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Playing in the New Age of Toys and Technology

By Melody Yuan

Apr. 3, 2017
Little girl playing on digital tablet
Digital innovation is changing the toy industry. (Photo credit): Gettyimages.com/Hero Images

How a traditional toy company is finding ways to reinvent play.

Mattel Inc., an American toy manufacturing company that began seven decades ago, is redefining what it means for children to play. With ever-changing technology trends that influence consumer behavior, retail companies—especially those in the toy industry—find it increasingly hard to engage with and earn customer loyalty.

“I think the biggest challenge for the toy industry as a whole is figuring out how to combine traditional retail distribution and manufacturing with a technology startup mindset,” says Robb Fujioka, senior vice president and chief products officer at Mattel.

U.S. toy sales grew by six percent from January to September 2016 but, despite this growth, toy companies face higher competition. No longer are toys appraised only on the physical “play” aspect, they must now cater to children who are technologically savvy and require a higher level of intellectual engagement.

Innovation, connecting old and new

Currently, Mattel requires 18 months on average to develop a toy. Once that toy is developed and dropped off at the retailer, most of the legwork is done and success is measured from sales numbers. In the case of newer and more sophisticated toys, however, the purchase funnel and success model changes slightly. While the bottom line still focuses on sales numbers, the way in which consumers purchase and retain their toys has changed. Take tablets, for example. “With new technology products, we usually don’t launch anything unless we have a three-year plan,” says Fujioka. “Especially because you’re going to invest tons of money into it, and if the first iteration isn’t done right, you typically just have to make a software update and the problem is fixed.” The ease of updating software creates a continuous relationship with the customer throughout the lifespan of the product.

Robb Fujioka, senior vice president and chief products officer at Mattel
Robb Fujioka, senior vice president and chief products officer at Mattel
"The winners in this space will use a complete standalone physical and digital experience that can become a much fuller experience when combined."

- Neyda Carballo-Ricardo

New age of A.I. interaction

With this relationship in mind, Mattel is releasing a new A.I. product called Aristotle that combines research and development (R&D), smart technology, and a product with a long lifespan. Aristotle will be the first voice-activated digital nanny and teacher on the toy market. “We’re very excited about the implications of adaptive learning, artificial intelligence and development categories on how an A.I. assistant can help teach a child basic skillsets,” says Fujioka. Aristotle will monitor your child as a baby, teach basic cognitive skills to your toddlers, and eventually help your children when they come home from school with their homework. As a result of a much higher investment into R&D, Mattel has now built a platform that supports the creation of products such as Aristotle, which cost almost $30 million. “With Margo [Margaret "Margo" Georgiadis] becoming the new CEO and having a technology vernacular, appetite for how digital play patterns intersect with traditional toys is becoming real,” says Fujioka. “You’re now seeing Mattel aggressively shift its mindset toward a technology-inclusive company.”

While companies such as Hasbro and Lego have found a steady stream of revenue through its licensing business, Mattel, which is made up of various brands, is leaning toward a strategy that will change the dynamics of play. So far, character-driven intellectual property (IP)-based packages and partnerships with brands like Marvel have helped drive the bulk of Lego and Hasbro’s profit margins. The success of Marvel’s character-based movies in turn helps Lego and Hasbro’s sell related products from G.I. Joe’s to Transformers. However, Fujioka says that has limitations. “The IP universe is a fixed pie, and you can only get so much, especially with other brands battling for partnerships to create content,” he says.

Instead, Mattel is heading in a different direction that will leverage play pattern, age and gender. Despite the presumption that children are spending more time on their screens and adopting sedentary play habits, The NPD Group Inc. reported that the Outdoor & Sports Toys sales were not only the biggest, with $1.7 billion in sales, but also the most popular category among the toy industry in 2016. “Kids are still playing outdoors and using a variety of toys,” says Fujioka. “We need to link physical and digital play to a whole new level by making the digital aspect more meaningful for child development.”

International partnerships

The recent announcement of Mattel’s partnership with Alibaba Group marks a new era and strategy in the toy business. New toys designed specifically for the Chinese marketplace will be licensed and distributed on a massive scale through China’s largest e-commerce company, Alibaba. This precedent entry means better experimentation in R&D, and also a vantage point of jumping early into the marketplace of a massive consumer nation.

In return, Alibaba will gain access and ownership into collaborative projects with Mattel on toy developments and entertainment products, such as Thomas the Tank Engine cartoons. In a statement, Mattel CEO Margo Georgiadis said, “Play has a tremendous impact on a child’s cognitive, social, and emotional growth. By combining Mattel’s unmatched expertise in childhood learning and development, with Alibaba’s immense reach and unique consumer insights, our goal is to help parents in China raise children to be their personal best.” With an emphasis on play as a means to foster better learning habits and educational growth, this partnership will pave the way for new data collection, technology development, market penetration and symbiotic partnerships. The first products for the Chinese market are scheduled to launch this year.

Defining success

The core competencies of toy companies to simply make plastic items, and then license and distribute these products are now becoming obsolete. So, how can traditionally large, multinational toy companies get creative and remain competitive?

“I don’t think success would be defined by another 100 acquisitions,” says Fujioka. Given the challenge of conflicting corporate cultures and bigger competition from smaller companies overseas, the new method is in partnerships. “The big players are strong at licensing,” says Fujioka. “Look at Disney, Nickelodeon, Sesame Street, etc. They understand distribution and manufacturing really well, and they could add value to smaller companies.”

According to Fujioka, startups may, in the future, compete with the corporate mainstays. Why? Because large multinational companies often take longer to launch products, and savvy startups with less bureaucracy could easily advance with unique solutions. It is obvious that industry players are in a race to find the right formula between physical toys and digital experience. A mutually beneficial success will be defined when a startup is able to converge the two and then partner with a bigger, more traditional toy company for licensing, manufacturing and distribution. “The winners in this space will use a complete standalone physical and digital experience that can become a much fuller experience when combined,” says Fujioka.

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