Toying with Hearts and Minds

With Christmas fast approaching, the race is on to work out what the kids want.

LIKE IT OR NOT, there are only 183 days until Christmas and the race is on to work out what the kids are going to be screaming for this year.

The biggest clues are provided by the many international trade fairs that take place exactly around this time. The New York toy fair took place recently, and there have been others in Milan, Paris and Nuremburg. Probably the most influential is the one that just took place this summer: the Tokyo International Toy Fair.

The event takes place on home territory for Bandai, Japan's biggest toymaker and now the third largest in the world after the US giants Mattel and Hasbro. The group is no stranger to the frenzy of Christmas toy crazes, and was single-handedly responsible for the Tamagotchi virtual pet mayhem that created half-mile queues outside Japanese, US and British toyshops in 1996. What makes this year different is that Bandai is now making an outright bid for the global No. 1 slot.

"We want to be the world's No. 1 entertainment
provider, and that means more than just toys.
It means everything fun"

That ambition was laid out by the company's president, Takeo Takasu, when he was informing the Tokyo market of another excellent year of results in late March. Newer divisions, such as the ones that produce anime DVDs and video games software, were particularly prosperous, beating forecasts by double-digit percentages. The shares have responded accordingly, coming within striking distance of an all-time high and giving the group a market capitalization of JPY220 billion.

That still only makes it half as valuable as Mattel, the maker of Barbie, and analysts remain puzzled over exactly how Takasu plans to make good on his promises.

In an exclusive interview, the Bandai president agreed that the statement needed more explanation: "When we talk about being No. 1 in the industry, we're not fundamentally talking about the volume of toys shifted any more. Mattel is the world leader in volumes and will probably stay there," he said, "but the industry has changed a lot because children have. We want to be the world's No. 1 entertainment provider, and that means more than just toys. It means clothes, sweets, video games, DVDs, mobile phone products, Internet stuff: everything fun."

Sitting in his Tokyo head office, Takasu surrounds himself with examples of all this. In one corner of the room he has a scale model of a six-piece blues band that springs into action when MP3 Internet music is played to it.

He pats a small cuddly toy on the head, and for the rest of the morning it interrupts the conversation with sudden bursts of Japanese baby-talk. He slides his mobile phone across the table and the background screen shows a picture of Barbie.

"We have the distribution rights to Barbie in Japan, and this is what we've done with her," he says, "for JPY100 a month, you join the Barbie club and you get a new image sent every day. As of last week we had 4 million subscribers to the service. We do other clubs, and we work between the Internet and the mobile phones. We're doing a lot of research, but the growth potential seems huge."

Movement in these new directions has brought the profit contribution of Bandai's toy division down to just 50 percent. That could fall further if Bandai goes ahead with its rumored deal to provide similar services across Vodafone's entire European network. But Takasu is adamant that its most famous physical products -- Power Rangers, Digimon and Hello Kitty toys still form the basis of the whole plan.

In 1963, Bandai released robot models of Atom Boy -- an iconic Japanese cartoon character which just celebrated its 50th birthday. It was the first time that a toy had been directly based on a television program, and that has been a central pillar of the Bandai strategy ever since. Themed around intricate fighting robots, Gundam, along with other anime cartoons, forms the basis for vast ranges of models and games, and provides, through the shows, a constant flow of new characters.

Bandai has also discovered that its toys are readily exportable. Power Rangers, a massive hit in Japan, was the best-selling toy of the 90s in the US. Historically, the company has made much capital from its ability to strike licensing deals with companies at home and abroad. One of its most effective has been the partnership with Sanrio, the creative brains behind Hello Kitty. Sanrio comes up with the ideas, and Bandai makes all the plastic toys, pajamas and stationery that fly off shelves around the world.

"As a chief executive I want rights, rights and more rights. I have very high hopes for the way that countries outside Japan will respond to our partnerships with cartoon makers, and Gundam particularly is really taking off in the US," says Takasu. "Miyazaki's recent Oscar gives Japanese animation an even stronger following wind. Cartoons are very powerful tools because they only need minimal changes to make them localized. That said, we've always had to do a little work to suit international tastes. When the Tamagotchi pets died on the Japanese version of the game, they turned into ghosts. Western kids got scared, so we had them turning into angels."

But Takasu has another, more fundamental reason for looking at markets outside Japan. "Twenty-five years ago there were 2.2 million children being born in Japan each year. Now that number is down to 1.1 million. If we're only talking about children, it means our domestic market has been cut in half. So of course, we look outside at China, Indonesia and all the other parts of the world," he says.

Keeping very quiet on the details, Takasu has made it clear that part of Bandai's bid for the world's No. 1 slot will come through mergers and acquisitions. He does hint, however, that he has particularly high hopes for the division making video games. Earlier this year, Bandai abandoned its own hardware projects in the handheld console market, acknowledging that it was an area that Nintendo's Gameboy Advance now dominates.

Bandai says it will be focusing on the software market, and it has made swift headway doing for video games what it did for toys: playing off the popularity of TV shows. In 1997, Bandai called off a $1 billion merger with Sega, but analysts believe Bandai is now looking very carefully at a merger with a big video games company.

Takasu's ambitions are also based on his conviction that his company can beat recession, and particularly the spiraling deflation that is hitting so many parts of the Japanese economy.

"Deflation? It doesn't bother me that much," he says. "This business isn't about looking at two packets of toilet paper and seeing that one costs JPY10 less than the other. You can survive without the things we make and that is what gives us pricing power. All we need to do is keep them entertaining. If people find our products fun, they buy them. If it makes the children happy, parents buy them. The great strength of Japan is its ability to keep inventing new ways of entertaining people." @