Licensees bank on Potter's magic
By Nicole Maestri, CBS.MarketWatch.com
Last Update: 2:00 AM ET Nov. 22, 2001
SAN FRANCISCO (CBS.MW) -- For children and theater owners, Harry Potter's record-breaking debut last week was an instant success. But companies that spent millions for licensing rights tied to the books and movies may have to wait years to measure the magic.
The debut of "Harry Potter and the Sorcerer's Stone," the first movie based on the mystery-adventure book series by J.K. Rowling, came after months of fierce competition for the rights to merchandise and marketing licenses.
After reportedly doling out large fees and agreeing to give Warner Brothers 15 percent royalties, big companies like Mattel (MAT: news, chart, profile), Hasbro (HAS: news, chart, profile), Electronic Arts (ERTS: news, chart, profile) and Coca-Cola (KO: news, chart, profile), won the rights.
But it might take years to figure out how much these companies will benefit from the prized rights because licensing revenue will be dependent on the continued popularity of Harry Potter books and movies over the next few years.
Behind the scenes
Over the past two years, about $7.5 billion of the annual $23 billion in toy sales came from licensed products, said Reyne Rice, director of marketing and communication for NPDFunworld, a market analysis firm.
Sales of Harry Potter-related toys are expected to account for $500 million to $1 billion of that $7.5 billion, so interest in the licenses was high.
"Everyone was trying to get the rights for Harry Potter," Rice said.
Warner Brothers, a division of AOL Time Warner (AOL: news, chart, profile), picked industry leaders as licensees to increase the chances that products and promotions would be successful. In an effort to avoid Harry Potter overload, Warner Brothers gave out fewer licenses than usual, making competition fierce and raising the cost of the rights.
It's difficult to pinpoint what these companies paid for the licensing rights because they don't disclose that information, but it is reported to have been a hefty sum. And the 15 percent royalty figure is much higher than the usual 8 percent to 10 percent, according to Laura Liebeck, executive editor of License Magazine.
"This is definitely one of the highest priced licenses ever," said Miguel Iribarran, an analyst with Wedbush Morgan Securities. He covers Electronic Arts, which won video game rights.
Coke was selected as the sole global marketing partner, making it the only company that can associate its brand with Harry Potter. Mattel won the license for most toy categories, while Hasbro is making trading and movie cards. Privately held Lego developed a line of Harry Potter building block toys.
The companies wasted no time capitalizing on the rights they won. Coke said it is putting the same effort into promoting Harry Potter as it does the Olympics or the World Cup.
"It's certainly one of the biggest, if not the biggest, entertainment focused things that Coca Cola has ever done," said Coke spokeswoman Susan McDermott.
Harry Potter, a few years older
"Mattel pursues very few licenses," said Matt Bousquette, president of the boys and entertainment division at Mattel. "We do it only when we have a very strong conviction that the property has richness, depth, longevity and worldwide appeal."
Longevity of the brand will determine whether these licensing rights become big revenue producers, analysts say.
Rowling says she will write seven books, one for each year Harry Potter is in enrolled in the Hogwarts School of Witchcraft and Wizardry. Four of those books have been published, and Scholastic (SCHL: news, chart, profile), which has the American publishing rights, expects the fifth book in the summer of 2002. Warner Brothers has already started production of the second Harry Potter film.
"The opportunity for the toy companies related to Harry Potter is probably more significant into 2002 and beyond," said Melissa Williams, an analyst at Gerard Klauer Mattison who follows in the industry.
There are only seven weeks left in 2001 for Harry hype. But with the home video release of the movie due next year along with another book and movie, 2002 looks promising for licensing revenue.
Charles Riotto, president of the International Licensing Industry Merchandisers' Association said there's potential for Harry Potter to spawn into a franchise like a previous blockbuster series.
"Judging by the hype that's led up to the movie opening ... and the fact that you've got a ready-made audience in the millions of people who have read the books and the demographics that cut across so many different age categories, the potential for a Star Wars-like merchandising process is definitely realistic," Riotto said.
The bottom line
For all the hype and the Olympic effort of these companies, how well will these deals line the pockets of those involved?
"The reports that I have heard so far is that it [Harry Potter merchandise] is doing pretty well," said License Magazine's Liebeck. "But the potential is really open ended."
She said Harry Potter merchandise could potentially generate $500 million over the next 9 months.
But Riotto said roughly $1 billion in merchandise tied to "Star Wars: Episode 1 -- The Phantom Menace" was sold in the four to six months following the film's release.
Not betting the farm
If they're playing it smart, companies with Harry Potter licenses may be able to declare victory even if Pottermania fades early.
The toy industry has been burned in the past few years by making too much product for licenses, said Chris Cox, an analyst with Goldman Sachs who covers both Hasbro and Mattel. Companies may have learned their lessons this time around.
"I think both Mattel and Hasbro are playing it close to the vest," Cox said. "I don't think that they're planning on these products really moving the meter either way."
Analyst Williams estimated that Mattel could bring in $125 million to $150 million in Harry Potter product revenue. But for a company that is expected to generate $4.9 billion in annual revenue for the year, the sales are only a fraction of its business.
And the same is true for Electronic Arts.
"They'll make money on this," said Iribarren, "But because Electronic Arts is such a big company in this sector, its sales tend to be diverse. It's not like they're betting the farm on this."
Nicole |
