Kids love to tickle and squeeze Elmo. Unfortunately for Sesame Workshop, Elmo's corporate parent, the tumultuous economic environment is doing some squeezing, too.

C is for cookie, R is for recession
Last month, Sesame Workshop sliced roughly 19% of its staff. Like its for-profit cousins, the nonprofit organization is trying to sell global products during a worldwide downturn while it must pay higher production costs for its content and invest heavily in digital-media capabilities. And if that's not enough to keep a grouch inside his trash can, Sesame Workshop depends heavily on corporate donations and government funding -- two sources that generally contract during a recession.

"P" and "S"
Dubbed "Program Support" by Sesame Workshop, this blend of institutional and government money accounted for 28% ($40.5 million) of its revenue for the year ended June 30, 2008. This portion of Sesame's three-pronged revenue model actually increased 20% from the same period in 2007. A similar bump seems unlikely in 2009. The Sesame Street producer, formerly known as Children's Television Workshop, said distribution fee income for its content climbed to $52.7 million in 2008, up 22% over 2007.

But the report foreshadowed some of the challenges that likely led to the staff reductions. Fees generated by licensing the powerhouse core asset of Sesame Workshop -- its roster of characters ranging from Elmo to Big Bird to Bert and Ernie -- decreased from $52.3 million in 2007 to $52.0 million in 2008, while costs to produce global educational content grew to over $116 million from just under $100 million in the previous year.

Can the brand keep going strong?
Brand fatigue is a risk for any company that relies on a stable of core characters. Sesame Street, the cornerstone of the Sesame Workshop enterprise, celebrates its 40th season on television this year.

It's possible, though unlikely, that children (or more importantly, their parents and grandparents) could decide that Snuffleupagus & Co. are passe and look for trendier characters from competitors. So, the Elmo Empire can't rely just on its existing superstars -- it needs to develop fresh and appealing new monsters, expand to additional international markets, and compete aggressively with other kiddie competitors like Disney (NYSE:DIS) and Nickelodeon parent Viacom (NYSE:VIA) (NYSE:VIA-B).

Sunny day, sweeping the clouds away
Like those multichannel brand monoliths, Sesame Workshop will continue to maximize its beloved characters across as many platforms as its licensees can imagine -- toys, books, magazines, DVDs, greeting cards, home goods, clothing, and yes, even an amusement park.

And while the kick-to-the-gut downturn may hamper fundraising efforts, Sesame Workshop continues to create a pipeline to government and corporate funding, including sponsors such as McDonald's (NYSE:MCD) and Wal-Mart (NYSE:WMT). It's also made investments in a multimedia "Sesame Street" website and relaunched an old favorite, "The Electric Company," for Gen Xers to enjoy with their children.

Final thoughts
Like many of its publicly traded peers, the skies over Sesame Workshop may seem partly cloudy. But just as the message of optimism and learning brightens every corner on its flagship show, the organization is positioning itself for better days. It will continue to intelligently leverage its prime asset and brand moat -- the instantly recognizable and adored characters -- and learn how to become a partner that the government and sponsor corporations can't live without.

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Rob Runett does not own shares of any of the companies in this story, but the signs of Elmo (and Ernie, and Bert, and Big Bird … ) are everywhere inside his home. Disney is a Motley Fool Stock Advisor selection. Wal-Mart and Disney are Motley Fool Inside Value recommendations. The Motley Fool has a disclosure policy.