The toy industry recently ended a difficult year with several key markets, including the U.S., U.K., and Australia, declining. As technology continues to become more affordable and available, toymakers have to adapt to the changing markets. Hasbro (NASDAQ:HAS) is doing this by increasing its digital presence and investing in Backflip Studios, a mobile game developer. The company hopes that new digital offerings will help separate it from competitors like Mattel (NASDAQ:MAT) and Jakks Pacific (NASDAQ:JAKK).

A potentially impressive Backflip
Hasbro purchased 70% of the Boulder-based company, Backflip Entertainment, at the beginning of July 2013. The company paid $112 million in cash for a majority stake of the company that produces popular games like NinJump, Dragonvale, and Paper Toss.


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Since the acquisition, Backflip Studios has helped Hasbro's entertainment and licensing revenue increase by 5% for the year but it was also responsible for a $6.5 million decline in operating profit for Hasbro. The negative impacts of the acquisition were slightly greater than expected, but according to CFO Deborah Thomas, "the team, their brands and their talent are important new assets to our business which we will leverage for the full year 2014 and beyond."

2014 will be the first full year of contributions from the Backflip team who will focus on three main areas. First, the team will continue to drive its already-successful brands like Outworded and Army of Darkness Defense in addition to the games mentioned above. Second, the team will launch new game brands like Dwarven Den. Finally, Backflip plans to launch games based on popular Hasbro brands to connect digital and analogue play. The coming year will shed more light on how Backflip will affect Hasbro's bottom line, but for now the company seems optimistic.

Current toy apps
Hasbro's competitors, Jakks Pacific and Mattel, have also invested in technology to accompany their traditional toys.

DreamPlay, Jakks's joint venture with NantWorks LLC, was founded at the end of 2012 and it offers digital apps that interact with its traditional toys to enhance a child's experience. It recently launched "Ariel's Musical Surprise," an app that is used with several of its Little Mermaid-themed (A Disney property) toys which include Ariel's Musical Light-up Dress, Musical Instrument Set, Magical Mermaid Kitchen, and the Ariel keyboard vanity. The patented 2-D and 3-D recognition technology recognizes these toys and incorporates them into the game and entertainment content of the apps. DreamPlay could be what Jakks needs to come back after a year that saw the company's share price drop to a low of $4.65.


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Mattel also has apps to accompany its major brands Hot Wheels and Monster. Each app, produced by Apptivity, offers unique gameplay that can interact with select toys. Physical Hot Wheels cars can ride a digital road and Monster High characters can solve mystery-based missions. The company also has non-Apptivity apps for its other popular brands like Barbie and Max Steel. Mattel, like all toy-makers, had a challenging end to 2013 as revenue declined, but it still managed positive growth of 1% for the year. The company still has a high gross margin of 54%, which compares to 50% and 24% for Hasbro and Jakks, respectively.

Looking forward
By investing in Backflip Studios, Hasbro has gained access to the 53% of online gamers who play in game categories that include casual, social, puzzle, and board games.  Hasbro already had mobile apps for popular brands like Transformers and Beyblade, but Backflip will bring additional mobile gaming expertise to designing new, popular games. Brian Goldner, Hasbro's CEO, said, "As mobile play continues its rapid growth, Backflip's leadership position, great games and established network of users, makes Hasbro a more meaningful participant in digital gaming." This forward-thinking could lead to solid long-term growth that would please any Foolish investor as they move closer to retirement.

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