Not long ago, Hasbro Interactive seemed to be doing everything right. Fired by $81 million worth of acquisitions, the video, PC, and interactive-game division of toymaker Hasbro Inc. was racking up big sales on computer versions of its popular board games, including Monopoly and Scrabble, and made-for-PC hits such as Roller Coaster Tycoon. From less than $5 million in 1995, sales at the unit exploded to $230 million in 1999.
But for all its fast growth, Hasbro Interactive was slow to react to a major shift in the computer-game business: the move to the Internet. Last year, while Hasbro was rolling out its latest line of software, rivals such as Web portal Lycos Inc. and game designer Electronic Arts Inc. (EA) were refining game sites that brought players onto the Web, with everything from intricate multiplayer fantasy games to simple puzzles. Meanwhile, CD-ROM titles sat on store shelves untouched, slowing HI's growth and denting profits. "Software sales went flat," says Thomas R. Dusenberry, president of Hasbro Interactive: "The Internet went prime time."
MOUSE-HAPPY KIDS. Toy companies such as Hasbro have long been interested in harnessing the power of the Internet, but the effort is taking on a new urgency. Sales of some of the biggest names in toys, such as Mattel Inc.'s Barbie and Hasbro's Star Wars merchandise, have been disappointing. Certainly, online games are still a tiny market--$106 million last year vs. $22 billion for the total toy industry. But while traditional toys are expected to continue their annual growth rate of 5% to 7%, online games are pegged to boom 66% a year. According to Jupiter Communications Inc., 22.4 million kids in the U.S. between the ages of 2 and 18 are online these days. The No. 1 activity--beating e-mail, chat, and homework--is game playing.
These mouse-happy kids are creating a gold rush in toyland. Everyone, from old-line toymakers such as Hasbro to video-game companies like Sony Corp. to Web portals such as Lycos, is making plays in the Internet game world. They face huge challenges, from devising a profitable business model to placating suspicious parents. But anyone with a youthful customer is clearly afraid to be left behind. "This is where the kids want to be," says Ken Goldstein, senior vice-president and general manager of Disney Online, part of GO.com. "If you're not pushing [online], you're really missing the next wave."
Kids like Diane Langona's 8-year-old son Kyler have already gotten interested in playing games on the Net on regular PCs. "They're very simple compared to CD-ROM games, but there's something about finding it on the Web that kids like," says Langona.
INTERNET-READY. And many more of Kyler's pals are likely to dial up now that the big names in gaming devices, including Sony, Sega, and Nintendo, are getting Internet-ready. Soon, kids will be able to play their favorite video games with online opponents by using modems packaged with their systems. Sega Enterprises Ltd.'s latest machine already includes a 56K modem ready to hook players up to the Internet via traditional phone lines. Next year, Sony's Playstation2 will offer users the chance to connect to a broadband provider like the digital cables being installed in some U.S. markets. Nintendo Co., too, will include a modem in its next offering, code-named "Dolphin," and Microsoft Corp. is expected to enter the Internet game fray as well. Modems are "spreading gaming past the PC," says Ed Williams, an analyst with Gerard Klauer Mattison.
Lycos, already a force in the world of adult online games, is banking on advertisments to support its new focus on kids 3 to 12. Its eight-month-old site Lycos Zone features everything from Chinese checkers and Crazy Eights to homework help and math and word games. But so far, the company, which posted an operating loss of $67 million overall last year, is struggling to perfect its strategy for Lycos Zone. Ads work in Lycos' adult site, gamesville.com, which turns a profit. But on kids' sites, they are a trickier business.
So Lycos is bending over backward to appease parents. All advertisements, for example, are clearly marked by the word "ad" because, says Madeline S. Mooney, vice-president for marketing at Lycos, "kids sometimes have a harder time distinguishing between what is an ad and what is content." Plus, to protect kids' privacy, Lycos does not ask kids to register and won't provide advertisers with profiles of the people on the site, a standard in Web advertising.
SURFER MOMS. Scott Rabschnuk, head of marketing for Healthaxis.com, says his Lycos Zone ads have done a good job of reaching his target: moms surfing the Net with their kids. Ads on Lycos Zone have had two to three times the response he has gotten elsewhere. Still, even though advertisers are happy, and even though Lycos Zone is one of the most visited kids' game sites on the Web, it remains unprofitable. Lycos CEO Robert J. Davis is convinced his kids site will be profitable but admits: "We make it harder on ourselves having all the restrictions."
The difficulties in advertising to children online have many Internet game makers looking for profits in a more traditional location: the toy store. Dallas-based Radica Games Ltd., a small toymaker with $134 million in revenue last year, is planning to launch a group of online kids' games later this year. The company expects to make its money from the sale of handheld controls. Its $80 GirlTech Pocket Com for girls 8 to 14, for example, lets users download free games, puzzles, and e-mail from its Web site. Although it seems that charging a monthly subscription would be a stronger long-term revenue generator, Radica CEO Pat S. Feely says he has yet to see that model work for games. "We sell devices," he says. "This is our primary business model."
Early leaders in the Internet game world say a mix of models is the key. Electronic Arts is selling ads on its Internet game site. But in the near term, it expects most online profits to come from subscription dollars. Although EA's online division doesn't yet turn a profit, it has a profitable game, Ultima, where players from around the world pay $9.99 per month to battle one another in a virtual world. The game broke even at about 80,000 subscribers, says EA. Now it has 153,000. Last November, EA became America Online Inc.'s exclusive gaming partner. For $81 million plus 5% of the subscription revenues and 30% of the ad revenue, AOL will link its 50 million subscribers to EA's games site. "We've demonstrated we can make money," says President John S. Riccitiello.
Competitors such as EA have a long headstart, but that's the approach Hasbro plans to copy. It is confidently predicting it will be the No. 1 game site in two to three years. Hasbro will launch games.com this June--and will kick off a multipart moneymaking strategy. On the sections of the site aimed at kids, Hasbro will sell ads and sponsorships, offer subscriptions for premium services such as game upgrades, and set up an online shop for CD-ROMs, video games, and other merchandise. It will also collect data about its customers to use in future marketing to repeat customers. Analyst Margaret Whitfield of Tucker Anthony Cleary Gull says she likes Hasbro's online strategy: "I think it could easily become the biggest element in the industry," says Whitfield.
Still, experts say Internet game sellers face huge hurdles, not only as they try to find ways to make money, but also as they struggle to appease worried parents. As game sites proliferate, more and more parents are likely to take notice and object, experts say. Joseph Turow, a professor at the University of Pennsylvania's Annenberg Public Policy Center, has found in his research that "parents are really scared of the Web at the same time as they see value in it."
More troubling, some marketing experts say all these companies are unrealistically optimistic about the amount of time parents and children will give to the Net. "I think companies are trying to create the trend," says Marianne Szymanski, founder of toy research consultant Toytips.com. In the past, when Szymanski has done research on Internet-connected toys, she says "kids were interested at first. But they weren't saying `I have to go back and go back and go back."'
SHAKEOUT AHEAD. Some companies seem to be daunted by the challenges. Disappointing returns on its traditional videos and CD-ROMs led DreamWorks SKG to abandon its Internet game ambitions and sell its gaming joint venture with Microsoft to rival EA on Feb. 24. Mattel, weighed down by poorly performing software acquisitions including the Learning Co. and Paper Moon, hasn't moved beyond using the Net as a simple marketing tool.
But plenty of others are pressing ahead. Leap Frog, an Emeryville (Calif.) maker of educational toys, including the popular LeapPad, an interactive book series, is launching its first Internet game this year. The company, which only hit $70 million in revenue last year, invested $10 million developing the Web site. "We're going to see an explosion of things hooking into the Internet," says Jim Marggraff, vice-president of the Internet division of Leap Frog. "This will be the year of the shakeout. Businesses with viable business models with real products people can use will rise to the top." Hasbro and the rest want to be among them.