VTech's Kid-Friendly Tech Strategy

Can kids get excited about electronic storybooks once they've played Plants vs. Zombies on Mom's iPad? That's the dilemma facing Allan Wong, the co-founder and chief executive officer of VTech Holdings. The Hong Kong-based company is a world leader in electronic toys for toddlers and preteens, an industry threatened by the popularity of tablets and smartphones, which can run millions of games, educational programs, and other apps. Wong says that even Steve Jobs has limitations when it comes to the youngster market. "I have seen parents give their iPhones to their kids to keep them quiet," he says. "But would you buy an iPhone for your kids? Probably not. That's where we come in."

Wong's formula: Build cheaper, kid-oriented versions of adult gizmos. Children "love to have what their parents are using," he says. Last year the company introduced the V.Reader, which looks like Amazon.com's (AMZN) Kindle but can handle animation and music, and the MobiGo, a smartphone-like device with a touchscreen and a slide-out keyboard. This fall, the company will roll out the InnoTab, a kids' version of the iPad, with a tilt sensor, media player, calendar, address book, and apps for painting and drawing.

Central to Wong's strategy is keeping prices for VTech products much lower than toys for grown-ups. Instead of hunting for cutting-edge components, VTech's designers look for mature technologies that are already heading down the price curve. The lowest-priced Kindle has a 7.5-inch screen and up to 4 gigabytes of memory, but a 4.3-in. screen and 64 megabytes of memory is good enough for the V.Reader, says Wong. VTech's other major product line, plain-old cordless phones, uses similar components, so the company can save by buying in bulk, says Eric Lau, an analyst in Hong Kong with Citigroup (C). The result: VTech's toy tablet will go on sale for $80, a fifth of the cost of Apple's (AAPL) cheapest iPad. The V.Reader and MobiGo both sell for $60.

To help stay current with today's kids, VTech consults academics such as Eric Klopfer, a Massachusetts Institute of Technology professor and director of the school's Scheller Teacher Education Program. For the InnoTab, he agreed with VTech's decision not to follow Apple's lead in creating an app store that can deliver games and other content over the Internet. Parents might feel uncomfortable allowing their kids to venture online without supervision, so the InnoTab won't have wireless connectivity. Instead, parents will buy plug-in cartridges in toy stores or download games via their PCs from VTech's website. Some of the titles that will be available when the InnoTab is released will include games based on kid-friendly franchises such as Toy Story and SpongeBob SquarePants.

VTech is hedging its bets by looking for new markets beyond the iPhone-crazy U.S., the company's biggest source of revenue. The most attractive is mainland China. VTech hasn't put much effort into Chinese sales till now, says Wong, because the retail sector was too fragmented, making wide-scale distribution almost impossible. With a growing middle class and the emergence of big, nationwide retailers like Gome, Wong says the time is right.

Appealing to Chinese buyers will require some changes, though. "In the U.S., fun and learning go well together," says Wong. "Most products are 50 percent fun, 50 percent learning." In China, though, the ratio is more 95 percent learning, 5 percent fun. With that in mind, Wong has formed partnerships with Chinese textbook publishers so VTech toys can complement school lessons. Although Chinese are already big purchasers of tablets and smartphones, Wong says parents everywhere aren't going to give up on educational toys for their kids. "We don't believe it's a declining market," he says. "There is a lot of life left."

The bottom line: VTech thinks it can win by keeping toys cheap and untethered from the Internet—and by selling to education-crazed parents in China.

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