Plug and Play Profits: TV Games Surprise the Market and Teach Some Lessons

September 9, 2004 – Even the companies that are profiting from the new toy phenomenon, plug and play TV games, seem to struggle for a good explanation of why such low-tech, low-res gaming is surprising everyone in the past year with monstrous sales. In an otherwise depressed toy market, these $19.95 joysticks and controllers with embedded classic video games are one of the only growth areas for toymakers. In fact, there is nothing really surprising about it. The simplicity, affordability, portability, and wholesomeness of these products all run counter to many of the trends now driving console and PC gaming. And therein lies an important lesson.

The plug and play TV game market truly came out of nowhere in 2003, and a year later it is pegged to be one of the major growth areas for toys in Christmas 2004. “We’re into millions of units now,” says Anson Sowby, director of marketing, TV Games, the subsidiary of JAKKS Pacific, which is the undisputed king of the market. Toymaker JAKKS estimates that 15% of its total revenue for 2004 will come from TV games, which was a key driver in the company’s 49% hike in Q2 revenues ($108.4 million).

Competitor Techno Source recently announced it has sold over 1 million units of its plug and play game controllers that include old Intellivision properties. “Twelve months ago, the plug and play shelf was maybe six items – four or five from JAKKS and two from us,” says Eric Levin, EVP, Techno Source. “Now you’ll be looking at up to 16 (shelf) feet of plug and play product going into this holiday. The SKU growth has been massive.” PiperJaffrey analyst Tony Gikas agrees that “Plug and play product sales continue strong at retail and additional product flow should benefit sales during the back-half of the year.” And according to Levin, “we have yet to see a failure in the plug and play markets.”

For the big game companies, TV games seem to represent all upside. In addition to licensing revenue, the controllers are extending and enhancing the brands, so companies like Atari, Namco, and even EA can identify themselves with an entertainment legacy and perhaps even start to brand among the kiddie segment that also uses these devices. Even more valuable, say Sowby and Levin, is the extension of these devices into new retail venues. “Techno Source now has demo units running in many Walgreen drug stores. “We’re also seeing amazing extensions into Urban Outfitters and Saks Fifth Ave,” says Sowby. One can imagine an interesting brand eco-system evolving from this category, in which new audiences are exposed to the original versions of longstanding franchises like Street Fighter or Madden, which might inspire them to check out the current iterations on consoles.

The Console Backlash?

How did we get to a point where 8-bit gaming is selling millions of units in a 128-bit era? While none of the TV game makers feels that their products are direct competitors to consoles, it is hard to miss how the market drivers for plug and play seem to represent everything that console gaming has lost. Audiences for these devices vary greatly by title, but Sowby says that classics like Pac Man get picked up by hardcore gamers because it comes with the joystick that console versions lack. Meanwhile, many others who don’t own a console love the $19.95 price point and have fond memories of casual play in their youth. In toys, pricing items beneath $20 opens up a very lucrative birthday gift-giving market, an arena most mainstream game publishers rarely consider.

Simplicity and innocence in an age of gaming complexity is the real message of plug and play. The devices themselves are portable, so they can be used in hotels or any TV in the house. The titles are wholesome E-rated fare you can share with your kids, while much of the console market this Christmas will be driven by mature titles. But most of all, they are antidotes to gaming fatigue. “The content of gaming systems is becoming extremely complicated,” says Levin. “To play Madden Football you practically need to take a college course.”

Just as online casual and mobile game distributors report that they are getting a lot of former hardcore players who just haven’t the time or patience for today’s demanding console titles, the TV game makers also see many core gamers yearning for more straightforward play experiences. It can be argued that while electronic gaming has proliferated wildly in the last two decades and multiple audiences have developed for gaming in several different age and gender segments, the mainstream publishers have not kept up with the real breadth of gamer tastes. Like mobile and casual gaming, TV games represent another instance where the major publishers have decided to focus on the core gamer and simply license out their properties to third parties who cater to otherwise underserved game markets.

Testing the Limits

For most game companies licensing into this space, TV gaming represents a minor incremental revenue stream off of deals that garner 8% to 14% of device sales revenues, but all of the major publishers are sniffing around for deeper entry into this hot category. Electronic Arts recently announced a deal with JAKKS to bring early Madden and other mid-90s console titles to plug and play as the platform starts embedding more powerful chips and moves to 16-bit processing. Atari is making the boldest move this Christmas by issuing the ultimate plug and play device, a $49 “Flashback” miniature replica of the original Atari video systems that runs 20 titles from the early consoles.

Despite its success, the category is also poised for a number of tests and changes in the coming year that may determine how much more deeply publishers should get involved. First of all, how many plug and play games is the ordinary consumer willing to buy since each unit is its own controller and console? They pile up quickly. “That’s the $64 million question,” Sowby admits. “We’ve seen no slow-down yet, but none of us really knows yet not only how many can the market support but how many can each consumer buy.” The market is about to get flooded, with many more SKUs this Christmas and large lines of retro and original titles for the platform coming in early 2005. Major toy companies are now looking to exploit the category.

Also, can TV games move beyond retro? The unexpected strength and endurance of the retro toy and gaming trend is one of the driving forces in the TV game phenomenon. The category existed prior to 2002, but it only took off when companies began licensing old 8-bit game titles from the classic brands like Atari and Intellivision. Retro toys have had their cycles before, says Levin, but in post-9/11 America the hunger for innocence and parents sharing their own first video game experiences with their kids seems to be unprecedented. The problem is that most of these properties have already been produced. “We realistically are seeing the end to the amount of licenses available,” says Levin.

The next wave of TV games will rely at least as much on entertainment licenses like Marvel superheroes and SpongeBob Squarepants turned into original games for plug and play. According to JAKKS, the SpongeBob game has been selling as well as the Atari and Namco classics. “It tells us that [TV games] are not based only on retro titles,” says Sowby. We will also be pushing into 16-bit processing and titles like Madden 2005 that get ever closer to the quality of console titles.

“One of the big questions is price point,” says Levin. We are already starting to see $24.95 titles, and he expects to see some next-gen TV games soon go for $34.95 as well. “What price point can you go to in this category before people stop seeing the value vis a vis their console systems?” he asks.

Because of its newness and surprisingly quick success, plug and play is as uncertain a category as one can find in gaming. If it does have legs, however, TV gaming will become more sophisticated and pricey. At some point it will not be so easy to assume that the markets for consoles and plug and play are mutually exclusive and non-competitive. It seems to tell us that TV gaming’s success suggests a lot about the markets and game play styles that the bulk of the games industry is overlooking.