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The Invasion of the Toy People

The big fish have been busy this year, doing what they do best--eating little fish. Many, many takeovers have occurred--Cendant's software operations by Vivendi, Crystal Dynamics by Eidos, Microprose by Hasbro, Broderbund by The Learning Company--and now, The Learning Company by Mattel.

At first glance, there's been enormous consolidation in the field--but at the same time, hardly a week goes by without a new developer starting up. Gaming is a quick-moving, quick-changing field; even as big fish devour little fish, little fish are born and grow... It's what Schumpeter called the creative destruction of capitalism. Turmoil always, but also growth.

The mere fact of takeovers, therefore, is not a trend. But perhaps this is: In the last year, both of the major toy companies--Hasbro and Mattel--have acquired substantial computer game operations. Is this the beginning of The Invasion of the Toy People?

Barbie Strides Colossus-Like Across the Land of Riven

On December 14th, Mattel announced that it was purchasing The Learning Company for close to $3.8 billion dollars. The takeover is supposed to complete next April.

The Learning Company claims to be the second largest publisher of consumer software after Microsoft. Among other subsidiaries, it owns Broderbund (one of the grand old computer game publishers, founded in 1980), Red Orb , CyberPatrol, Comptons, Mindscape, and Creative Wonders.

From our perspective, The Learning Company may look like a major game publisher--among its products are Myst, Riven, Warbreeds and Prince of Persia. But in fact, games are a tiny portion of its product mix. It's an educational and reference publisher. It publishes Carmen Sandiego, The Print Shop, Living Books, Mavis Beacon Teaches Typing, Compton's Encyclopedia, Sesame Street and School House Rock titles, home office productivity software, and SAT review products. You and I may walk straight past this stuff when we enter a software store to get to the games, but this is in some ways a much easier business to be in: development costs per title are much lower, and perennials easier to establish. (Reader Rabbit is still one of the top-selling educational titles, more than a decade from its initial release.)

According to reportage elsewhere, Mattel is imitating Hasbro by getting into computer gaming. But that isn't really true. It's more accurate to say that Mattel is getting into kid software in a big way; they're getting some games along with the package, but The Learning Company's game properties were obviously not the main motivation for the takeover. Remember that Mattel mainly sells products to kids; Carmen Sandiego and Sesame Street are products that appeal to Mattel a whole lot more than Myst.

Indeed, Mattel, in contrast to Hasbro, basically doesn't give a tinker's cuss about games. Hasbro own Parker Brothers, Milton Bradley, and Selchow & Richter; it bestrides the boardgame world like a Colossus. Mattel owns squat--no, that's not quite true, they own International Games, the publishers of Uno--but they're toys first and games maybe tenth.

Both companies have independently developed substantial interactive divisions of their own, before this year's acquisitions; Mattel Media's Barbie CD-ROM products consistently hit the best-sellers list. Only last month, in fact, three of the top ten slots on the PC Data list were occupied by Barbie titles. Yes, Half-Life and Rainbow Six are being beaten out by shovelware drivel featuring a plastic doll.

And Hasbro Interactive has had fair success with titles based on its stable of great old boardgames, and products based on its toys--Mr. Potato Head is their friend. But the difference there is important, too. Axis & Allies is clearly a game (even if the boardgame is more fun than the computer version, grump grump). Barbie Nail Designer clearly is nothing like a game.

Rather than 'getting into gaming,' it's more likely that Mattel will get The Learning Company out of gaming. The Learning Company's game assets were mostly obtained when it took over Broderbund in August; Broderbund published games through Red Orb, but its mainstay was educational product, too--Carmen Sandiego among others. Almost immediately, The Learning Company laid off 500 Broderbund staffers, and cancelled a slew of games. And frankly, there may not be a lot of reason to continue much in the way of game development: Broderbund's gaming mainstay was Myst and Riven, but the Miller brothers who created them have since split up... There may not be a third in the series, and without it, Red Orb's product line looks pretty bare.

Although to be sure, Mattel isn't exactly known as an educational product producer, either. It's mainstay is pure kid entertainment product--toys sold for kids to have fun with, eductional value irrelevant. Why Mattel wants to be in the educational software business is almost as mysterious as why it wants computer games.

Actually, Mattel probably wasn't watching Hasbro so much as Vivendi. For close to six months starting last April, Cendant's software divisions were up for sale--ultimately going to Vivendi, a French water utility (I don't make this stuff up). Cendant includes Sierra Online and Blizzard--it is genuinely a major game publisher--but it also includes Knowledge Adventure (the Jump Start series) and Davidson Associates (Math Blaster). It's the largest educational software publisher other than The Learning Company.

There's no way to know for sure, but it's likely that Mattel was one of the companies interested in Cendant. And with the Cendant companies sold to Vivendi, there was only one big kid software publisher remaining....

And Mattel paid over the odds for it, too. The sale price was $3.8 billion. This is a for a company that lost $475 million on revenues of $392 million in 1997--that's right, lost more than it took in. That in the first nine months of 1998 lost $200 million on revenues of $564 million--definitely an improvement, but not exactly indicative of a rock-solid operation. And whose total market capitalization was about $2.1 billion before the takeover was announced.

Mattel is paying almost double the market's valuation of The Learning Company, with the market near its all time high. And though Mattel is a big company, $3.8 billion is also a lot of money for it to spend; in 1997, Mattel's sales amounted to $4.8 billion, with a profit of $285 million. So this is no small deal for Mattel.

They must really want to be in this business, eh?

A Tale of Two Trade Shows

Of course, maybe Mattel does want to be in computer games as well as kidware. To justify the purchase price of The Learning Company, they certainly ought to try to squeeze as much value out of it as they can, and Broderbund had some good game properties. But can Mattel make games work?

At first glance, the toy industry and gaming have a lot in common. Both are capital-intensive, hit-driven industries; in computer gaming, a handful of games rake in big bucks while most (94%, according to conventional wisdom) lose money. Similarly, every Christmas sees one or a few hot-hot toys that become national crazes--this year, Furbies. New toy launches are often complete flops, just as new game launches are.

And in toys, as in gaming, an established brand-name can have legs for years--if you establish a franchise like Tomb Raider or Quake, you're guaranteed a certain level of sales. The same is true of franchises like Barbie or Hot Wheels.

But the mentalities of the industry are very, very different. Take a look at their major trade shows. The Toy Fair occurs every winter, two blocks from where I sit at the moment, in two old office buildings (Toy Center North and South) which boast among the highest rents in New York City because that's where Toy Fair is held. In crowded rooms, hordes of middle-aged buyers wander from show room to show room, examining toys and trying to guess what's going to be hot almost a year later, in the Christmas season. It's remarkably low key, in many ways; it's barred to the public, open only to the trade, and while companies invest a fair bit in displays, the nature of the Toy Center and of the trade itself mean that glitz and hoopla are at a minimum. This is a skeptical, cynical, tough business; buyers demand a seven-figure promotional campaign for a new product launch before they'll take it seriously.

Compare that to E3, one of the glitziest and most ludicrously hype-ridden shows on Earth: bass booming music across an enormous trade show floor, fog machines filling the space with steam, lasers zapping through the miasma, the rumble and roar of videogames, chirpy publicity wenches burbling superlatives in an effort to present their me-too games as something truly hot. Outside Hollywood and the fashion industry, you just don't find anything quite so mind-numbingly awful.

Or contrast the typical attendees of each show: At Toy Fair, a pudgy, balding, tired, middle-aged buyer in a rumpled suit who isn't chomping a cigar only because city regulations prohibit it. At E3, a Skeecher-shoed 20something guy with a peroxide-blond crewcut clad in bondage pants--okay, I'm exaggerating a bit for effect.

The cultures and sales practices and the aesthetics of the two markets are very, very different.

And the development practices are different, too, in a fundamentally scary way. In the toy industry, the over-riding problem is cost of goods; that's where the major sunk cost goes. You have to commission product from factories in East Asia by late Spring to get it in the stores by Christmas. Before you launch a toy, you test it extensively, watching kids play with it through one-way glass, until you're certain you've got something kids will like; only then do you commit to manufacture.

In gaming, you look at a sketchy written proposal and a clunky demo that maybe gives you some idea of the final product's look, and you gulp and sign on the line to commit a million bucks or two--and a year later, more likely a year and a half, you have a product that, God and Microsoft willing, maybe someone will actually want to play. The major cost is development funding; cost of goods is trivial. You can't product test, because you don't have a product to test until you've already sunk most of your cost.

Anyone who tries to manage game development like toy production is going to be handed some rude surprises.

The Suits March In, The Suits March Out

We've seen this before.

This isn't the first time that companies outside computer gaming have decided that they want a piece of the action. It happened with the first video game boom, when Mattel and Coleco both had game systems.

It happened scant years ago, when virtually every Hollywood studio decided their understanding of 'entertainment' and video production made their conquest of the new world of CD-ROM gaming inevitable and set up interactive subsidiaries--none of them terribly successful. (Well, except for LucasArts, but they've been in gaming forever--no johnny-come-latelies here.)

And it happened when the publishing industry decided "CD-ROM" was a form of publishing, and set up subsidiaries to develop products for this wonderful new medium-- only to discover that CD-ROM isn't a medium, merely a delivery system for software. Simon & Schuster Interactive is about the only such operation that still remains.

Hasbro is at least committed to games; they make good money off non-electronic games, and they know there's a big electronic games industry out there. And Mattel has had considerable success with non-game software.

But neither company is used to the large budgets and uncertainties involved in game development, particularly in the development of products that aren't based on time-tested brands. And neither is used to the dark, sardonic edge that seems to sell best in computer games.

Just as publishers found that this industry isn't like publishing, and the studios found that this industry isn't like film, so the toy companies will find that it isn't like toys, either.

Frankly, Hasbro is likelier to make a better fist of this than Mattel. The corporate mentalities are different. They're both toy companies, but Hasbro at least understands games, and understands that development may take a while. Mattel is much more imbued with the toy industry mentality, wedded to yearly cycles and plannable production. Game development doesn't work that way. Imagine them deciding, today, that they want a Riven sequel by Christmas.... How long did it take the Miller Brothers? Three years?

When they've been burned a time or two, perhaps like the studios and publishers before them, perhaps they'll decide that the game isn't worth the candle.

Or then again, maybe not. Maybe I'm underestimating the folks from L.A. (where Mattel's headquartered) and Pawtucket (Hasbro). Maybe EA and GT Interactive had best beware the fearsome threat from Barbie and Dude Potato.

Maybe the Invasion of the Toy People has just begun.

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Copyright © 1999 by Greg Costikyan.