May 12, 1999

What George Lucas Really Meant by
"The Force"

by Louis Corrigan
(TMF Seymor@aol.com)

"May the Force be with you." While many have equated the mystical Force with religious concepts like Zen or the Holy Spirit, Star Wars creator George Lucas just might have had something else in mind. Like, say, the merchandising opportunities related to his hugely successful film franchise.

Although the Star Wars prequel, The Phantom Menace, doesn't hit theaters until May 19, a new line of related toys has already landed on store shelves -- and has been quickly snatched up. It's become obvious that this Force will be inescapable.

Back in 1977, after the original Star Wars had thrilled the nation with its mythic intergalactic saga and its eye-popping special effects, writer/producer/director Lucas made a brilliant decision. Rather than take a hefty director's fee for the sequel, he opted instead for rights to the sequels and all related merchandise. At the time, movie tie-ins were not a major revenue stream for Hollywood studios since few films stuck around long enough to generate significant sales, and America had not yet become addicted to videos. Toy makers concentrated mostly on products linked to Saturday morning cartoons.

Since then, however, the Star Wars industry has done better than many small countries, bringing in an estimated $4.5 billion in sales. In the decade following its release, more than 250 million Star Wars action figures were sold. Lucas has pocketed a substantial chunk of these sales through rich licensing deals. In turn, fan magazines, websites, and collectibles vendors have turned Luke, Leia, Han, Chewbacca, R2D2, and even Darth Vader into friends for life, keeping the Force alive. Obi-Wan Kenobi would be proud.

Lucas stands to make out handily in this new round of mega-merchandising surrounding Phantom, the first film in a new trilogy to be produced over the next few years. And a number of companies have staked serious bucks on the success of Phantom, proving that selling toys isn't child's play.

While Lego will sell Phantom-related construction sets, Hasbro (AMEX: HAS) should be the toy maker that benefits the most from the new film. Retailers Wal-Mart (NYSE: WMT) and Toys "R" Us (NYSE: TOY) should also do well selling Hasbro's products. Firms in the online auction business -- especially eBay (Nasdaq: EBAY), but also Yahoo! (Nasdaq: YHOO) and Amazon.com (Nasdaq: AMZN) -- may also see increased traffic from surging new interest in Star Wars memorabilia.

Much if not all of the Force has already been built into these companies' stock prices. Indeed, there may be more downside risk than opportunity for investors at this point. What if the film somehow fails to live up to the hype? Then again, we are talking about a George Lucas production, not just some lousy Godzilla flick.

After picking up rights to the Star Wars collection when it acquired Galoob Toys last year, Hasbro went all out to win Lucas over for the new trilogy. Hasbro CEO Alan Hassenfeld reportedly dressed up like Obi-Wan himself to make his pitch. But donning a costume is nothing compared to shelling out hundreds of millions of dollars for a ten-year licensing agreement. Hasbro will pay Lucas some $250 million in licensing fees by the time the film opens, according to Business Week. That's part of the 20% royalty deal that's expected to cost Hasbro about $600 million over the life of the contract. Lucas has also received warrants for 5.7 million shares of Hasbro stock, currently worth around $140 million.

Hasbro cranked up the Force last November with a sample of Phantom toys, including the Gian Speeder and Theed Palace play set and the four-inch Mace Windu (the Jedi Knight played by Samuel Jackson in the film). The company has introduced around 100 new toys, including smart digital dolls and other interactive figures.

Packed with a Comm Tech microchip that allows them to speak lines from the film when accompanied by an electronic "reader," these three-inch dolls of Darth Maul (the evil one), Anakin Skywalker (Darth Vader before he went to the Dark Side), Obi-Wan, and his Jedi master mentor Qui-Gon Jinn will let you, eh, will let the kids recreate scenes from the movie. Larger, more deluxe products will have swinging lightsabers, including Maul's double-edged version, sure to be a hit with dads battling two kids at once. Girls who missed out on all the Queen Elizabeth hype last year will get their due with a doll of Queen Amidala (Luke's mom as a young girl), complete with some of the eight ornate outfits she wears in the film.

The cost of Hasbro's deal with Lucas should be worth it. Analysts figure Hasbro's Star Wars related sales could run as high as $1 billion this year and $5 billion over the next decade. The stock is up nearly 40% in 1999 alone thanks to the high expectations. With Hasbro already gaining on Mattel (NYSE: MAT), which has seen its Barbie line break a heel in the changing toy marketplace, some analysts are betting Phantom returns Hasbro to the top of the toy industry.

That would be pleasantly ironic since some blame the original film for helping to wound Hasbro's major G.I. Joe franchise. The original Star Wars figures were just three inches high since they had to be small enough to fit into those cool X-Wing fighters. Plus, plastic got more expensive during the oil shock. So Hasbro downsized G.I. Joe from 12 inches before Star Wars to eight inches in 1977. He dropped to just three inches by 1982. Old Joe never really recovered.

Though they had enjoyed just a taste of the new film thanks to the much-hyped trailer, fans and collectors were out, well, in force, during the wee hours of the morning on Monday, May 3. That's when the Phantom toys officially hit the stores, in a move choreographed by Lucas to generate a whole lot of free publicity.

Many Wal-Marts that aren't usually open 24-7 opened their doors at midnight for the occasion. Some employees wore costumes, creating a festive atmosphere. Now the nation's largest toy retailer, Wal-Mart, probably has made the biggest investment in the film. The company has reportedly purchased more than $500 million worth of Phantom merchandise (about $250 million wholesale). It plans to stock 16 of its 36 departments with tie-in products, from toys to toiletries, making it the company's most heavily supported film promotion. Of course, given Wal-Mart's revenues of $139 billion last year, Phantom will be, at best, just another little lift for this retailing powerhouse.

Other toy retailers also went all out. Toys "R" Us hosted its own midnight magic, as some 683 of its 703 stores opened up for the occasion. At many locations, hundreds of customers waited in line for the chance to spend their handfuls of cash. According to some reports, the collector-heavy hoards were ringing up average sales tickets of over $100 a piece. The Darth Maul action figure was reportedly a hot item, selling out at numerous sites.

As the former number one toy retailer, Toys "R" Us has a lot riding on Phantom. It ordered some 700 trailer trucks full of related toys. Mega-movie flops like Godzilla haven't helped the company's sales in recent years, which have dropped as Wal-Mart wooed customers with low prices and convenience. To revive its one-stop-shop destination concept, Toys "R" Us has begun redesigning its stores, adding more interactive game areas and cutting prices and inventories.

The modest recovery so far could get a major boost from Phantom. Kids and their parents will no doubt be making special trips to the local Toys "R" Us for its wide selection of products, and that should boost spending on other toys, too. The Phantom buzz plus the company's recently announced plans to launch an online store have already sent the stock price up 60% from its February low.

Of course, if you want a complete collection of memorabilia from Phantom and the first trilogy, E! Online figures you'll need $100,000 or more. So hopefully you made some smart Internet investments in the last year! A set of 62 character coins marketed by original Star Wars toy manufacturer Kenner will now cost you about $2,500, nearly a hundred times more than it cost in 1984. Folks looking to start or fill out a collection will be clicking onto websites, especially the big online auctioneers. A quick check of eBay turns up more than 15,000 Star Wars items for sale.

Indeed, the whole Phantom hysteria seems likely to drive some very new customers into the virtual world of online auctions. And e-tailers are adroitly capitalizing on the phenomenon, with Amazon rolling out its own special Star Wars store that melds its basic book and CD collection with its new auction site and wealth of editorial content. Of course, real aficionados will be exploring other sites on the Web for hidden treasures and background reading. E! Online put together this explorer's guide, which I highly recommend.

I'd say, "May the Force be with you," but it already is -- ready or not.

Next -- Food & Beverage Industry

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The Official Star Wars Site     Amazon.com's Star Wars Store