Smart ToysFrom the onslaught of gaming companiesto the prospects for the toy industryM15275IN1A – December 2015 – Synthesis

Digital Entertainment

This document is part of our 'Digital Entertainment' series, which includes for 2015:- A database in Excel format- 3 Word reports, with PowerPoint summary- Privileged access to our 'Media' experts

About IDATE and DigiWorld Institute

Founded in 1977, IDATE has gained a reputation as a leader in tracking telecom, Internet and media markets, thanks to the skills of its teams of specialized analysts. Now, with the support of more than 40 member companies – which include many of the digital economy’s most influential players – the newly rebranded DigiWorld Institute has entered into a new stage of its development, structured around three main areas of activity:

• IDATE Research, an offer of market intelligence publications• IDATE Consulting, time-tested analysis• DigiWorld Institute, a think tank on the digital economy

Copyright IDATE 2015, CS 94167, 34092 Montpellier Cedex 5, France - All rights reserved. None of the contents of this publication may be reproduced, stored in a retrieval system or transmitted in any form, including electronically, without the prior written permission of IDATE. IDATE, DigiWorld, DigiWorld Institute and DigiWorld Yearbook are the international registered trademarks of IDATE.

Contact us for further information on our publicationsIsabel JimenezP: +33 (0)467 144 404 - F: +33 (0)467 144 400 i.jimenez@idate.org

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Author : Laurent MICHAUD, Head of Consumer Electronics & Digital Entertainment Practice

Cliquez sur l'icône pour ajouter une imageLaurent is responsible for studies related to consumer electronics and video games industry through changing uses, technology innovation, market analysis, business strategy, industrial perspectives, forecasts and prospective issues.

He acts as economic advisor for game companies and subcontractors working for video game industry.

Laurent carries out techno-economic appraisals for innovation agencies and incubators on the issues of video gaming and multimedia content development.

He’s also the originator of Game Summit, which takes place during the Digiworld Summit in November each year (www.gamesummit.pro)

Laurent holds a Master's degree in Economic and Financial Engineering.

l.michaud@idate.org

Contents of the report Synopsis

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1. Executive Summary

2. Methodology

3. Introduction: context3.1. Definition of the smart toy concept3.2. Industry context characterised by the convergence of two

entertainment areas, video games and toys3.3. A three-sided market, pursuing combinatorial strategies3.4. A sector born of industrial and technological convergence

4. Smart toys in the video game industry4.1. The major industry players and their results4.2. Two major smart toy categories in the video game industry

5. Smart toys in the toy industry5.1. Strategy adopted by the major toy industry players in the smart toy

sector5.2. Some of the challengers5.3. Market positionings5.4. Technologies used for interfacing5.5. The toy is the main source of value

6. Industry takeaways and future prospects

6.1. The main industry takeaways6.2. Ten opportunities and challenges for 2016-20176.3. Market outlook

•The second edition of this report identifies the main challenges faced by the 'smart toy' market, also known as 'toys-to-life', over the next two years.

• It highlights this fledgling sector's major players from the toy and video game industries, examines their offerings, and also looks at new entrants looking to challenge them.

• It analyses the main trends and key success factors of smart toys, and provides data (volume of smart toys sold, market value) for the period between 2015 and 2020, broken down per geographical region.

Smart Toys: From the onslaught of gaming companies to the prospects for the toy industry

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A market halfway between the video game industry and the toy industryA smart toy comprises a video game interconnected to one or several objects, mainly toys· Video game companies have already made their moves for the most part. They dominate this segment with the Skylanders

(Activision-Blizzard) series and amiibo (Nintendo). · The Disney media group with its Infinity universe has slotted in between the two with growing success.· LEGO, the leading toy manufacturer, has already invested in the video game sector with Warner Bros. It has recently entered the

smart toy segment with LEGO Dimensions.· Hasbro is also entering the fray with successful brands such as Transformers, Furby, GI Joe, PetShop, and even Monopoly and

Cluedo, which are likely to successfully make the transition to the smart toy segment. · Mattel dipped its toe in the water in 2007 with Funkeys but the gaming aspect of this range of products did not convince

consumers/gamers. Its flagship Barbie brand currently remains unexploited in terms of smart toy potential.

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Source: Disney

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An oligopoly that will change gear in 2016Four global players control a large share of the market· In February 2015, Activision Blizzard announced that the Skylanders franchise, which boasts over 300 figurines, had generated 3

billion USD by the end of 2014, with more than 240 million toys sold. - By the end of 2015, the series will have sold more than 20 million units worldwide.

· In August 2013, Disney Interactive launched Disney Infinity. Since then, over 100 figurines have been launched, representing the most popular characters from Walt Disney Company, Marvel, Pixar and Star Wars. - The three versions of Disney Infinity could approach 8 million units sold to the public by the end of 2015.

· Nintendo launched its amiibo line in November 2014. These small figurines represent the brand's heroes: Mario, Luigi, Princess Peach, Link, Kirby, Samus Aran, etc. - As of July 2015, 50 figurines were available. - Less than six months after release, 10.5 million amiibo figurines had been sold.

· LEGO Dimensions, the new smart toy developed by LEGO, is changing the game. It is the first smart toy from a toy industry player that integrates a video game that could be described as a AAA title. It combines what the brand's popularity is based on, namely interlocking bricks and LEGO versions of characters from popular franchises.

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Source: Nintendo

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Endless potential for contentMore than a growth driver?· Although 2016 — with the success of Disney Infinity 3.0, Skylanders: Superchargers, LEGO Dimensions and Nintendo's amiibo —

will be a watershed year for confirming the potential of smart toys, it remains to be seen whether combining their universes with video games will be anything more than a growth driver for toy industry players.

'Phygital': an obligatory passage point for bringing dreams to life· The goal for toy industry players is not only to position themselves opportunely in the 'phygital' market segment, but also to fully

invest in it, master it and thus be in a position to face long term challenges in the toy sector. · With the success of Skylanders and Infinity, toy manufacturers have found that smart toys and how they can be used is not a fad but

a genuine market. · Toy manufacturers are sparing no expense for R&D investment and talent recruitment for development.

Universe against universe, brand against brand· Many entertainment markets could be exploited to stimulate growth in the two sectors: sports, music and variety, TV games,

literature and comics...

Source : IDATE , Smart Toys, December 2015

Growth in value of the video game and toy markets (billion EUR)

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2015 2016 2017 2018 2019 2020

57.765.5

71.0 74.9 76.8 77.666.5 67.0 67.4 67.8 68.2 68.6

Video Game Market Toy Market

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Four main business modelsSeveral business models have been adopted· The first aims to encourage the collection of paid figurines. These figurines are like keys in their associated video games. Users

need to collect more figurines to unlock more areas of the game. This dependency model between the figurines and the video game requires that the game is also paid. This is the model used by major video game publishers.

· In the second model, which is based on independence between the figurines and the game, the former and the latter are both paid, but the game can also be played without the figurine. Nintendo has adopted this model. It is designed to add value to the brand rather than the video game.

· The third model is based on a free game and paid toys. The toy is therefore the source of almost all the added value. This model is being pursued by the major toy manufacturers, building on their competitive advantage. LEGO, which has a long history of collaboration with the video game industry, has eschewed this model in favour of a dependency model.

· The fourth model exists because of new entrants in the smart toy market segment. These companies mix business models. The toys tend not to have communication built in, but are instead recognized physically by the application. The value of the product mainly resides in the play and interaction. Within this category, we can identify two separate models: - The app and the objects are inseparable. They are bought together without the need to build a collection. The complete package is paid. - The app can use the free-to-play model and therefore integrate paid items. The toys may be inseparable from the app, or separable and collectibles.

Source: Activision Blizzard

Bowser and Donkey Kong in Skylanders: Superchargers

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Source: Nintendo

Donkey Kong and Bowser amiibo

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Key success factors

The main goals pursued by smart toy providers are to maximize users' loyalty to a product, and to make their engagement viable and sustainable.

4 key success factors: · Understand customer expectations in terms of interactions,

the 'phygital' experience and narrative.· Offer a simple, fluid and fun experience.· Tell a story with deep characters and rich worlds.· Provide users with the opportunity to create physical and

digital content and to customize their experience.

The user experience is central to the success of smart toys. This experience is made up of seven interconnected steps related to the video game's gameplay. It is worth noting that these elements maximize the user's stimulation, creativity, socialization and gratification.

Source : IDATE , Smart Toys, December 2015

The steps to success for a smart toy

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Ten opportunities and challenges for 2016-20171. AAA video games vs TTT smart toys · LEGO has disrupted the status quo and has laid the foundations for a new standard of smart toys with LEGO Dimensions. LEGO has shown

that a toy manufacturer can also create a winning combination that we can refer to as 'TTT' by way of analogy to AAA video games.

2. Display devices: a fixed/mobile dichotomy· Smart toys are aimed at two types of display device, fixed and mobile. The smart choice will be to ultimately develop device-agnostic and

ubiquitous environments to provide a seamless experience.

3. 'Walled garden' strategies vs open strategies· Initial strategies implemented involve designing, publishing and distributing exclusive content and technology. A strategy involving

interoperability between figurines may emerge afterwards, like the experiment carried out by Nintendo and Activision.

4. Virtual vs reality· As with any other game, smart toy licences may be developed for virtual reality and augmented reality. The appeal for these licences could

be getting users to participate in Skylanders or Disney Infinity in-game events. Another interesting avenue could be bringing a figurine to life.

5. A possible destination: 3D printing and smart toys· With the rise of home 3D printing and 3D scanners, we can envisage the possible emergence of 'User-Generated Smart Toys'. This would

involve designing a figurine with a computer or scanning one, then printing it in 3D before bringing it to life in a virtual or augmented world.

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LEGO Dimensions starter pack on Xbox One

Source: LEGO

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Ten opportunities and challenges for 2016-20176. The barriers to entry will remain high· The main companies dominating the smart toy market already have a stranglehold on the major franchises of interest to young audiences. Although

there is still a lot of room for development in the smart toy sector, the barriers to entry are very high. To capture significant market share, a major license and an AAA game are needed.

7. Overlapping universes remain a prerequisite for entering the market· One of the ways in which smart toys provide entertainment is by allowing franchises and worlds to overlap, instead of remaining distinctly separate.

This provides a new experience for users, who have previously only been able to get their heroes teaming up or battling each other in their dreams.

8. Backwards compatibility as a selling point· Backwards compatibility is a fundamental concern for users. This would allow them to use their purchased figurines for future titles.

9. Gameplay innovation could be inspired by figurine modularity· Smart toys are not limited to exploiting popular franchises. Talented developers will naturally come up with new gameplay ideas, with new methods of

interaction and new business models. Those trying to compete with the major industry players have cleverly adopted a strategy of creating a new experience from scratch, like Tiggly Toys, or combining the best of existing experiences into one game (Sick Bricks, Spinmaster).

10. Toy manufacturers and publishers moving towards 'first party' and 'second party' partnerships · Currently, smart toy production is mainly handled internally by publishers in two ways:

- either the publisher has an in-house development team, e.g. Hasbro and Nintendo- or the publisher uses a subsidiary:

- Traveller's Tales Games for Warner Bros. Games, working on LEGO Dimensions- Toys for Bob and Vicarious Vision, subsidiaries of Activision Blizzard for Skylanders- Avalanche Studios for Disney Interactive

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Source: IDATE , Smart Toys, December 2015

Growth in the number of smart toys sold (million units)

The smart toy market segment will grow massively: by 2020, IDATE estimates that 4 billion figurines will have been sold around the world. · The smart toy market should reach maturity in 2018, just over seven years after it emerged. · After 2018, growth will slow before possibly being revitalised by the arrival of new companies or technological innovations that inspire new experiences and

gameplay.

While around 285 million figurines had been sold in 12 months by late 2014, IDATE estimates that this figure will rise to 456.2 million in 2015.

North America: leading smart toy market· North America will still account for 40% of smart toys sold worldwide by volume in 2020. Over the 2015-2020 period, more than 1 billion smart toys could be

sold in North America, compared with almost 890 million in EMEA, even though there are nearly three times more users in the latter.

Between 2015 and 2020, the market shares of the 4 major regions identified will change very little. North America will lose 3 points to Asia Pacific.

  2015 2016 2017 2018 2019 2020

North America 136.2 166.4 182.2 188.0 190.0 190.5

Latin America 7.2 8.5 9.5 10.4 11.0 11.4

EMEA 113.6 139.4 152.6 158.4 161.3 163.5

Asia Pacific 63.0 79.1 90.2 97.0 103.0 107.0

Total 456.2 559.9 616.7 641.8 655.3 662.9

More than 660 million smart toys sold by 2020

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By 2015, the global smart toy market will rise to 3.8 billion EUR in value and could reach 8.4 billion EUR by 2020. ·North America will remain the leading smart toy consumer

market over the period. ·The growth rate of the smart toy market in Asia/Pacific could

result in it surpassing the North American market in 2024.

In 2015, the smart toy market segment accounts for 6.6% of the global video game market. This proportion is likely to rise to 10% by 2020.

From 2011 to 2020, IDATE estimates that almost 4 billion smart toys will be sold worldwide. If this rate of annual sales continues, and assuming public interest is renewed and we see new gameplay and technological innovations emerging, 1 billion figurines and other connected objects for video games could be sold annually by 2030.

 

Source: IDATE , Smart Toys, December 2015

Smart toy market growth (million EUR)

A global market worth 8.4 billion EUR in 2020

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Relative share of the smart toy market compared with its reference markets

Source : IDATE, Smart Toys, Décembre 2015

Copyright © IDATE 2015

Who we areFounded in 1977, IDATE has gained a reputation as a leader in tracking telecom, Internet and media markets, thanks to the skills of our teams of specialized analysts. Now, with the support more than 40 member companies – which include many of the digital economy’s most influential players – the newly rebranded DigiWorld Institute has entered into a new stage of its development, structured around three main areas of activity:

•IDATE Research, an offer of market intelligence publications: Our expertise and client list > Research

•IDATE Consulting, time-tested analysis: Our catalogue of reports > Consulting

•DigiWorld Institute, a think tank on the digital economy: Our annual programme > DigiWorld Institute

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