Digital toys at play

Top 10 toy and entertainment licensors in gaming

Both the Euro Cup and the Copa America are, at long last, behind us. Sobered by the loss to the English (a deserved win), I already have high hopes for 2026 when the World Cup kicks off.

I’ve also returned to normal levels of productivity. Well, relatively speaking, of course. Because according to some accidentally disclosed court documents, Valve, is one of the most productive firms around. It generates billions in revenue and, as we can surmise from the data quickly captured by The Verge, Valve barely employs any people.

Kindly take these numbers with a grain of salt, of course. But maintaining a workforce of only 336 people across its entire organization does explain why it is so hard to get a hold of anyone there, or why Valve can be such an absentee landlord. Or, most importantly, why we’re still all waiting for Half-Life 3.

On to this week’s update.

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BIG READ: Digital toys at play

Interactive entertainment is changing the way consumers connect with brands.

A growing list of investments and successful releases point to the potential of engaging audiences in ways traditional media no longer do. Disney took a $1.5 billion equity stake in Epic Games earlier this year. Amazon exceeded expectations with the launch of its Fallout-based series, which reinvigorated activity around the franchise’s many iterations and generated a cool $84 million.

Digital spaces have become the new social playgrounds, and brand holders are figuring out how to formulate meaningful experiences in these novel spaces. As audiences shift their leisure time to online platforms for entertainment and social interaction, interactive entertainment across PC, console, and mobile platforms has emerged as an increasingly prominent connection between traditional media properties and digital-first audiences.

This shift is not merely about translating physical toys or media franchises into digital formats. Instead, it's about creating immersive, interactive experiences that allow fans to live within their favorite branded worlds. For toy companies and media giants, success in this new landscape means more than just selling products—it's about fostering digital communities and providing platforms for self-expression and shared experiences, all centered around beloved intellectual properties.

In an attempt to go beyond the headlines, the following looks at how existing non-gaming firms have managed to transition. As the lines between toys, video games, and traditional media are blurring, creating meaningful digital experiences that attract massive audiences across different platforms will become an increasingly important strategic component. Non-gaming companies here are defined as organizations that rely for less than half of their annual income on games revenue. Bandai Namco, for instance, generates only about 35 percent of its annual income from digital games.

Aggregating across all gaming platforms for the twelve months ending in June 2024 shows a combined $9.9 billion in total consumer spending.

A few observations. First, Hasbro leads the pack in 2023. Its success with Monopoly Go, due to Scopely’s deep pockets and expertise in mobile app store marketing, has resulted in a blowout year. My prediction: Hasbro will announce having broken the $3 billion threshold for Monopoly Go before its next earnings. Add the outsized success of Baldur’s Gate III, which has been winning so many accolades that developer Larian Studios is sending people to award shows in shifts to not interrupt its production schedule.

Disney had a great year, too. Spider-Man 2 has been a top-selling exclusive for the Sony PlayStation, generating well over half a billion in revenue. Disney’s Marvel universe (including titles like Star Wars: Galaxy of Heroes, MARVEL SNAP, and Marvel Contest of Champions) amounts to a combined billion dollars in sales. The company is straddling the intersection between real-world entertainment and digital experiences.

The Wizarding World, owner of the Harry Potter franchise, had a notable windfall late last year with the release of Hogwarts Legacy. Despite, or more likely because of, several hurtful comments from its author, the game exceeded expectations for both its owner and publisher Warner Bros.

On a franchise level, we can discern a few different approaches. For instance, Bandai Namco has a mixed strategy when it comes to working with outside studios. The Japanese firm generates $1.1 billion with titles it develops itself based on Dragon Ball and One Piece. The breakout success of the Dark Souls franchise, however, originates from FromSoftware.

Disney, by comparison, relies completely on other firms to bring its franchises to interactive entertainment. With the most entries in the top 15—Spider-Man, Star Wars, Contest of Champions, Snap, Tsum Tsum, and Strike Force—totaling 21 unique applications across PC, console, and mobile, Disney generates $1.4 billion in annual revenue with zero in-house development.

In addition to licensing IP to third-party game makers, licensors have started investing and formulating a flywheel approach to reach audiences in online environments. Beyond merely having a presence in the mobile app stores, for instance, firms like Spin Master have made strategic acquisitions (more on this in a second) and used the novelty of digital spaces to their advantage.

“About five years ago you have the sharp decline of kids watching TV. And so when we think about where do we put our marketing dollars, also that was a factor because kids are spending two and a half hours on average a day on on Roblox."

Its franchise Paw Patrol, which started as a TV show, now has an educational app called Paw Patrol Academy. Similarly, Rubik’s Cube is being developed into a casual mobile game. In a recent interview with Naavik, Spin Masters’ Head of Strategic Partnerships, Yves Saada, stated that its approach to Roblox does not revolve around driving revenue but rather focuses on marketing and engagement. It also further explores ways to connect physical toys with digital experiences, potentially using Roblox and similar platforms to enhance toy features or create "super toys."

Rose colored glasses

Despite the existential need to establish a presence in interactive entertainment, so far the category has seen a mixed bag of results. Mattel, for example, benefitted enormously from last year’s success of its Barbie movie. The film captured a cultural moment and for several months, everything was pink.

Such awareness has also manifested in digital spaces. Roblox, one of the most popular online destinations for young audiences, offers a host of different branded experiences. Among them, Barbie DreamHouse Tycoon—an online environment where players can build a Barbie-themed house, play games, and socialize—is the most popular toy IP-based map, counting 22 million visits in June 2024.

The stats are impressive. Since it went live, Barbie DreamHouse Tycoon has accumulated over 250 million visits for an average playtime of 14.5 minutes per session. It will be some time before its real-world equivalent, Barbie Beach House in Mattel’s Adventure Park in Arizona will see the same amount of traffic.

Allowing people to visit a branded digital environment makes for a great top-of-the-funnel. But it doesn’t necessarily translate into digital sales.

To remedy that, Mattel made several announcements earlier this year. Carried by Barbie’s success, the firm ramped up its interactive ambitions in an effort “to grow the company’s footprint in digital games.” Soon after, it also announced “a multi-year strategic partnership” with Outright Games to develop games around Mattel’s properties.

But it is harder than it looks. For Mattel, translating all this engagement into substantial gaming revenue remains a challenge. The firm ranks eighth with $91 million in revenue across all platforms and environments.

Build versus buy

A next key question that emerges is whether companies should develop games in-house or partner with established developers. Hasbro’s success with Scopely and Larian Studios suggests that strategic partnerships can yield significant results. In fact, among the entire top 10, the bulk relies on third-party developers, totaling $7.9 billion in consumer spending compared to $1.8 billion coming from in-house developments. Two firms that stand out here are Bandai Namco, generating $1.2 billion on its own strength, and Spin Master, which acquired Swedish developer Toca Boca back in 2016 and currently generates $148 million across its many mobile applications.

As toy manufacturers and media companies increasingly embrace gaming, it further raises questions about company valuations. The transition from traditional manufacturing to digital content creation and distribution has the potential to alter how these companies are perceived by investors.

Do we, for instance, assign a market-conform valuation to the growing parts of toy and media firms as they develop internal studios and build their capabilities in terms of marketing optimization and creative innovations? As large toy makers transition towards a business model that embraces novel distribution and marketing channels, they offset the traditional risk profile associated with the design, manufacturing, shipping, and sales of physical toys.

The big idea

The landscape of licensed IP in gaming represents far more than just a novel revenue stream for toy manufacturers and media conglomerates. It signifies a fundamental shift in how these companies engage with their audience. Through interactive entertainment, brands are no longer just creating products for consumers; they're crafting experiences that allow fans to immerse themselves in digital worlds.

Such experiences foster a deeper, more personal connection between consumers and brands. It poses a strategic challenge in formulating a unique digital engagement, choosing the right development approach, and continuously innovating to meet evolving consumer expectations. For IP holders and toy companies willing to embrace this new relationship model, interactive entertainment may yet offer a growth opportunity to build lasting, meaningful connections with consumers that extend far beyond the confines of traditional retail shelves. To do so, consumer-facing brands will need to view their properties not just as products, but as gateways to expansive, interactive worlds.

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NEWS

A few thoughts on Game Pass’ price increase

Team Xbox announced several notable changes to its Game Pass service. Specifically, it includes price increases and tier restructuring. Its highest tier, Xbox Game Pass Ultimate, goes up from $16.99 to $19.99 per month, alongside the introduction of a new $14.99 Xbox Game Pass Standard tier without day one releases.

These changes, occurring worldwide, seemingly take place in the wake of the Activision Blizzard acquisition, as Microsoft’s games division is focusing on profitability. It marks the second price hike in two years and impacts the value proposition of the service, specifically regarding access to day-one game releases.

My take: Xbox is finding its footing, both in terms of pricing and how to best cater to its different subscriber types. Considering that the average console gamer buys 2 to 3 premium games annually, totaling between $140 and $210 in spending, the updated Game Pass Ultimate sits above that range at $240 a year. But you do get a lot more content and die-hard fans tend to be less sensitive to price increases. They are also part of the player base that incurs the greatest expense on Xbox in terms of usage. They play more hours and present a heavier load on Xbox’s infrastructure. Charging them for the privilege makes financial sense.

That falls roughly in line with a recent study on Game Pass from the Haas School of Business at the University of California, Berkeley, which found that casual players generally benefit less from a single subscription offering than those that play more hours per month. It has a negative impact on the extra benefit that consumers receive beyond the price they pay. Offering a single-tier subscription is, in fact, poor practice for both subscribers and Xbox, which explains why Microsoft is tweaking its Game Pass model to offer multiple subscription tiers that accommodate different player behaviors.

Moreover, the findings indicate that a hybrid model combining subscriptions with à la carte purchases, or offering tiered subscription levels, may be the most effective approach to cater to diverse gaming preferences. The researchers observed that Game Pass subscribers tend to be more active gamers who explore a wider variety of titles, including less popular ones, highlighting the potential for subscriptions to influence gaming behavior and market dynamics.

And one final observation worth noting is that in a randomized simulation, (1) the optimal price for a basic bundle is $15, and (2) $33 for a premium bundle. Given the current price increase to $19.99, it suggests that we can expect additional increases in the period ahead.

Nevertheless, I do agree that in the wake of one of its best showcases, the optics of a price increase and dilution of value for the lower tiers are not ideal. It tells you that we should expect more changes down the road as Xbox iterates on a new business model. Among them, I predict, there will be an ad-based version of Game Pass, probably sometime next year, like we’ve seen in other digital entertainment services.

If you recall, Xbox had previously set itself a revenue target for 2030 that included $1.4 billion in ad sales as part of its ambition to sign 100 million Game Pass subscribers.

There will be three phases, roughly. Initially, I expect ads to show up as banner ads inside of the Xbox and Game Pass menus. Mostly as a test case, it will start slow. However, once Microsoft develops this capability over the next few years, I anticipate interstitial ads (during loading screens, for instance) as a second phase. Finally, and assuming that this works out well for its ecosystem, Microsoft is likely to make an acquisition in the ad tech space to acquire the capability to both facilitate programmatic ads and a centralized inventory using existing ad industry metrics and toolsets. This last component is obviously the furthest out.

In summary, Xbox has shifted its efforts toward innovating its distribution model. After spending heavily on acquiring content, it is now tinkering with novel ways to make its catalog available and priced appropriately.

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PLAY/PASS

Play. Pocket Pair, maker of the 2024 breakout hit Palworld, announced its joint venture with Sony Music and Aniplex. It has sold 25 million copies to date.

Pass. Apple continues to be finicky about having to accommodate Epic Games’ standalone store. Give it a rest.