventory cost represents a high percentage of the sales value in comparison i.e somewhere between 25% to 35% of Toy company revenues are spent on direct product costs. This means that the decision to fully commit to develop a video game is the biggest financial decision, whereas with Toys the biggest risk is the inventory commitment. Skylanders then, although it was truly brilliant, combined the two riskiest elements of both the Toy & gaming business models – high development costs & high inventory risk.

To put this in further context, we shouldn’t just look at the most successful iteration of fused Toy & gaming products – we should look at something that didn’t work and the costs of that. THQ was once a mighty force in video gaming, but alas suffered greatly from the flop of their uDraw product which was another Toy/gaming fusion product launched around the same time as Skylanders. To cut a long painful saga short, the product failed to excite and at one point THQ reported a revenue shortfall of $100m+ on the product and an excess inventory of 1.4m units. In this case the failure of the product combined with the excessively risky business model was a major factor in THQ’s eventual demise.

FROM VIDEO GAME RETAIL TO TOY STORES?

I could go on and on looking at products and franchises which prove the clear symbiotic relationship between gaming and Toys (I didn’t even mention Fortnite, Angry Birds and so many more), but by now you probably get the point – because of the crossover in consumer between the two adjacent industries, and the strength of characterisation with clear Toyetic appeal, there is always likely to be a link. The Kidult Toy trend about which I have written extensively elsewhere is only going to strengthen the links between Toys & gaming.


One clear physical symptom of how the world has changed is the fact that many video games retailers with physical stores are now handing over more and more of their in-store footage to Toy products. Over the past few years, as the delivery of gaming has transitioned to an ever-increasing extent to online via download or live play, there appears to be a revenue gap these retailers need to fill. This trend began with the obvious links – at one point the Toys you would see in stores like GAME in the UK would be those with clear links to gaming – like the perennial Super Mario Toys referenced earlier from Jakks Pacific, but in recent times, alongside the growth in the Kidult Toy trend and the rise of Funko, these stores seem to be stocking all types of Toys where they fit with geek culture.

Toy Companies Back Playing in this Space: Hasbro and Spin Master

Arguably the biggest trend we can observe in this space of Toy & gaming industry fusion currently is the return of long-standing Toy companies to the gaming space. The first example of this would be Spin Master, who having come up as a Toy company across the last 30 years or so didn’t have any of the baggage of failure that some other companies did in gaming. Spin Master’s acquisition of gaming companies like Nordlight & Toca Boca give the company a clear footprint and set of new revenue streams from the digital gaming space.

Hasbro also has a strong footprint back in the world of digital gaming these days, with leading subsidiary Wizards of the Coast having several gaming development studios in house and various gaming projects in market or under development.

There are of course many other companies working in and across these two spaces, but by this point hopefully you get the point...

IN CONCLUSION

So look, here’s the bottom line – there is a clear link between Toys & digital gaming. Sometimes the flow goes one way, sometimes the other way, but the symbiotic relationship between the two has lasted a very long time now, and looking forward, the factors pointing towards greater interactions seem greater than those pointing towards less. The current success of Super Mario Bros at the global box office shows us that gaming franchises as cultural and commercial phenomena can be as mainstream as mainstream can be.

N.B. All trademarks shown herein are the property of their respective owners.


PLAYING AT BUSINESS PODCAST

Have you listened to the latest episodes of my PLAYING AT BUSINESS podcast:



PLAYING AT BUSINESS PODCAST

EP 97 – UNCHANGING FUNDAMENTALS OF THE TOY & GAMES BUSINESS

We are living through times of massive change and disruption. Technology is advancing at a frighteningly quick rate, and the very fabric of society has been changed by our adoption and development of new technologies.

However, despite that there are 5 unchanging fundamentals of the Toy & Games business. In this podcast we take a look at these fundamentals that have not changed for decades and are unlikely to change in the coming decades despite the huge technological change we have seen and are yet to experience.

EP 96 – 5 CHARACTERISTICS OF BEST-SELLING TOYS & GAMES

There are some recurring characteristics of bestselling Toys & Games. In this episode we run through the 5 most important features. This is not so much creative inspiration as it is a checklist for new Toy & Games products in development.

EP 95 – HOW TO SELL MORE TOYS & GAMES INTERNATIONALLY

Regardless of which country is your home market, the opportunity outside your borders is greater...in this episode we take a look at some simple ways to significantly increase your export sales of Toys & Games.


AND FINALLY…

If you want to find out more about my Toy & Game business consultancy services, please just click the link below. Our company has helped hundreds of Toy & Game companies to get ahead and grow sales/make more profit. I have worked on all product categories across a 20+ year career in Toys & Games, and genuinely love sharing knowledge, contacts and facilitating greater success for our clients. For more information on our services, click here: https://www.toyindustryjournal.com/toy-business-consultancy


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