Happier Times in Toyland

The toy industry seems to be emerging from its slump, and aims to keep the ball rolling with new products that tap into kids' techno-mania

Is the toy business fun again? After several disappointing years, the U.S. toy industry showed a glimmer of growth in 2006, climbing under half a percentage point, to $22.3 billion in U.S. sales, according to market researcher NPD Group. Some players did much better than that. Industry leader Mattel (MAT) saw its revenue leap 9%, to $5.6 billion, last year. The share price of archrival Hasbro (HAS), meanwhile, has climbed 60% in the past year, to $28.

Behind those good results are a slew of new products that tackle the industry's most vexing problem—all the competition from handheld video games, digital music players, and other electronic gadgets. To fight back, toymakers are doing a much better job of tailoring their products to the lifestyles of today's kids. "They've gotten more clever about electronics and more assertive about price," says Sean McGowan, a toy industry analyst at Wedbush Morgan Securities.

Net Connections

Much of that new assertiveness will be on display at the annual American International Toy Fair which began on Feb. 11 in New York. Toy retailers from across the country will get their initial glimpses of toothbrushes that play the Rocky theme and Chat Divas Barbie, the newest version of the iconic doll that chats on her cell phone and sings into a doll-size microphone along with music downloaded from an Apple iPod (AAPL). "There's a lot of good product," says Chris Byrne, contributing editor for industry publication Toy Wishes. "They're really looking at where kids are putting time and money."

One area where kids are focused is computers. Hasbro is launching Net Jet, a $25 console that connects to a computer so kids can play online games. Mattel's version is the $30 Easy-Link Internet Launchpad. Both devices block pop-up ads and keep kids from Web sites and other parts of the computer parents don't want them to be. Educational toymaker LeapFrog Enterprises (LF) is introducing its own kiddie console. The $60 ClickStart My First Computer has a little wireless keyboard and mouse that links up to a TV set. It allows kids as young as three to count in Spanish along with Dora the Explorer and test their math skills while clicking away on a keyboard.

Toymakers are also keeping a close eye on the video game industry. Guitar Hero, the wildly successful game for Sony's (SNE) PlayStation 2 that lets kids pretend they're rock stars, is clearly an influence in a couple of new toys. Mattel's $100 I Can Play Guitar connects to a TV set and teaches kids to play the instrument. Hasbro's $70 Power Tour Electric Guitar allows kids to jam along with songs such as Smoke on the Water and Wild Thing. Meanwhile, Mattel's new Rainbow Adventure Elina doll, $25, operates like a remote control, so girls can use it to play games on the television set.

Banking on Blockbusters

The coming year will likely bring a major battle in the entertainment-licensing arena, with some industry insiders are calling it "The Year of the Threes." That's because three big sequels are in due to be released this summer, including Spider-Man 3, Shrek the Third, and the third installment of the Pirates of the Caribbean series.

Add to that the July 4 release of a feature length Transformers movie directed by Michael Bay and produced by Steven Spielberg. "In a summer where there are a lot of sequels, Transformers is the freshest new movie idea," says Brian Goldner, chief operating officer at Hasbro, which is screening a 30-minute preview of the movie for Toy Fair guests on Feb. 13. "It's as big or bigger than the first time you saw the dinosaurs in Jurassic Park," he adds.

It wasn't too long ago that toy companies shied away from blockbuster movie tie-ins, after many retailers got burned by an overproduction of Star Wars toys. "It depends on the movie," says Roger Shiffman, founder of Zizzle, a toy company whose licensed merchandise includes a $40 toy Pirates boat that rocks like it's at sea as it buzzes across the carpet. "There are a number of properties that are one-off hits. You're investing a lot in making the product and they don't have legs. Pirates is not one of those," he says.

Work-Out Play

For some toymakers, 2007 means back to basics. Lego Group has in recent years done away with action figures, such as Galidor, as well as Clickets, a line of arts-and-crafts products for girls. This year, the company is introducing a $60 Lego Fire Station. "We're getting back to the classic Lego play," says Brand Relations Manager Michael McNally. That doesn't mean the company is giving up on line extensions. Lego is also selling a $35 Fire Boat, a $30 Fire Hovercraft, and a $10 Fire Pick-Up Truck.

Mattel Brands Division President Neil Friedman is very proud of a new set of toys that help fight childhood obesity. These include Smart Cycle, a stationary bike for preschoolers that connects to the TV set and lets kids play games while they pedal. Once again it was based on consumer research. "Mom was telling us to get kids off couch," he says.

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