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How Lego Became the Most Valuable Toy Company in the World

A bucketload of license deals

Lego owes some of its partners far less, according to a source with knowledge of Lego’s business dealings who declined to comment on the record. For one of Lego’s licensed lines, a recent two-year agreement guaranteed a base of less than $1.5 million, with royalties halved if a product is sold at one of Lego’s own retail stores. Across all its lines, licensing and royalty expenses came to about $263 million in 2012. Hasbro and Mattel each topped $400 million—though to be fair, their toy offerings encompass a much wider range. With the exception of a few line extensions like watches and flashlights, Lego stays close to home (more on that later).

“They are incredibly smart and strong managers of their brand,” says Karen McTier, evp of domestic licensing and worldwide marketing for Warner Bros. Consumer Products, which has several properties with Lego—Harry Potter, the DC Universe superheroes, The Hobbit and The Lord of the Rings movies. “The goal is to be in that Lego aisle or assortment no matter what other properties sit alongside you.”

If imitation is the sincerest form of flattery, then the toy industry has been throwing laurels at Lego’s feet since a crucial patent expired in 1983. Lego has argued in court, usually without success, that the “stud-and-tube” system of bricks constitutes a trademark, not just a patent. It has sued several companies, including the now-defunct toy maker Tyco Industries, Canada-based Mega Brands, and the Chinese company Tianjin Coko over its CoCo line (which Lego won). Such companies have even played off Lego’s popularity in their marketing, with Tyco ending every ad with the line “They work with Lego, too!” and Mega Brands’ Mega Bloks emphasizing that its bricks are “compatible with leading brands including Lego.” But among collectors and children alike, there is consensus: Lego bricks are just better made.

The manufacturing specs on a single plastic block are hyperspecific. The margin of error is an astonishing two microns, or 0.000079 inches (the average human hair is about 100 microns wide). Meanwhile, the plastic used is the same material from which car bumpers are made. The plastic is dyed, not painted, and the mix of ingredients is precise enough to make each brick extremely hard—as anyone who’s stepped on one can tell you.

But lawsuit or no lawsuit, expensive or cheap, plastic building blocks keep cropping up, often among rivals that see Lego’s (figurative) inflexibility and its position in the toy market as a threat. Mattel has licensed its crown jewel, Barbie, to Mega Bloks, which also holds licenses for video-game franchises Halo, World of Warcraft and Skylanders. Hasbro has twice tried to create construction toys, first in the early 2000s with a line called Built to Rule that focused principally on G.I. Joe and Transformers, and recently with Kre-O, toys that landed on shelves in fall 2011 with Joe and Transformer versions. Kre-O expanded this year to include the new Star Trek movie, a major coup. Hasbro says there are more external licenses to come but declined to identify them.

Construction toys “just seemed like an obvious next step for us,” says Kimberly Boyd, senior director of global marketing for Kre-O. Boyd says that Hasbro’s goal with this and other lines is to see its intellectual property realized in as many different versions as possible, and it wants to own all major iterations rather than licensing them out. “Our characters are really the spokespeople for the brand with the target consumer,” she says.

This is something like blasphemy to Lego. “We do not aspire to be an entertainment company,” declares McNally. “We are not one of these companies that says the path forward is to make entertainment.” But, mind you, Lego does make entertainment. Its cartoon Ninjago, produced by Copenhagen-based Wil Film, which Cartoon Network aired last year, was the highest-rated series on the net in 2012 among boys 2-11 and 6-11. Those are key Nielsen demos for the children’s market—particularly among toy sellers, since boys’ toys outsell girls’ toys by a wide margin. The season finale pulled in 3.3 million viewers—more than the season-to-date average for NBC’s Smash.

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