Hasbro still optimistic about future

By MARC FORTIER

Essex County Newspapers

BEVERLY _ Five years ago, optimism abounded as Hasbro Inc. launched its newest venture, Beverly-based Hasbro Interactive.

A month and a half ago, with its interactive games division foundering, Hasbro decided to take its losses and run, selling Hasbro Interactive and the rights of its best-known products to French game creator Infogrames for $100 million plus future royalties.

In doing so, Hasbro, the world's number two toy maker behind Mattel Inc., admitted its failure to turn a profit in the lucrative video game industry.

The toy giant is not alone. Earlier this year, Mattel made a similar decision, selling off The Learning Company, its own attempt to grab a piece of the interactive gaming market.

Toy industry analysts say it may just be that larger toy manufacturers are poorly equipped for the very different world of interactive gaming.

"The underlying story is toy makers find themselves fundamentally challenged managing interactive toys," said Eric Johnson, professor of management at New Hampshire's Dartmouth College.

The hope is that Infogrames, which makes games for PlayStation and Nintendo, among others, can use its expertise in the video game industry to turn a difficult situation around.

"Infogrames has always done a pretty good job of reworking companies that needed it," said Tom Richardson, an Infogrames spokesman.

That would seem to bode well for the Beverly-based Hasbro Interactive. But there has been no word yet on whether layoffs should be expected, or if the company will even remain in Beverly.

A team from Infogrames visited the Dunham Road facility the week after the Dec. 6 sale. But so far, both Hasbro Interactive and Infogrames have been silent on the company's future.

Johnson and other analysts agree that the sale should be a positive for Hasbro Interactive, breathing new life into a company that was in a tailspin.

Hasbro Interactive lost about $85 million in 1999, and the division was expected to equal those losses this year.

"To some extent it's not an easy business," said Melissa Williams, a toy analyst at the New York investment firm Gerard Klauer Mattison. "Having a company that is 100 percent dedicated to the business may make more sense.

"The Hasbro brands fall very clearly within Infogrames strategy, which is to build big mass-market products. I think it's a good strategic fit. And it helps Infogrames build their US presence."

As part of the deal, Infogrames will acquire the rights to Games.com, Hasbro's Internet gaming site, plus Hasbro's Atari and MicroProse. It will also gain rights for 15 years to develop interactive versions of Hasbro products, such as Monopoly, Scrabble and Mr. Potato Head.

Jim Silver, publisher of Toy Book, a trade magazine, also thinks Hasbro Interactive's chances for survival under Infogrames are good.

"They (Infogrames) have the expertise," he said. "This is a different business than making toys.

"They're marketed differently, they have different life spans, even different return policies. We thought it was the toy business. It was a different business altogether."

Analysts also seem to agree that Hasbro did well in getting out of the manufacturing side, while keeping itself in the royalties picture if Infogrames succeeds in turning things around.

"I think it's a great move," Silver said. "At the end of the day it is much more profitable to be licensing out the properties than to be managing them themselves."

He said most of Hasbro's growth through the years, particularly in the `80s, really came through licensing. My Little Pony in the `80s, along with a couple of other successes, allowed it to buy Milton Bradley and Playskool.

"The realization they have come to is that they have all these brands and properties, they can just license out the names," Silver said. "Profit-wise, it makes sense."

Johnson also feels Hasbro cut a fairly decent deal, getting cash and revenue streams. "Maybe from their perspective, that whole division was costing them 65 cents per share," he said. "They figured they could cut this thing loose, and still profit from some of its upside potential.

"On the surface, it looks like a better deal to me than The Learning Company. There wasn't much left there."

Williams said the video game industry might have become a business Hasbro just didn't want to manage anymore, and getting an expert in the field involved may be best for all parties.

"Given the losses they've incurred in the past couple years, it just made more sense to have someone else run it, and get some kind of recurring revenue stream from the royalty agreement," she commented.

Dartmouth College's Johnson has several of his own theories why traditional toy giants like Hasbro and Mattel haven't been successful in this area.

"There's two main themes of thought," he said. "Both Hasbro and Mattel have tried internal development of these skills to put together their own divisions, or through acquisitions like The Learning Company, to acquire these skills."

But the interactive gaming market is just different enough from the conventional toy business that they haven't been able to succeed.

The selling of video and computer games is where the big toy companies seem to fail, he said.

"High tech toys and software are sold in slightly different channels, and these differences seem to befuddle the toy makers to a certain extent," Johnson said. "Hasbro and Mattel live in a world where Wal-Mart, Toys R Us, KMart and Target essentially make up half their sales. That's not true for the high tech toys.

"That's been a huge issue for toy makers. It's just hard for them to get used to that different type of mentality."

Williams thinks Hasbro's stock of popular board games just didn't translate well to the video gaming market.

"I think the strategy was in place," she said. "But to some extent the life cycle for board games ended up being shorter. Once you sell one version of Monopoly for the PC, it's harder to sell versions two, three and four."

Unlike Hasbro's traditional board game favorites, sport and action games can be updated with new information and statistics and resold each year.

"Some games are just inherently easier to sequel," Williams said.

The companies were also unable to duplicate the successes they've had in linking toys with new television series or movies.

With the interactive games, Johnson said, it just didn't work, as evidenced by Hasbro's unsuccessful attempt to link its interactive games division with last year's big Star Wars push.

For now, it appears both Hasbro and Mattel have decided to stay away from what they don't know, despite a long history of trying.

"I think both Hasbro and Mattel feel at this point there is room in their conventional toy brands to find some more growth," Johnson said. "I think what they're arguing is these other things have been a distraction the last couple of years. Now they're going back to their knitting, as it were."

But that doesn't mean they won't at some point try to reenter the interactive games industry.

"I'd be willing to bet anything that both these guys are going to be back," Johnson said. "They should be able to do it, and it's a traditional growth segment."

Toy Book's Silver disagrees, saying he thinks Hasbro and Mattel have been burned and won't be back.

In the end, it may just be an industry suited to smaller, more streamlined companies that started out as video and computer game manufacturers. At least that's what Infogrames is banking on.

"It's a perfect fit with the distribution network we have," said Richardson, the Infogrames spokesman. "We've been doing this for 17 years."

Two years ago, Infogrames, the number two video game publisher in Europe at the time, decided to increase its North American presence.

The company acquired Accolade, a mid-sized video game publisher. Soon after it bought and resurrected GT Interactive, a New York-based game publisher that was on a downhill slide.

The acquisition of Hasbro Interactive is just the next step for Infogrames.

"The overall goal of our CEO (founder Bruno Bonell) is to build a family entertainment company that has a lot of offerings for all age groups," Richardson said.

"Hasbro Interactive had a lot of great products, but it wasn't necessarily going that wonderfully for them," he said. "A lot of companies that weren't traditionally in our space got into it and said, `This isn't exactly what we want to be pursuing.'"

But Infogrames feels it can take Hasbro Interactive's strongest points, and turn the company around.

"The things they have to offer, property-wise, fit great," Richardson said. "We don't have a well-developed on-line gaming strategy. And the licensing deal too. We'll be able to license stuff from Hasbro. And this will also fit perfectly with our family entertainment line."

What this means for the approximately 200 employees at the Beverly plant remains unclear.

The sale is expected to close at the end of the first quarter of 2001. Hasbro spokesman Wayne Charness said last month that the decision to keep local employees, who work on both the creative and administrative sides, will be up to Infogrames at that time.

Infogrames was tight-lipped when it came to their future plans for the Dunham Road plant.

"It is too early for us to answer questions about our specific plans," said Infogrames' Padia, when asked whether any layoffs are envisioned, or if the plant could be moved.

"(The employees) have been told that we value them and that Infogrames is a fun and successful company," she added. "We also said that we are looking forward to all of us together creating the world's leading digital interactive entertainment company."

Hasbro Interactive spokesman Jason Hill said with the acquisition by Infogrames still pending, company president Tom Dusenberry won't be available for an interview until February at the earliest.