Big Companies Are Racing to Make "Interactive Toys." Can They Really Change the Toy Industry?

When the middle class "invented" childhood, toys found a market. Now big companies want each toy to last longer and longer, and to reach more and more people.

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"Enemy approaching! Take cover!" The Iron Man gauntlet on her hand barks a warning. The little girl ducks aside, raises her arm, fires, strikes an Ultraman-style pose at an invisible enemy, and finally nods with satisfaction, surveying her bedroom like a conqueror, as if the enemy has been wiped out.

This is not a teenager in the final stages of "eighth-grader syndrome." It is a preview video Disney showed at its fan convention for Playmation, a toy it had just launched.

What looks crazy to an onlooker is in fact a girl completely absorbed in the game's story. Voice prompts have turned the bedroom into a battlefield. Sensors in the gauntlet let Playmation capture her movements, record them and feed them back into the game's virtual scenes. Through an app on a phone or tablet, she can pick up missions set around the world and head off to fight as Iron Man.

Disney calls Playmation a fourth-generation toy.

"We brought in a lot of kids to test Playmation, and they all found it really exciting," Kareem Daniel told QDaily. Daniel, Disney's senior vice president of strategy and business development, demonstrated the new toy to reporters from around the world at the fan convention that just ended.

Disney also released version 3.0 of Disney Infinity. This mix of game and toy, which Disney launched in 2012, has been one of the company's priority projects in recent years.

Animated-film characters you know well all appear in the game: Mickey Mouse, Aladdin, Marvel's Hulk and Iron Man, even Elsa from Frozen. In the game's Toy Box mode, you can control them as they solve puzzles, explore and race together (picture the Hulk and Mickey Mouse shooting side by side). You unlock a character in the game by buying its figurine, which also stores in-game data.

Characters from Inside Out and Star Wars are the stars of version 3.0, and they will join this Disney all-star brawl.

The Disney Infinity series: on the left, the second-generation Marvel line; on the right, the first-generation Disney line; in the middle, the newest Star Wars line

Daniel calls Playmation a fourth-generation toy. The first generation was the traditional doll, the second the video game console, and the third interactive toys like Disney Infinity. Both the third and fourth generations are interactive toys, a term that is new, fashionable and still a little unfamiliar.

The idea of toys that interact with people, or of toys that come to life, is nothing new. Think of Pinocchio in The Adventures of Pinocchio. But five years ago the interactive toy market simply did not exist.

In 2007 a company called U.B. Funkey tried selling figures of game characters that could also take part in the game, but it soon shut down. In 2011 Disney released a game in which kids drove toy cars from Cars across an iPad screen: a highway stretched endlessly across the iPad and kids pushed their toy cars along it (good thing the screen was sturdy). Barbie was busy fighting Bratz in court, and ended up losing. At the end of that year Lego, which was preparing a film with Warner Bros., launched a game of its own that worked across platforms after a fashion: players built structures out of real Lego bricks, photographed them with a mobile device's camera, and used them to clear the game's levels.

Lego and Disney both saw that the world of physical toys and the world of video games ought to connect, but both fell just short. The toys were still lifeless. Apart from crossing platforms, there was no "interaction" in them at all.

Also in 2011, Activision formally put forward the concept of "Toys-to-life" and turned it into a real business. The interactive toy market grew from there.

Activision's breakthrough starts with a little purple dragon. Spyro the Dragon, a character the developer Toys For Bob designed in 1998, was never as famous as Mario or Sonic, but the team believed in him. Activision bought Toys For Bob in 2005, and the team still had its heart set on the character it had created. At the time Activision was cancelling many game projects and was hungry for a new source of growth. "Activision said they needed to reinvent Spyro and his games, and they needed a completely new way to get a return on investment and stay competitive," said Paul Reiche, one of Toys For Bob's founders.

Toys For Bob eventually hit on the idea of bringing the toy straight into the game, and six years later it released Skylanders: Spyro's Adventure with Activision.

Compared with the earlier cross-platform games from Disney and Lego, what sets Skylanders apart is that the real-world toy truly comes alive in the game. Through NFC and other wireless technologies, the figure in your hand enters the game as if through a portal, moving and talking: truly "alive." You become your toy and go adventuring in the game world. Because the figure also stores data, it can be used in games on any console or mobile device, as if your dragon were stepping through one portal after another, traveling between digital worlds.

For Activision and Toys For Bob this was a gamble: could one product get kids to buy the game and also gladly pay for the characters in it?

It worked. In January this year Activision announced that it had sold more than 250 million toys worldwide, bringing in more than US$3 billion. At the recent Gamescom in Cologne, Activision decided to press its advantage by giving 20 different Skylanders their own vehicles and adding a racing mode to the game. This kind of add-on service (compare QQ's paid memberships) will be Activision's next signature move.

The racing mode in Skylanders will be Activision's next killer title.

This gamble changed the world. Five years ago no one expected video games to become so closely tied to the toy industry, or that the combination would come to dominate the toy market's future. According to a recent NPD survey of the toy market, seven in ten American parents know the concept of interactive toys well, and more than 41% own at least one.

Skylanders set the standard setup for every product of its kind: a physical figure, a video game, and a wireless base that connects the two. Anyone who wanted to link real-world toys to a virtual world has since had to follow that route. Mattel, the maker of Barbie, tried a different path. In February this year it released a Barbie that can talk with children. Using voice recording and a Wi-Fi connection, the doll recognizes what children say and uploads it to a cloud server for analysis. It was soon accused of eavesdropping and met strong opposition from many people. So far it looks like a failed experiment.

Look at the world's best-known and most profitable toy companies. Whether it is Mickey Mouse or Barbie, people have never bought them just because "this doll's clothes use the softest fabric." What gives them meaning is the character and the story behind it. I buy a Mickey Mouse toy not because I like this lump of cotton, but because I like the funny, cheerful little mouse on the screen.

Before interactive toys, the characters and stories behind toys were either fixed in advance or made up by us, as when kids play house with a pile of dolls: "This one's the dad, that one's the mom." Those flights of imagination live briefly and then vanish.

Interactive toys let consumers create their own stories for their toys. The game gives the characters a stage to perform on, and the data storage records their stories. Once Mickey Mouse is no longer just a comedian on the screen but also a gunner and a racing driver in a game, his story grows richer and kids like him more. And kids liking him more means more money.

The giants have all spotted this business. Besides Activision and Disney, Nintendo and Lego have joined the big interactive toy market in the past two years. The former leads the game industry. In August 2014 it released Amiibo, interactive toys that work with Nintendo's own games. Helped by figures that work across many games and by a rich lineup of fun titles, Nintendo turned its first profit in four years in fiscal 2014 and sold more than 14.7 million Amiibo, though players have complained throughout that supply is too thin to meet demand. The latter is a giant of the toy industry. It announced Lego Dimensions at the end of March this year and showed a new trailer at Gamescom in Cologne. Working with Warner Bros., Lego is betting on its worlds. In the trailer you see the world of Batman and Superman, Gandalf's Middle-earth, the American Wild West and more: 14 different worlds in all. You and your toys will fight and explore across them. Lego Dimensions goes on sale this September.

Nintendo will release a new wave of Amiibo this September; the most eye-catching is an 8-bit Mario.

Of course, toys that move do more than make money. The biggest benefit comes from users' familiarity with and affection for the characters. Once a player owns a figure and a game starring that character, that familiarity and fondness push them to buy more related merchandise, which makes it easier for the company to build the character further. A recent example: Activision has started developing a mobile card-collecting game based on Skylanders, due next year. Without the earlier string of titles as a foundation, this once-obscure character would never have been given such a role. Players' fondness for each character has become a guide to where companies invest and what they develop. Which characters users liked used to be hard to measure; now you only need to see which figure sells best.

But not everything has gone as smoothly as hoped. Disney, the oldest name in the field, has recently stumbled in this business. Disney Infinity: Marvel Super Heroes, released on September 23 last year, fell short of expectations. The latest earnings report also shows Disney Infinity sales falling. Disney is now counting on the Star Wars line to reverse the decline.

Toys really are hard to sell right now. Even Disney, with all its characters and stories, can misjudge the market, let alone companies with only one or two minor characters. Barbie, the queen of the toy world, is slowly aging. Mattel's sales have fallen year after year, overtaken by merchandise backed by hit films, such as characters from Frozen and Teenage Mutant Ninja Turtles. These days a toy cannot survive on its own without a large, rich "pan-entertainment" ecosystem behind it. If you want to sell toys, first make a good animated film or movie, or at least publish a book.

That is why every company you see making interactive toys today already owns well-established characters. Mickey Mouse, Mario, the Lego minifigure and Spyro were all more or less familiar to people beforehand. Disney and Nintendo have a natural advantage: their films and games are the best advertising for their toys. Lego is catching up fast. Its partnership with Warner Bros. lets its minifigures ride the wave of hit films such as Jurassic World and The Lord of the Rings, and makes them better known.

Video games are also battering the whole toy market. Once kids get electronic devices like the iPad, they toss traditional toys aside. In a broad sense the iPad, the iPhone and the computer are toys too. They are not made only for play, but they serve a toy's most important purpose: entertaining people. As a form of entertainment that spans platforms, interactive toys gain from their link to electronic devices, which helps them fit how people consume today.

The Marvel line of Disney Infinity sold poorly and dragged Disney down.

Still, don't expect interactive toys to replace the tablet in kids' hearts. The interactive toy market is only five years old and has barely got started. In the latest quarter, revenue at Disney's interactive division (mainly its games business) fell sharply as Disney Infinity revenue declined, dropping US$58 million to US$208 million. But that is a small part of Disney's US$13.2 billion in total quarterly revenue, and the interactive division also includes Disney's other games.

Even so, Disney will not let this new market slip away. It recently announced that it would merge its consumer products and interactive divisions, a sign of how much weight it now puts on combining games and toys, and how confident it is: toys, as consumer products, carry physical value, while interactivity is what games do best. Playmation, launched this year, is Disney's latest effort. Disney calls it a fourth-generation toy, following traditional toys, video games and Skylanders-style interactive toys. The ambition is plain to see.

Will Playmation succeed? That depends on how it tells its stories and what fresh ways of playing it offers. How many scenarios will the Playmation app let you choose from? How many of your movements can the gauntlet of Iron Man, or of any other hero, recognize? How can the sensors' feedback feel more real? How can players play more like the Iron Man of the movies? These may be questions Disney has to answer in the future, and every toy maker has to consider. In a market where the contest is over who plays coolest, no one wants to fall behind.