Toy Story
Not that long ago, in a
galaxy very, very close to home, the nation's third-largest toy company tied
its fortunes to the most popular film series in history. In a strange way, it's
been paying for that decision ever since.
The toy
company is not Mattel or Hasbro, but Galoob, makers of Sky Dancers, My Pretty
Dollhouse, Men in Black action figures, and Micro Machines. The film
series, of course, is the Star Wars trilogy. For five years, Galoob has
been making vehicles and action figures based on those films, and that
arrangement by itself catapulted the company into the ranks of major toy
makers. This year alone, Galoob will sell $120 million worth of Star
Wars toys. And while sales this year were obviously boosted by the
re-release of the trilogy, George Lucas' creation has become a source of
perpetual revenue in the 1990s. Since the first film came out, Star Wars
merchandise sales have totaled more than $2.5 billion.
It's safe to say, in fact, that Star Wars
single-handedly created the film-merchandising business. While it had always
been possible to buy movie posters or souvenir plates (and God knows we're
thankful for the plates), the concept of creating a toy universe replicating
the one in the film somehow eluded movie makers until Lucas came along. This
isn't because Star Wars was the first movie that lent itself to action
figures and plastic vehicles. One could easily imagine James Bond toys--as
there are now--or toys based on The Man From U.N.C.L.E . It's a classic
example of a company creating a market rather than responding to an existing
one. No one knew how much kids wanted action figures until they were offered
them.
The
result, of course, has been a flood of toys based on everything from comic
books to Westerns. (Galoob is even in the process of hurriedly rushing to
market 11 ½-inch Spice Girls dolls, hoping to cash in on the frenzy before the
British quintet end up in Palookaville.) Nothing drives home the ephemeral
nature of popularity better, in fact, then wandering through the action-figure
section of Toys "R" Us and seeing the deep discounts on toys from films that
were supposed to be hits but weren't. Ah, there's a Schwarzenegger figure from
The Last Action Hero ! There's the Riddler from Batman Forever and
Poison Ivy from Batman & Robin ! And they're all yours for 80 percent
off.
The problem for toy companies is that they need
to design and manufacture the toys for a movie without having any sense of how
popular that movie is going to be. You can easily end up making $50 million
worth of Hercules toys only to watch the orders dry up as the movie
tanks. On the other hand, if the movie's popular and you don't have enough
product on hand to take advantage of those few weeks when your toys are hot,
you won't get the chance again.
The one
exception to this short-life-expectancy rule is the film series that started
the whole exhausting merry-go-round. Star Wars toys did go through a
long slump, but since 1992 or so they have been consistent winners. As the
incredible box-office numbers for the trilogy's re-release showed, there are
millions upon millions of American children, born a decade or more after Luke
Skywalker first appeared, who nonetheless see him as their hero. This is
a phenomenon that could only have happened in the age of the videocassette
recorder, but even so it remains an anomaly in the world of pop culture. Where
almost everything else gets consumed and cast aside almost immediately, Star
Wars has been able to remain somehow fashionable.
Galoob, as it happens, is not the leading manufacturer of
Star Wars toys. That honor belongs to Hasbro, which swallowed Kenner in
1991. Kenner had been given the license to make Star Wars toys "in
perpetuity" back in 1977, and was responsible for those little plastic Darth
Vader and C-3PO figures that now sell for hundreds of dollars at collectors
shows. But soon after Hasbro acquired the company, it made one of the great
blunders in the history of merchandising, forgoing its licensing fee to
Lucasfilm because the sales of Star Wars toys were in a bad slump.
Lucasfilm turned to Galoob, which created an entire new line--the Micro
Machines--of Star Wars toys. When those toys took off, Hasbro jumped
back into the fray, but Galoob was there to stay. Some have even suggested that
Galoob, by proving that the franchise still had legs, was indirectly
responsible for this year's revival and for the prequel trilogy that will debut in May of 1999.
This,
then, is a story to warm the heart of any entrepreneur. Small company sees big
opportunity, seizes it, and reaps the rewards forever after. The only problem
is that Galoob doesn't own the franchise. Lucasfilm does. As a result of the
Star Wars deal, Galoob devoted more and more of its resources to that
line, shifting money out of internal development, staking the company, in a
sense, on this product whose existence depended utterly on staying in the good
graces of Lucasfilm. This year, Galoob found out exactly what dependence
means.
The Star Wars toy contracts were
scheduled to expire next year, which sparked a bidding war this fall. Mattel
offered $1 billion for a decadelong contract, while Hasbro sought to expand its
current $200-million-a-year business. Galoob, having less cash than either of
the two big toy makers, offered part of itself. In the end, Galoob was able to
secure a license and guarantee its future, but in exchange it mortgaged the
farm. Beginning in 1999, Lucasfilm will receive $140 million a year in
advance-royalty payments, plus a set percentage of all toy sales. More
strikingly, Galoob gave Lucas options to buy 20 percent of the company at $15 a
share, which at the time the deal was made was a bargain. Galoob's future is
solid--once the first film of the new trilogy comes out, sales of its toys
could reach as much as $400 million a year. But more than ever, that future
will be tied very tightly to the desires of Lucasfilm.
As it happens, right now the
deal isn't looking as great for Lucasfilm as it originally did. Announcement of
the terms sent Galoob's stock plummeting, so that Lucasfilm's options are now
out of the money. (It would be cheaper to buy the stock on the open market than
by using the options.) Still, the stock price will likely improve as 1999
nears. And Lucasfilm does hold all the cards.
There's been a lot of
overdone talk in the last couple of years about the transformation of the U.S.
economy away from one based on manufacturing toward one based on ideas. But the
more interesting transformation signaled by the relationship between Galoob and
Lucasfilm may be the one from an economy in which companies design and make
products in-house toward an economy in which those functions are separated and
contracted out. And in this new world it's not the company that owns the
assembly line that has real power. Instead, it's the company that owns the name
that dictates the terms. Anyone can make toys, apparently. But not anyone can
stamp the Star Wars tag on them.
