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LEGO is the latest toymaker to dip its toe into the $4 billion toys-to-life market, an emerging genre of play that attempts to combine physical toys with digital experiences. The Danish company, like many of its American counterparts, is looking for ways to make its toys more compelling as kids spend more time on devices. But it will face intense competition as other toymakers try to get a piece of the growing market.
It's an industrywide concern, according to Lee Giordano, a retail analyst at Sterne Agee CRT, who expects more traditional toymakers to follow and experiment with different types of toys-to-life products.
"Kids today are certainly technology savvy, and they're looking for ways to combine physical toys with their devices. And parents are looking to make sure that their kids have a diverse play experience," which creates a challenge for traditional toy manufactures, Giordano told CNBC.
"The toys-to-life genre is continuing to grow in importance and you're seeing examples of that in lots of different areas … there's no signs of this category slowing down soon."
Since 2011, when Activision Blizzard introduced the first toys-to-life game, Skylanders Spyro's Adventure, global sales in the category have rocketed to more than $4 billion, with Activision accounting for about 75 percent of those sales, according to Josh Taub, senior vice president of product management for Skylanders. Domestically, the category has reached $2.1 billion sales life to date, according to the NPD Group.
"Every one of our characters is an original creation and, because they're so varied, they've sparked a lot of collectability with both kids and adults who are kids at heart," Taub said in an interview with CNBC. "Each toy that you collect has meaning within the game and it has the potential to unlocking new areas or giving you a chance to experience replayability within the game."
Skylanders was the top-selling kids' console videogame franchise globally and the accompanying figures outsold all top action-figure lines worldwide last year, the company said, citing NPD Group, Gfk Chart-Track and internal data.
Activision has a foothold in the area that it pioneered, but the space is becoming more populated with Disney, Nintendo and now LEGO entering the arena with hopes of capitalizing on their intellectual property and/or licensing agreements.
"It's going to be very important for companies to have licensing agreements with properties that they can tell a story around," Sterne Agee CRT's Giordano said.
Disney, Nintendo and LEGO have each released toys-to-life titles that integrate characters from multiple properties into one experience.
LEGO, which mostly stayed away from licensing deals up until the late '90s, has increasingly embraced content deals as a part of its broader strategy to diversify its offerings beyond brick-building sets.
LEGO's Dimensions playset merges physical LEGO brick building with digital gaming. The game, released late last month, intermingles the worlds of various Warner Bros. brands, including DC Comics, "The Simpsons," "The Lord of the Rings," "The Wizard of Oz," "Scooby Doo," "Jurassic World" and "Doctor Who." (LEGO did not respond to requests for comment.)
Most of the games operate the same way: The action figures are placed on a portal or gaming pad that connects to the users' gaming console. The pad scans the action figures, unlocking their playable counterparts in the video game, which can introduce new characters, place settings and/or perspectives into the game.
Like other games that fall into the toys-to-life category, Dimensions can be played with straight out of the box, but the additional action figures can be purchased as add-ons to give the games a longer shelf life.
In its fiscal first-quarter earnings report, Nintendo cited "favorable sales" of amiibo, collectible figurines featuring characters such as Mario and Luigi that players can bring to life in a video game. The Japanese gaming giant also said sales of the action game Splatoon, which sold 1.62 million, "contributed to vitalizing the Wii U platform."
For its part, Disney Interactive tapped into the media conglomerate's wealth of properties, including classic Disney, Marvel and Pixar characters, to supply it with content for its Infinity franchise. Last week, the company said it would release its Marvel Battlegrounds for the Disney Infinity 3.0 Edition in March.
Disney is hoping to revive the Infinity product line amid tumbling sales in its Interactive gaming unit.
For the quarter ended June 27, Interactive division sales fell 22 percent to $208 million, while segment operating income declined by $29 million to break-even. The company attributed the declines to lower Infinity unit sales and lower average net effective pricing.
Disney, like other companies, is challenged by this digital world that kids are spending more and more of their time in, said Marty Brochstein, senior vice president of industry relations and information for the Licensing Industry Merchandisers' Association.
"All the toymakers know that they are confronted with this challenge" and they are searching for ways to meld real-life play experiences with digital ones, but it's not an easy feat, according to Brochstein.
These are all attempts to have a software side as well as a physical thing that you can sell and that interacts in the digital world, " Brochstein said, but it's a challenge because kids have "existing play patterns, so you're trying to adapt something that already exists."
"Kids might still like to play with their LEGO blocks, but if you can add a digital experience it's that much better," Brochstein said.