This Toy Maker's Copycat Strategy Should Reward Investors

This Toy Maker's Copycat Strategy Should Reward Investors

After watching rival toy companies successfully enter the entertainment business, the world's largest toy company is trying a big move of its own. Mattel is creating Playground Productions, which will serve as the in-house studio of Mattel's toy brands in the entertainment field. The company will oversee script development, work on storyboards, and ultimately greenlight movies. Mattel is hoping the new studio can transition its brands into film, television, web, books, music, and video games.

One of Mattel's best-known brands, Hot Wheels, gets the first experience with "Team Hot Wheels: The Origin of Awesome." The animated kids show will air a 22-minute episode in the fall, with 11 two-minute shorts to follow in the summer. These 12 episodes will ultimately lead up to a 74 minute direct-to-video story released next fall. Mattel is of course hoping that the movie increases sales of Hot Wheels cars along the way.

Another Mattel brand that will get the movie treatment is Max Steel. With Dolphin Entertainment and Open Road Films, Mattel will see the character hit the big screen. The Max Steel brand remains strong in many parts of Latin America, and Mattel could see a nice boost of international sales if the movie has a good showing in the region.

Mattel can also show off its latest acquisition through its new entertainment umbrella. Mattel acquired Hit Entertainment, the company behind Bob the Builder, Barney, and Thomas the Tank Engine. Mattel can now create new television shows and movies based on these characters and hopefully rejuvenate toy sales.

Mattel's recent third quarter earnings showed the strength of several brands. The company reported revenue of $2.21 billion; this was an increase of 6% from the prior year, and also came in $0.2 billion ahead of estimates. Results were particularly strong among international markets (+9%), Barbie (+3%), and American Girl (+20%).

Rival toy company Hasbro has had success boosting its sales through motion pictures and televisions. The company has used motion picture deals with partners to boost sales of brands like Transformers and G.I. Joe. The company continues to bring its brands to the big screen. A current three-picture deal with Emmett/Furla Films will bring Monopoly, Hungry Hungry Hippos and Action Man to the big screen. This is on top of a deal with Sony to create movies based on Risk and Candy Land.

Mattel should take a book out of Hasbro's page when it comes to television. Hasbro co-owns The Hub, a joint venture television company with Discovery Communications, and the television channel helped Hasbro's entertainment segment become a staple for revenue. In 2012, the segment grossed over $300 million for Hasbro and was able to increase toy sales for many brands that appear on weekly or daily television shows.

Hasbro should also be an easy winner going into the future thanks to its strong relationship with Disney. Back in July, Hasbro renewed and extended a deal with Disney to sell toys relating to the Marvel and Star Wars brands. Hasbro will pay a minimum of $80 million and up to $225 million for Marvel and Star Wars, respectively. The extension gives Hasbro exclusive rights through the year 2020. With several huge Marvel blockbuster franchises and a brand new Star Wars trilogy coming, investors should get behind Hasbro now.

While I have been bullish on Hasbro in the past, I continue to come around to the Mattel side of things. As the biggest toy maker in the world, Mattel doesn't always seem like a growth play, as many of its brands like Barbie are old and outdated. With a new focus on entertainment, however, Mattel should be able to reward investors going forward.

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Chris Katje has no position in any stocks mentioned. The Motley Fool recommends Hasbro and Mattel. The Motley Fool owns shares of Hasbro. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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