The Wall Street Journal reported that more than 90 percent of app toys fail around the same time Activision announced that Skylanders’ sales exceeded $500 million. Among the failed app toys were Barbie Dolls and Hot Wheels cars with special conductors to control games on a tablet from Hasbro, Disney’s Cars AppMates, and a version of the Game of Life from Hasbro in which players spin a wheel on an iPad rather than a physical wheel. Yet, Activision’s physical virtual goods continue to sell incredibly well, driving Activision’s profitability. This interesting juxtaposition of news shows the value of using the equivalent of in-app purchases rather than the business models designed around retailing, distribution and manufacturing processes from the last century.
What is wrong with App Toys?
The biggest problem with app toys is that the toy makers are simply trying to move the same product to a new platform. The toy companies do not understand what creates compelling experiences on tablets (or consoles or phones, for that matter). Instead, they are replicating the same experience people have with the physical goods in the virtual world, which is not what consumers are looking for. They are competing with (thousands of) native games and products that are created to meet customers’ needs. It becomes obvious why the app toys cannot compete.
Worse, many of them are really just gimmicks, using tablets or other devices to justify a higher price but not adding any functionality (or fun) to the underlying product. For example, the spinning wheel for the Game of Life I mentioned earlier is not more fun because it is running on the iPad; the iPad does not spin a wheel better than a simple piece of plastic. Consumers are sophisticated and these gimmicks are not appealing to them.
Activision instead designed Skylanders (since I have written about them several times, I won’t waste your time describing Skylanders again) as a product built around gaming consoles, with the physical toy as a complement to the digital experience. Activision built a strong gaming experience as they would any other title targeting game platforms. They then used the physical element to augment the digital product. You can even call the physical toys a gimmick, as they can be replaced with virtual goods if Activision wanted to do so. This is the perfect example of development that is digital first, rather than digital as an afterthought.
The business model
The other reason most app toys fail is their business model is geared to the twentieth century and not the digital age. Toy makers are used to developing—and are still developing—for retail, where there is a single discrete purchase, driven by distribution, advertising, and point of purchase promotion.
Instead, to be successful in the crossover between toys and apps, you must focus on lifetime value (LTV), a metric I have discussed frequently in this blog. Skylanders is built from the beginning to generate large amounts of revenues from the customers most engaged with the product. Customers can spend hundreds of dollars once they fall in love with the game (I can vouch for that with my own kids). Conversely, with app toys, once you buy them there usually is not an opportunity to spend more no matter how much you love the product. Thus, the best customers cannot move the needle any more than the other 80 percent. Second, Skylanders products are designed for retention. Even when they are not playing, customers are often thinking about the game (the number one rule for successful retention). With the characters constantly leveling up and facing new quests, players continually return. Finally, app toys are designed to appeal to the customer at retail (often via packaging or point of purchase promotion), with little inherent in the product to encourage word of mouth (i.e., virality). Skylanders is designed so players will want to take their Skylanders to friends’ houses to play against them, encouraging both word of mouth and a competitive dynamic in which some customers want to gain an edge over others.
Activision has wholeheartedly embraced maximizing its LTV. With LTV being a function of monetization, virality, and retention, they have designed a product in which these three values build on each other. Toy makers are creating toy apps using an older business model that leverages retail distribution, packaging, and advertising to get a discrete sale. When they try to move into the digital app world, that model is as doomed as trying to sell horse whips to Model T owners (even if they call them car whips and paint them silver).
It is going to be very difficult for most toy makers to create compelling products for the app world. I wrote about a year ago about the challenges traditional core game developers had when trying to compete in the free to play world and toy makers have a steeper challenge. They must understand new business models and ways to appeal to customers after doing business the same way for 50 plus years. Although a few will get it (just as Activision found a great hybrid model to the in-app purchase world), many more will end up like THQ and Atari.