Kenner and Lucas make a last minute deal and an unconventional sales strategy wins the Toy Wars.

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Dave Young:
Welcome back to the Empire Builders Podcast. Dave Young here with Stephen Temple. And we were going to start this episode with the whole scrolling a long time ago in the galaxy, far, far away. There were these movies, these Star Wars movies, and then three more of them. And in the meantime, toys. We’re going to talk about toys?

Stephen Semple:
We are going to talk about toys. There’s a couple of really interesting stories from the early days around the Star Wars toys. So as we know, Star Wars comes out in 1977 and it’s this huge success. And in 2020, the value of the Star Wars franchises is estimated to be $70 billion, when you put it all together. They do about $14 billion in toy sales, which is twice the box office sales. Toys is a very, very big part of the business, highly, highly collectible now. And when Star Wars came out, the most popular toys were Barbie and GI Joe. Those were the most popular toys of the day. And when you look at it, a lot of the success that came from toys at the time had small screen tie-ins. So they had TV shows or cartoons or television ads.

Dave Young:
Yeah.

Stephen Semple:
That was basically what really made toys work. And movies are different. Traditionally, movies didn’t have toy tie-ins because a movie would come out, it would be around for a few months and then it would be gone. And once the movie was gone, the toy sales would decline off.

Dave Young:
You wouldn’t roll the dice on creating a whole bunch of toys before the movie came out because you didn’t know if it was going to be success at the box office. That’s always been a bit of a dice roll.

Stephen Semple:
It’s hard to use movies to sell toys, certainly at the time. And so when Lucas approached Mattel, Hasbro, Parker Brothers, they all turned him down.

Dave Young:
Yeah.

Stephen Semple:
They all said, “Nah, nah, we don’t want to do this. Now, he really believed in the potential of the toys, but six months out from the release of the movie, he still didn’t have a deal. And part of the other challenge, he was also very secretive, he didn’t want to share drawings and things along that lines, he was prepared to share the script. So finally Lucas approaches Kenner. And at the time, Kenner was this really tiny company located on the 11th floor of a Kroger department store building in Cincinnati, so they’re this tiny player in the Midwest, but at this point, they’re the only suitor. And it turns out that there’s a Jim Swearingen who works at Kenner is this huge sci-fi fan, and in fact, a follower of George Lucas. And Jim looked at the script and thought, “This is great.” So he goes and he commences upper management and he recommends it to them and they do a deal. Now, here’s the thing, because they also knew they were the only suitor and time was limited, they cut a sweetheart deal. So Kenner got 95% of the fees and Lucas got 5%.

Dave Young:
Oh wow.

Stephen Semple:
And Lucas hates this deal, but he had no choice. More on this later. So with the film six months out, they’re interested in doing it, but they still haven’t inked the deal, but they’re in that early stages. And look, normally it takes a year to get a toy out. Because here’s what happens; you do some sketches for the licensee, licensee looks at it, comes back with changes, you then go back to the licensee, the licensee’s happy, then you go to the manufacturer and the manufacturer says, “We can’t make it this way.” There’s this tremendous back and forth, that it takes a year, takes a year for these toys to come out. Movies being released in six months still don’t have the finalized agreement. So it’s about a month out. And they go, they meet with Lucas and company and actually they go to Paramount Pictures, and Lucas is not even there. And they present bunch of ideas. And here’s what they did. They found stuff from Fisher Price and all these other companies and put clay around it and tried to make something up.

And they’re doing all of this literally before the final licensing. And they also wanted to do accessories like Millennium Falcon and the X-wings. So those Barbie toys and GI Joes, they’re all 12-inch dolls. And they couldn’t do 12-inch and do all these accessories. So they had decided on three and three-quarter inch for the line. So again, they go to Fisher Price, they’re using this modeling clay and all this other stuff, and they go to LA to make the presentation, George Lucas is not even there, he’s busy doing the final stuff on the movie. But 20th Century Fox, and sorry, I said Paramount earlier, 20th Century Fox liked it, said, “These are great.” But they’re unwilling to write the check for the development. It is not until April 1977, one month before release, that the deal finally gets inked.

Dave Young:
Wow.

Stephen Semple:
And Kenner gets 95% of the fees. Turns out the film is a huge hit, but there’s no product. A lot of the designers from Kenner saw a bunch of the stuff for the first time when they went and saw the movie. Well, that’s cool, we should do something on that. So Dave, how many months from May to Christmas?

Dave Young:
Not enough.

Stephen Semple:
Not enough.

Dave Young:
Yeah.

Stephen Semple:
That’s right answer, not enough. See the problem? By December, this best-selling movie of all time, there’s hardly any product, there’s nothing to sell. So what do you do when you have no product and a movie’s coming out? They created this two-part plan. And this is the interesting part of this whole story. So the first thing they did was anything that could be done quickly, puzzles, stuff along that lines, slap a label on it. Slap a label on it, get it out there. So they looked at all these things that could easily be converted to a Star Wars product and got it out the door. But Christmas is coming up and they still don’t have any dolls. And there’s this huge opportunity. And also, as we know, the longer it goes, more things drop off. So here’s what they did and this was brilliant.

Today, when people are out of stock on things, think about this. They sold an empty box with a certificate and a stand. I kid you not. They sold an empty box, and inside the box there was a stand for the four dolls that you were going to get, and a promise of four action figures to come in the spring when it’s released.

Dave Young:
Nice.

Stephen Semple:
And it like sold crazy, an empty box.

Dave Young:
Now, you’ve got prepaid toys, all you have to is make them.

Stephen Semple:
Right? Think about this.

Dave Young:
You’re not rolling the dice anymore. Yeah.

Stephen Semple:
No, you’ve got the sales.

Dave Young:
Yeah.

Stephen Semple:
You’ve got the sales. And it was a frenzy when these toys came out, it was crazy. Stock would come in and be sold in three days. They sold 22 million figures a year is what Kenner’s been doing. And two years after the launch of the toy, they’re still under that original agreement because it was rights forever. All they had to do, all they had to do, produce enough toys to generate $10,000 in royalties and they would keep this forever.

Dave Young:
How hard is that?

Stephen Semple:
Yeah, not hard at all. Now, one of the other things that Kenner did that was really interesting, because there was this big gap between the figures and things like the Millennium Falcon, so they started making up things to fill the price gap, just things that never appeared in the movie. And Lucas loved it. Here’s the other part where I’ll give Lucas a lot of credit, he loved it because he said, “Well this adds more life to the product line.” It doesn’t have to be in the movie, as long as it fits the theme of it. Now, Kenner also went and bet on a little micro line that failed, and they cut it after a year and they lost a ton of dough on it. Second film comes out, third film comes out, both of them opportunities for new figures. It’s huge.

The average kid now owns 10 figures from Star Wars, 10. But the trilogy’s now over, and Kenner’s like, “Now what?” Because Lucas says, “You know what? I’m going to rest the brand.” So Kenner’s now in trouble. And if we think about it, if we go back and listen to the Lego episode, this is similar to what happened to Lego because Lego bet heavy on Star Wars. And when the trilogy ended, it almost put Lego out business. It came like this close to it sinking Lego. And that was back in episode 28. And Kenner is in trouble, Hasbro swoops in and buys Kenner. So great.

Dave Young:
Okay.

Stephen Semple:
But guess what Hasbro forgot to do? To do the $10,000 a year in royalties.

Dave Young:
Oh, okay.

Stephen Semple:
And they lost the contract. Lucas now decides, “I’m coming out with a new trilogy.” And guess what? This deal’s going to be renegotiated, and Hasbro has no leverage with Lucas.

Dave Young:
Sure.

Stephen Semple:
Because Lucas hated the old deal. And seemingly, this became the most expensive deal in history in terms of a toy deal. The base royalty, instead of it being 95% to the toymaker and 5% to Lucas becomes 18% to Lucas and 82% to the toymaker. And they haven’t even seen the script yet.

Dave Young:
Yeah, movie’s not out.

Stephen Semple:
Movie’s not out, haven’t seen the script. So lots of toys are built ahead of time and sales tank because that first movie was not a big success with kids. But what they did was they pivoted and decided to focus on collectors.

Dave Young:
Mm-hmm.

Stephen Semple:
Variations of the original. And that worked out really well for them.

Dave Young:
Those kids that grew up and had a mint, in-box, unopened figurines that they had just kept from their childhood, there’s nothing to a collector, more tempting than having all of the things.

Stephen Semple:
Yeah. So they focused on that. But then Clone Wars came out and that was a huge opportunity for more toys. And then Lucas sells to Disney for over $4 billion. And to date, there’s been 1 billion Star Wars toys sold.

Dave Young:
That’s a lot of toys.

Stephen Semple:
That’s a lot of toys. When I was looking at this, I thought there was a couple of really interesting things that came out of it. First of all, read your contract. How much do you think Hasbro wished they had read the contract and had been signing those $10,000 checks?

Dave Young:
Oh, 13% worth.

Stephen Semple:
Oh yeah.

Dave Young:
Whatever that works out to.

Stephen Semple:
Yeah. And the other thing that just really also got me was no product to sell, they didn’t let that prevent them. They got creative on it. And I am sure the person who stood up and said, “Hey, let’s sell an empty box with a certificate in it in stands,” I’m sure everybody went, “Oh, you’re nuts.”

Dave Young:
Yeah, I’m kind of a geeky fan, I don’t have any of the toys, but I remember when those action figures came out, it was rare to find a Boba Fett toy, that one was hard to get.

Stephen Semple:
The Boba Fett toy where the rocket actually fires is the most valuable toy, most sought after, most rare toy in the Star Wars collection.

Dave Young:
Because they quit making the rocket-firing one because it was dangerous.

Stephen Semple:
And it was actually a bonus offer that came along with something else. I forget what the deal was on it exactly, but it is most valued toy.

Dave Young:
And I think the cool thing about it is that the Boba Fett character, because that toy was rare and sought after, there became a bit of a lore about Boba Fett, which turns into an entire series.

Stephen Semple:
It does.

Dave Young:
And character development and storylines, and an entire race of Mandalorians. And so the toys actually added to the Star Wars universe in a way that wasn’t anticipated. It’s really a cool story about toys.

Stephen Semple:
The other thing I really admire about Kenner is when they saw this price gap, they said, “Well, let’s create some other things that aren’t on the movies but could be part of the universe.” They understood that kids would still want to play with those things. They bought into the idea that it was a made-up universe. And Lucas was cool with it as well because he’s like, “It’s a made up universe.”

Dave Young:
Yeah.

Stephen Semple:
And Kenner, look, to Kenner’s credit, they also bought rights to a movie that no one else wanted.

Dave Young:
Sure.

Stephen Semple:
And they saw this as their opportunity and leveraged that. And that was really brilliant. But the caution in all of this is what Kenner did not do was plan for a future without Star Wars. That was a mistake Lego made as well. And sometimes we get caught in this whole thing of, “Things are going great, things are going great, things are going great, I’ve grown by this, I’ve grown by this,” and we continue to project that that future is going to be exactly the same. And they didn’t plan for a future without Star Wars and it killed them.

Dave Young:
Yeah.

Stephen Semple:
And so sometimes we’ve also got to recognize that we got to look forward and be prepared for things like Star Wars coming to an end, or this change happening or that change happening. Or also not having so much of our business wrapped up in one thing, that if that one thing goes away, it spells the end. But I would love to have been in the meeting where the person stands up and says, “Hey Dave, here’s what I think we should do. I think we should just sell an empty box.”

Dave Young:
Sure.

Stephen Semple:
Empty box, the stand, little certificate inside, I think that’s what we should do. And people will buy that and kids will actually be happy to unwrap a present that is an empty box.

Dave Young:
It’s such a risk, but you think about the anticipation of those kids then too. They’re just looking forward to when they finally get these things. And that’s hard to do as well because you’re in between movies.

Stephen Semple:
Yeah.

Dave Young:
You don’t even know that you’re in between movies, the movie’s done. There’s talk of maybe a second one, but the memory of the movie is fading.

Stephen Semple:
Yeah, it was a really gutsy move and good for them, good for them.

Dave Young:
Yeah. Well, thanks for sharing this one. I love talking about Star Wars.

Stephen Semple:
All right, thanks David.

Dave Young:
Thank you. Thanks for listening to the podcast. Please share us, subscribe on your favorite podcast app, and leave us a big fat juicy five-star rating and review. And if you have any questions about this or any other podcast episode, email to questions at theempirebuilderspodcast.com.

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