‘Wars’ Fallout
An unprecedented movie inspired an unprecedented licensing deal. Two of the top toy companies in the U.S., Hasbro and Galoob, agreed this week to give Lucasfilm Ltd. a combined total of $225 million in stock in addition to many millions more in royalties for the rights to produce toys based on “Star Wars.” “Star Wars” is the top-grossing film of all time, and, along with its two sequels, has grossed nearly $2 billion worldwide.
As the negotiations have taken place over the last several months, there has been speculation over whether the huge deal would change the rest of the licensing industry. Will the studios start seeking equity positions and sky-high guaranteed royalty payments? Will toy companies and other licensees acquiesce? The answers to those two questions, according to analysts and industry observers Wednesday, seem to be “sure” and “unlikely.”
“I think [“Star Wars”] is really unique. . . . In the past, even with extremely successful properties like the Power Rangers or the [Teenage Mutant Ninja] Turtles, it’s almost impossible to relaunch them,” says John G. Taylor, an analyst at Arcadia Investment Corp. who follows both Hasbro and Galoob.
Taylor says its staying power is what gave Lucasfilm the clout to ask for the moon and get it. Jim Silver, publisher of the industry publication Toy Book, agrees. “This is a phenomenon that comes along once in a lifetime,” Silver says.
Silver adds that its hold on adults is also remarkably valuable: In 1996, nearly two-thirds of “Star Wars” merchandise was purchased by consumers over age 10. The older buyers among those will likely keep spending money on “Star Wars” merchandise and will bring their kids to the new movies beginning in 1999.
At least one licensing executive finds the toy business’ reliance on entertainment properties troubling. “Creativity has gone away in the toy industry. Toy companies are ever more dependent on marquee value,” says Seth M. Siegel, co-chairman of New York-based licensing company Beanstalk Group.
Nevertheless, Siegel thinks the “Star Wars” deal will prompt more licensees--from movie studios to Calvin Klein--to ask for equity positions in companies, based on how much business their brand generates for them. Galoob, which gave Lucasfilm nearly 20% of its stock, gets about 33% of its business from “Star Wars” toys.
The two Hollywood studios that have established long-lasting, cross-generational “brands”--Disney and Warner Bros.--have already made licensing deals that give them much more than today’s standard 8% to 10% royalty rate.
Disney has a far-reaching deal with top U.S. toy maker Mattel, in which Mattel granted Disney stock options and hefty fees. Warner Bros. formed its own in-house toy operation in 1995; in exchange for developing and marketing products that are then manufactured and distributed by outside toy companies, Warner Bros. Toys also gets steeper-than-usual fees and royalties on big properties such as Looney Tunes.
Andrea Hein, president of Viacom Consumer Products (which merchandises Paramount film and TV properties), says Viacom has made deals in the past for its coveted “Star Trek” property that give the studio an equity position in addition to royalties. “I don’t really think there’s going to be a direct effect [from the ‘Star Wars’ deal],” Hein says. “It’s not like I’m going to say, nor are any of my counterparts, ‘I’m going to go to Mattel and get $200 million now.’ ”
On occasion, even smaller entertainment companies have been able to demand juicier deals on top properties. Saban Entertainment reportedly commanded royalties of 14% and higher for its “Mighty Morphin Power Rangers” at its height several years ago.
George Lucas’ company--which leveraged the phenomenal success of “Star Wars” in 1977 to get back the merchandising rights to the series from 20th Century Fox--stands to receive possibly more than $500 million in stock and royalty payments from Hasbro and Galoob over the next seven years.
The two companies will divvy up toy categories including action figures, hand-held electronic games and model vehicles. The deal doesn’t even include myriad other categories, including apparel and collectibles, that are produced by other companies.
On Wednesday, Lucasfilm announced an extension of its publishing deal with Random House’s Ballantine Books. Ballantine will now publish all “Star Wars” adult titles, including novelizations, trivia books and art books. The deal terminates Lucasfilm’s previous agreement with Bertelsmann’s Bantam, which published “Star Wars” novelizations. Terms were not disclosed.
The bottom line is that toy companies won’t give away the store unless what they get in return is a sure thing, or as close as one can get.
Today’s power brokers--chain retailers like Wal-Mart, Target and Toys R Us--are keenly focused on finding sure things. They work on small margins, and they’ve been burned before.
“We will support what kids want to buy. It’s a very simple formula,” says Michael Tabakin, director of trend merchandising for Toys R Us. “‘Star Wars’ is a turnkey, a slam-dunk. Retail will definitely support it.”
The importance of retailers in the mix also helps explain the value of “Star Wars” for Hasbro and Galoob. Analyst John G. Taylor says that beyond the sheer bottom-line business the license will bring them, “Star Wars” will give these companies “an extra face card to play with when settling in and arguing with retailers. It’s called a club.”
