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Chipping Away

The upcoming American International Toy Fair in New York City should probably be renamed the Consumer Electronics Show for Kids.

That’s the growing sentiment in the $22.3 billion dollar toy industry.

An iPod-playing Barbie and a device that lets preschoolers visit their favorite characters' Web sites, like those of Elmo and Dora the Explorer, are likely to steal the show among the 1,200 exhibitors at the annual trade fair, which kicks off Sunday, Feb. 11, and runs through Feb. 14. Some 14,000 buyers from 7,000 retailers ranging from Target to Best Buy will be there.

U.S. toy sales rebounded slightly in 2006, after dropping 2% the previous year, but manufacturers are well aware kids are flocking to more high-tech offerings like MP3 players and video games.

"I’m pleased to see the industry has leveled off," says NPD entertainment industry analyst Anita Frazier, who added that higher birth rates and more licensed products should drive future growth.

Toy makers including industry giant Mattel are also integrating more technology into their core brands to appeal to tech-savvy youth. Not surprising, since youth electronics is the fastest growing segment, surging 22% in 2006.

"Technology has always been there in toys," said Kevin Curran, senior vice president and general manager of Mattel’s Fisher-Price unit, whose TMX Elmo was a huge holiday hit. "But as prices have come down we find hopefully clever ways to apply it."

What’s known as the infant/preschool segment accounts for the largest share of spending dollars in the industry and has shown the most consistent growth, so infusing technology into the category makes good sense.

Mattel’s mega showroom featured a $50 electronic graphic design tablet, a stationary bike that allows kids to peddle through a virtual environment on a TV, and a guitar system for wanna-be rock stars. For girls, a Barbie doll that talks on a cell phone, sings and plays music from an iPod or other MP3 player. For boys, there's a handheld car with a virtual driver in the LCD windshield.

"It’s not just technology for technology’s sake," says Tim Kilpin, general manager and senior vice president of Mattel’s Boys business. "It’s technology that’s applied properly to a brand or a play pattern,"

Another driver for growth this year is the licensing business. Sales in the action figures category dropped 9% in 2006, but that’s expected to rebound with the release of this year’s big action movies, "Spider-Man 3," "Fantastic Four: Rise of the Silver Surfer" and "Transformers," a brand Hasbro introduced in 1984.

"Licensed product makes up about 25% of total toy sales each year," said analyst Frazier.

Curran of Fisher-Price pointed to the huge success of children’s entertainment and its growing importance to the toy industry.

"We have to participate in this [licensing] business," he said, noting that Fisher Price did not originally do toys based on TV shows. But as properties like "The Wiggles" and "High School Musical" and various shows from Nickelodeon and Disney grow in popularity, more companies are vying for a piece of the licensing pie.

The right licensing deals and cutting-edge tech toys are invaluable to toymakers given the industry’s evolving distribution model. Disney’s "Cars" helped boost sales for Mattel, while "Pirates of the Caribbean" put toy maker Zizzle on the map - and on the shelves of big box retailers. Mass merchants and discounters like Wal-Mart and Target still account for more than half of all toy sales.

But that, too, is changing, analyst Frazier says.

"Shelf space is getting smaller so the industry is looking for different ways to distribute," she said. "Whether it's through department stores, or Starbucks carrying board games, these new models offer a basis for expanding to masses."

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