Sector Watch: Entertainment and Character Licensing

Posted by Marty Brochstein on July 30, 2013

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This is one of a regular series of posts exploring key aspects of major licensing sectors.

With the possible exception of sports (where the four major sports leagues overwhelm most other properties), the entertainment business is probably the most consolidated sector of the North American licensing business.

According to results of LIMA’s annual Licensing Industry Survey, the entertainment/character segment continues to be the largest area of the licensing business, accounting for $2.55 billion in royalty revenues and an estimated $49.3 billion in retail sales, up 2.8% from a year earlier. Because royalty rates are generally higher in this category than in others, that’s 46.7% of total industry revenues, but 44% of overall retail sales.

While much of the business is still built around the traditional major theatrical franchises, long-running “evergreen” children’s properties and kids’ TV series, there are several trends that are contributing to market growth.

“The success of Angry Birds is still proof that the consumer will gravitate toward interesting properties and characters” from outside the major traditional entertainment licensing powers, says Debra Joester, Predient-CEO of The Joester Loria Group. Companies such as Disney (with its Star Wars, Marvel and Pixar franchises playing a major role), Warner Bros, Sony, Dreamworks and others are dominant players, but the entertainment space has always had room for the suddenly ascendant unexpected hit.

Properties such as Rovio’s Angry Birds, Activision’s Skylanders and Mattel’s Monster High were major successes in 2012, and continue to be, even as tentpole theatricals such as Man of Steel (Superman), The Avengers and others play their traditional roles within the business.

Everyone’s looking for the next Angry Birds, the mobile game which has blazed a trail as the first significant licensing program emanating from a mobile app. Other licensing is being done based on online communities, such as Stardoll and Moshi Monsters, or on web-video based characters and brands such as “Annoying Orange” or “Smosh.”

The tricky aspect of licensing based on such digital sources as apps, viral online videos and the like is that it’s virtually impossible to predict in advance which are going to catch fire virally, so by the time product can be developed, manufactured and shipped to retailers, it’s probably too late to capture the lightning in a bottle.

“There are so many properties out there nowadays, and we want to have what the customer is looking for in the stores,” said Andy Prince, Walmart Senior Category Director for Toys, during the keynote panel at Licensing Expo 2013. “But it requires you to work very quickly, not only from the retailer’s standpoint, but from the licensor’s standpoint, from the manufacturer’s standpoint, because properties are coming and going so quickly…. The customer is so fickle, and we just have to figure out how to move quicker in the environment.”

Another related challenge for the licensing community is to find safe passage through the overall transformation of the video game business. Once primarily the province of dedicated game consoles, the game business has splintered into many pieces encompassing consoles, mobile devices, computers and the web, with business models ranging from free promotional casual games to $60 packaged or downloadable titles.

Where entertainment licensors could once rely on hefty guarantees and royalties from videogame publishers, it’s a less predictable business now. Liz Kalodner, EVP/General Manager of CBS Consumer Products, says that it’s still possible to piece together revenue from the gaming sector that’s equivalent to that seen in the console-dominated world, but that it’s now a trickier proposition. For one thing, she points out, publishers of mobile games have been freed of producing physical media, with attendant packaging, shipping and other associated costs, so the overall “cost of development is so much less than it was that the royalty percentages are much higher than they were.”