Image: Digital camera
Mattel, Inc.
This kid-proofed digital camera from Mattel's Fisher-Price division has handles, a view finder big enough for two eyes, and a rugged design that Mattel promises can take a beating.
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updated 7/18/2006 9:02:11 PM ET 2006-07-19T01:02:11

When Hasbro first launched its VideoNow portable video player in 2003, the only picture it could provide at an affordable price came from a grainy, black and white screen. "Everyone thought we were crazy," recalls Duncan Billing, the company's chief marketing officer. But portable DVD players were a pricey $250 at the time and Hasbro's market research told the company that kids really wanted to watch shows like SpongeBob SquarePants and Blue's Clues on the go.

Now in its fourth iteration, VideoNow has a much sharper picture and a color screen. The price has dropped too, from $70 to $30 for the player and from $17 to $5 for the video cartridges. "That's technology moving at laser speed," Billing says.

Toy companies have to keep pace. Gone are the days when they could come up with a Mr. Potato Head and coast for decades. Today they face fierce competition for kids' attention, not just from traditional industry players, but from video game, consumer electronics, and computer companies. Forget about Santa's elves banging out wooden soldiers at the North Pole. These days toymakers have to act more like Apple's Steve Jobs—constantly reinventing their products in sleek labS in Silicon Valley.

'Digital natives'
Continuing a slump that's been going on for several years, toy industry sales fell 4 percent, to $21 billion in 2005, according to market researcher NPD Group. Traditional categories such as toy cars, dolls, and stuffed animals all fell. By contrast, video game sales rose 6 percent to $10.5 billion. A recent study from NPD found that more than twice as many kids own portable digital music players and digital cameras this year as last. Cell phone ownership is up by 50 percent.

"Today's kids are digital natives whose activities are fundamentally different than previous generations," says NPD analyst Anita Frazier. A study in Britian last year even found sales of live pets were falling in part because kids were spending more time with virtual ones in handheld devices and on the Web.

Hasbro has been more aggressive than most in making sure it adapts to the trend. In 2002 the Pawtucket (R.I.), company put together a special forces-like team it calls Big Kids. Hasbro won't say how big the group is, but the company is clear on its mission: recapturing the attention of the Nintendo generation. Last year the company had a hit with the I-Dog, a $30 electronic canine with lights and a speaker, that danced to sounds from a digital music player (see BusinessWeek.com, 8/23/05, "Make-Believe Goes Cutting Edge").

The I-Dog worked with any player and had no direct connection to Apple's iPod. This year Hasbro is rolling out the I-Fish, I-Dog Pup, and the I-Cat, which makes scratching sounds like a rap D.J. when you touch sensors on its face. "It's for the 11-year-old girl who needs a speaker for an iPod and can't spend $100," says Jim Silver, editor of Toy Wishes magazine.

Navigating these new waters isn't easy. Kids want gadgets that are designed for them, but will spurn stuff that looks too much like a toy. Last year, privately held MGA Entertainment, maker of the phenomenally successful Bratz dolls, created a cute little digital music player shaped like a lipstick. It didn't sell well. This year MGA Chairman Issac Larian is rolling out a $50 one with a more conventional design with a screen and round display. Its name: the iBratz.

Toymakers are bringing this new focus on gadgetry practically into the crib. Mattel's Fisher-Price unit is releasing a $70 digital camera for three-year-olds by the end of July. The Kid Tough camera has handles on either side, a view finder that accommodates both eyes, and what Mattel promises to be "drop-resistant" design.

VTech Holdings, long a leader in electronic learning products, has adapted its popular V.Smile educational video games to reach kids as young as nine months. Through its toddler-configured console, little ones can learn vocabulary, motor skills, and even baby sign language. "We worked with two PhDs," says Juliet Fitzgerald, VTech's vice-president of marketing. The V.Smile Baby sells for $40, cartridges are $15.

Toy companies are also updating the latest version of virtual pets to make them even more interactive (see BusinessWeek.com, 12/12/01, "Real Profits from an Imaginary World"). Jakks Pacific's VMIGO has a $50 handheld device and console that connects to the TV, creating an imaginary world where you can walk and feed your video Fido.

MGA's version, a $30 handheld device called Muichiz, connects to the computer, allowing kids to interact with other virtual pet owners over the Internet. It's part of a larger movement by toymakers and other companies to build online communities for kids.

Too much 'screen time?'
Traditional video game makers will be slugging it out this year as well (see BusinessWeek.com, 5/10/06, "Game Time for Sony, Nintendo, and Microsoft"). Nintendo's latest system, the Wii, features a wireless controller that looks like a small television remote. Players can move it in their hand and see corresponding action on the screen, so if you're playing a tennis game, for example, you swing the controller to serve.

Nintendo hasn't released pricing or a launch date for the system, but it's expected to cost much less than the new system from Sony, the PlayStation 3. High-end graphics and a 60-gigabyte hard drive are expected to bring the price of the premium version of that device to $600 when it's released in November.

Not everyone is wildly enthusiastic about this rush of tech toys. Stevanne Auerbach, an author and expert in child development, says she's concerned that kids are spending too much time with gadgets and not enough time in physical and educational pursuits, such as playing sports, reading books, and going to science museums. "There's too much screen time being spent," she says. "What's important also is to have a good balance of educational and active play so kids stay physically fit."

Despite the competition and handful of critics, the toy business still attracts entrepreneurs yearning to create the next hot product. Roger Shiffman, a co-founder of Furby-creator Tiger Electronics, has gotten back in the game. His company, Zizzle, generated a lot of buzz last year with iZ, an alien-looking character that also acted as an iPod speaker (see BusinessWeek.com, 8/23/05, "A Happy Tune for Zizzle's iZ?").

One of Zizzle's latest products is a $60 alarm clock and music player called Zoundz. By placing colored pawns on a plastic pallet you can create a variety of funky electronic noises. The rhythm tracks make it sound similar to an electronic keyboard. It's much easier to play, though—and very, very hard to put down.

Copyright © 2012 Bloomberg L.P. All rights reserved.

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