US OPINION: Activision invades toy land

Activision is the second largest publisher of video games in the world and known for such shooters as Call of Duty, World of Warcraft and Transformers. The company has two major problems.
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The first one is that the US video game market has been on the skids since 2008 and this year is not expected to be any better. The second is that its sales this year are declining even faster than the market overall. Its arch rival Electronic Arts is yapping at its heels and likely to pull up to sales parity this year.

So, Activision is in a box and the company has now taken the one not-so-obvious step – it got itself a new box. They are doing this with one daring leap into a market that is totally different from the one they have been operating in all these years – they are getting into toys.

This move into the toy market is spearheaded by the Skylanders. The Skylanders are three things in one – it is a game, it is a set of infrared-enabled action figures, and it is a peripheral, the so-called portal that makes it all happen. Apart from being a first for Activision, it is also a first by itself – it is the first video game/toy hybrid and the first whose figurines are set to remember all advancements gained even when ported across platforms. This means that you can take your Skylanders over to your friend’s house, drop them on their portal, and your Skylanders will come to life in the game.

The Skylanders have just been released and Activision is doing everything possible to make it a success. The company negotiated top merchandising locations at every major retailer – Wal-Mart, Target, ToysRUs, GameStop and all others. There will apparently be 20,000 kiosks and twelve miles of footprint [linear feet] merchandising space for the Skylanders in the United States. It secured a semi-exclusive deal with ToysRUs who have been promoting the game with a manned demonstration kiosk in all their location worldwide since middle of September. To ensure that their first foray into toy land is successful, Activision has teamed up with Nickelodeon on a European Tour that started on September 10th in Liverpool, UK, and completed on October 14th in Spain, having visited virtually every major European country between these two dates. In addition, once the product is released, Activision will embark upon a very heavy TV campaign both in the United States and Europe, to be climaxed in December with 3D ads to run at cinemas featuring Alvin and Shrek.

Pricing is not exceptionally cheap. A starter set consisting of the game, the portal, and three figures [plus stickers, trading cards, web codes and three AA batteries] costs at TRU $69.99. Twenty-seven additional figures are available in sets of three at a retail of $19.99. The whole ball of wax will set you back by $250 if you buy all nine sets of figurines in addition to the starter set.

Their pre-launch strategy seems to be working out just fine. At ToysRUs, where the product is on pre-order [you have to put down $5 to get on the list, to be refunded when you pick up the product] the starter set is moving very briskly. Also, my friends at Wal-Mart report that preorders are going very well. Interestingly, the situation at GameStop is different. It is on preorder also there but my friends there tell me that there does not seem to be too much excitement around the product.

This brings me to the two concerns the buyers have about the product. The first is the price – in this economic environment, $250 for a toy is a lot of money. However, since the first purchase is the starter set at only $69.99, and since the follow-up figurines can be bought over time, I do not think that price is a major obstacle.

The second is the audience. The product is clearly geared to 6 years and up even though Activision recommends it for age groups ten years and up. However, for instance, Migros Switzerland is recommending the product for ages seven and up. This is the typical toy age for action figures. However, the target group for games Is much older – at 15 years and up. My response to this is that the Skylanders, if they are successful, will push the age group down from the current medium. And, after all, NPD just reported that “today, 91 per cent of kids (approximately 64 million) ages two to 17 are gaming in the US, an increase of nine points when compared to 2009. While the percentage of kids gaming has grown significantly across all age groups, the fastest growth has been among kids ages two to five, with an increase of 17 points in gaming incidence when compared to 2009.”

I hence do not think that age will represent a problem for the Skylanders.

At this point in time, my friends at the large retailers tell me that they have placed very substantial first orders for the product – the Starter Set and the individual figurine sets – and it is my estimate, on the basis of these preorders, that Activision has shipped at least $50 million so far worldwide. On the assumption that two-third went to US retailers, and also assuming that the entirety of these shipments are in fact sold through, this would give Activision a market share of about 11 per cent in the action figures category in the fourth quarter.

I also asked my friends at the large retailers what they thought would happen as a follow-up. They believe that two developments will materialize. One is that there will be an additional set of figurines probably sometime early next year, accompanied by a price reduction for the first set of figurines. The figure of $49.99 was mentioned versus the $69.99 price today. They also thought that Activision would come out with a Skylanders II game, with additional figurines, in time for fourth quarter next year.

However, all these assumptions are predicated at one overriding condition – the Skylanders must sell well and sell through in the first two odd months or they will die a very quiet death. Looking at things on the basis of what we see today, this negative outcome is unlikely. I would venture to predict that the Skylanders will be a must-have toy for Christmas this year. Also, I think that it will give Activision a major leg-up over Electronic Arts at least for the next twelve months or so. I would also predict that Electronic Arts will have an entry of their own probably for fourth quarter next year and others will follow.

There is one last comment I must make. Activision is leaping from the box it is in today into another box. But is this new box so much better than the old one? The US toy market has been stagnant to declining since 2003 and is expected to be again flat to down this year. The major retailers are all expected to cut back toy space in their stores in the near future. On the other hand, the same retailers all tell me that they see an expansion in their consumer electronics space as a result. All forecasts are for strong growth in the sector both in the Unites States and internationally. Has Activision leaped into the wrong box?

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