The Toy Industry Transition – Part II: The Challenges

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In Part I we looked at three changes that shaking up the toy industry: bricks and mortar retailing collapsing, high-end sensors and other chips coming within reach of mass market toys and well-funded startups selling surprisingly large amounts of high-end expensive connected toys. 

Mattel already announced it will be focusing on developing more tech-enabled and connected toys in the next few years.  

Like in the consumer audio industry, it is conceivable that connected toys will become mainstream, just like the MP3 became the default, while non-connected toys will become niche, just like stereo sets are today. 

However, connected toys are at odd with the way most toy companies currently operate:

  1. Connected toys will increase the complexity of hardware and —more importantly— the complexity of software.
  2. The current inventor community might not be the ideal partner for connected toys, as the complexity will become too high for most inventors to handle.
  3. Startups have the different skills needed to develop connected toys in house and inventors could potentially team up with software companies, but the current inventor licensing model is unlikely to work for startups, since most licensing deals seem to cater for a single inventor or a small team at best. In contrast, to create its complex AI driven toys, Anki employs over 100 engineers.
  4. Managing highly complex technical development requires technically knowledgeable company and project management.  

Just like the automotive industry is finding out, software development will be the big differentiator going forward and the challenge is to manage highly complex technical developments. If those skill sets are out of your league, your toy company might not be able to ride the connected toy wave. 

So far, the toy industry has been in a comfortable position and arguably didn’t need to innovate as quickly as other non-toy consumer electronics industries. In other industries, startups drive innovation, but that didn’t happen in the toy industry: The number of toy startups is still very limited compared to for instance the video game market. Not that long ago, VCs weren’t comfortable investing in hardware startups. That has changed dramatically the last five years, yet we haven’t seen a boost in toy startups. One issue is the lack of toy startup acquisitions. Mattel’s acquisition of Silicon Valley’s Sproutling was a rare exception and without more acquisitions, VC funding will be limited to toy startups with a clear path to IPO, the only other way for VCs to make money. The comfortable position the toy industry is in, will likely not last.

In part III we will look at various scenarios your company can adapt to the new market of connected toys, even if you’re company is not ready today.

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