Oct 6, 2014
By Lutz Muller
The licensed toy segment is large and continues to grow. According to The NPD Group, the overall toy market in the U.S. declined by 1.8 percent last year, while licensed toy sales grew by 1.8 percent and now represent about 31 percent of the U.S. toy market in value.
There are two parties to any licensing deal: the licensor that owns the property to be licensed, and the licensee that will take it to the marketplace. Not surprisingly, the perceived value of a license differs sharply depending on which of the two parties you ask, but the perspective can be boiled down to a very simple statement: The licensor sees the upside of a product or a brand through rose-tinted glasses, while the licensee sees the downside given by competition and retailer limitations.
Because of the difference in perspective, the role of the licensing agent—the marriage counselor, so to speak—has become increasingly important. Industry experts estimate that today, about a quarter of all toy licenses are brokered in one form or another. The role of the agent is complex. On one side, he or she has to reduce the expectations of the would-be licensor to realistic levels, sharpen the product or brand narrative to a coherent and focused message, and ensure that the necessary conditions for a license arrangement are in place. On the other side, the agent has to identify a potential licensee with a product portfolio that has gaps into which the product could fit, that has the necessary clout to bring the product to market, and that is not a total slave to the “not invented here” philosophy barring any idea not conceived in-house.
The agent also fulfills another major role in that he or she is known to the would-be licensee, and hence trusted to be familiar with the legal and financial parameters governing license deals. In fact, many toy companies simply refuse to look at unsolicited license proposals from outsiders because it is often just a waste of their time.
This article looks at the perspective of one licensing agent, Patti Becker of Becker Associates LLC, and compares it to that of Brian Klauber, partner at Creative Toys, the licensor of Swivel-Snaps. Becker Associates LLC is a top licensing agency in the toy field, whereas Creative Toys has just completed the development of its first product, Swivel-Snaps.
Lutz Muller: What are the attributes of a product to be licensed?
Patti Becker: We’re very selective with what we represent. That said, we are always interested in properties that have the potential for global, mass-market appeal. I think one of the most important aspects is whether or not a product or property fits our licensees’ budget and line. We offer our customer innovative, proprietary products. Many of these require a significant investment, which can be challenging in this type of a conservative environment, with limited retail shelf space. We are fortunate to have many proven, successful products and brands to offer during times like these when the economy makes manufacturers risk-averse. In fact, our family is recognized for our evergreen products. My father-in-law, Jim Becker, who founded Anjar, the company my husband Jonathan runs, was just nominated for the Toy Industry Hall of Fame. He created, developed, or licensed Gumby, Pokey, Barrel of Monkeys, Disappearing Magic Baby Bottle, Othello, Nerf Ping Pong, Shirt Pocket Games, Betsy McCall Fashion Designer Set, and so many other toys that have become familiar household names and sold millions of pieces.
Brian Klauber: Our Swivel-Snaps are construction toys that enable kids and adults to build and explore 2-D and 3-D models quickly and without the danger of magnets. The geometric shapes found in Swivel-Snaps give everyone a chance to see, touch, and interact with geometry in a new and exciting way. The unique fastening technology in Swivel-Snaps allows users to safely build large structures and then quickly rotate pieces or entire sections to change their creation instantly into something new.
LM: What is the importance of price points?
PB: Price is always important. Hitting key price points in the range where the customer expects to see it is important to the success of all products, as is having a good price/value relationship. We all know examples of a great product at the wrong price that bombed, so we try to provide a line of branded merchandise that hits different price points whenever possible, which ultimately expands the reach to more consumers.
BK: At Creative Toys, our goal is to offer the best value possible to our customers. Initially, we will bring compelling and exciting options to market in the $20 to $30 price range. After gathering feedback from our customers, we plan to offer higher and lower priced [items] that can augment and enhance an owner’s prior Swivel-Snaps inventory. The market leader in the construction toy vertical (a household name) can charge upwards of $50 to $70 per kit. We believe Swivel-Snaps can offer equal or greater value to customers at a lower price point.
LM: What is the ideal partner?
PB: One of our sweet spots is representing inventors and entrepreneurs who come to us with a brand they’d like to develop and license. We also provide strategic marketing consulting services to help scale our clients’ businesses.
We work globally with many major toy, game, and consumer products manufacturers. Licensors often approach us to represent their brands. Other times, we have a product that would work especially well with specific licensors and we go after those properties. We also license product lines to manufacturers that obtain the rights directly from the licensor. In some cases, we help negotiate intellectual property (IP) rights. The industry has changed since I started in 1977, with more products being licensed and sold to fewer manufacturers, on a larger, global scale.
BK: We, the founders of Creative Toys, are passionate about our technology, creativity, and innovation, more than the day-to-day responsibilities inherent with manufacturing, distribution, and retail obligations. That isn’t to say we couldn’t tackle those challenges, but for us they made licensing the clear winner.
Ideally, we are looking for a partner that has penetration in the global toy market, a stable financial record, the ability to secure top-tier licenses for co-branding opportunities, a history of producing quality products, and a reputation for ethical business relationships—but not necessarily in that exact order. One worldwide licensee would certainly be simpler and preferable, but such deals are not easy to come by, so we are also exploring regional partnerships.
LM: How do you view the difference between exclusive and non-exclusive licenses?
PB: Exclusive license arrangements give retail competitors the opportunity to be the sole providers of the product or category, which is often seen as an advantage in attracting consumers.
BK: It is hard to draw a line in the sand on this one, because each situation and relationship is so different. Exclusive contracts can be mutually beneficial if the appropriate protections are in place for the licensor. For example, an exclusive contract should include guaranteed sales volume with penalties for lower-than-forecast performance. This ensures that a licensor who enters into an exclusive contract will be compensated even if the licensee changes their mind on bringing the product to market. In this case, the licensor would be entitled to compensation based on the missed sales opportunity. And on the other hand, an exclusive contract ensures that the licensee will have guaranteed access to the market without competition so long as the contract is valid. In both scenarios, the licensor and licensee are protected.
LM: What is your position regarding patents and trademarks?
PB: Patent and trademark protection are very valuable. IP protection, such as patents, trademarks, and copyrights, provide exclusive rights and keep competition away. Anjar Co. provides IP legal advice, protection, and management for product licensing, character licensing, and entertainment licensing, as well as trademark and copyright IP enforcement.
BK: We have filed international patent applications in the major toy producing and consuming countries. Additionally, a trademark for the product name “Swivel-Snaps™” has been secured.
As you can see, the two parties are not that different as far as the philosophical bases for a successful license negotiation are concerned. However, that does not necessarily mean that a license negotiation will finish up successfully. A license is a legal contract with a great number of conditions, and this is where things tend to get difficult. The most important points are:
•Financial aspects, including required advances, royalty rates [percentage on net or gross sales], upfront payments, minimum sales guarantees, and minimum inventories.
•Length of contract and renewal options including early termination.
•Territorial extent and deadlines for country launches; channel distribution guarantees.
•Territorial or channel exclusivity or non-exclusive arrangements.
•Licensor’s right to audit books, monitor production, and quality control.
There are no hard and fast rules for any of these conditions because, at the end of the day, a licensing deal must reflect a value judgement by both parties as to how successful the brand, the product, or the idea is likely to be in the marketplace at some point in the future.
This article compared the license agent to a marriage counselor. On second thought—a marriage counselor probably has an easier job!
Lutz Muller has been active in the global toy and video game market since 1984. He has lived and worked in Europe, Asia, Latin America, Australia, and the U.S. His insights are based on his daily contacts with toy buyers at big-box stores in the U.S. and Europe, his proprietary retailer panel in the U.S., and his third-party manufacturing contacts in China.