No business in show business

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As Hollywood studios continue their ongoing mating ritual with merchandisers, one ardent suitor has taken itself off the market. Large toy marketers such as Hasbro and Mattel will keep on courting studios for exclusive licensing agreements, but notably missing from this year's schmoozefest will be Equity Marketing.

A recent hot company among Hollywood studios, the promotional toymaker recently announced it would bow out of the movie-licensing business. The decision comes in the wake of weak sales of products tied to Universal Studios' "Babe: Pig in the City."

Just last month, the company said it had lowered 1998 earnings expectations "due primarily to the unexpectedly poor performance" of the "Babe" sequel. Earlier last year, Equity had taken another hit: lower-than-expected theater receipts for Sony Pictures Entertainment's "Godzilla," which led to soft sales of toys associated with the picture.

"They stubbed their toe through no fault of their own," said analyst David Liebowitz of Burnham Securities about Equity's setbacks. "If you don't succeed on the silver screen, it's very hard to have merchandise jump off the shelves."

RISKS TO SMALL MARKETERS

Those misfortunes are an example of the risks smaller marketers are forced to take in hopes of riding the coattails of potential blockbusters.

And with a larger crop of movies now entering the marketplace, companies such as Equity have a harder time winnowing out potential winners.

Equity's gamble also shows how difficult it is for such companies to gain and maintain ground in the grown-up world of toys licensed to feature films.

Such marketers as Hasbro and Mattel, for instance, do a broader array of license and non-license toymaking, which enables them to sustain the ups and downs of the film business.

On paper, Equity's original decision to sell "Godzilla" and "Babe" products through retail outlets seemed a prudent business option. "Godzilla" had a massive marketing campaign that started a full year before the movie's release. "Babe: Pig in the City" looked to continue in the hoofprints of the first "Babe" movie two years ago, which pulled in a hefty $246.1 million in worldwide box office receipts, according to Exhibitor Relations Co., which tracks movie revenues.

EQUITY ON NEW GROUND

Feature-film toy licensing deals were a relatively new territory in 1997 for Equity Marketing, which for years generated virtually all its profits from gifts and promotional items made for other marketers--such as BP Oil Co., Coca-Cola Co., Exxon Corp. and Sunoco. The Equity merchandise is given away to the customers of those marketers.

Equity still derives 75% of its revenues from this business, compared to 87% in 1995.

This past summer, Equity made the promotional toys based on DreamWorks SKG's "Small Soldiers"; the items were used as free premiums with the purchase of children's meals at Burger King Corp. restaurants. More recently, Equity produced the BK toys tied to Paramount Pictures' "The Rugrats Movie."

Producing promotional gifts and toys has been a safe business for Equity, analysts said. Promotion companies generally retain upfront fees from marketers such as Burger King to produce the toys.

But, in marketing toys directly, through normal retail channels, Equity entered a less predictable world. The company had to count heavily on fickle kids to decide whether its products moved off the shelves or not.

"The risks are greater," said Sheree Aronson, director of investor relations for Equity Marketing. Now "we have decided not to pursue tie-ins" with films, she said.

Another problem in linking up with filmmakers is that what appears in the development stage may not always resemble the finished movie.

Marketers "are not shown a finished product," Mr. Liebowitz said. "Sometimes they are shown an outline, and what is shown may have little to do with what makes it out into the market. It may not be part of your audience."

In Equity's case, it isn't all Hollywood's fault; the company has had some internal problems as well.

In September, Co-CEO and Chairman Steven Robeck left, although he was retained as a consultant. Other key li- censing executives recently left Equity as well, including Exec VP-Worldwide Pro- motions Al Ovadia.

Donald Kurz, formerly co-CEO and president, has become chairman-CEO.

Though Equity isn't taking any more event movie deals, it has one pre-existing arrangement with Universal Studios for a toy tie-in with the live-action feature "Curious George," which will be released sometime in 2000.

Back in the spring of 1998, it also struck a three-year deal with Universal for the rights to sell toys based on classic cartoon character Woody Woodpecker, who will appear in a new animated series on the Fox Kids Network. Equity also has a deal to make plush toys for Warner Bros.' "Scooby Doo," which currently runs on the Cartoon Network.

POTENTIAL IN TV NOT AS GREAT

However, analysts generally recognize TV related-properties as a safer bet for toy companies. They have a consistent and loyal audience, which makes revenue projections easier to calculate. Unfortunately, most TV properties don't have the revenue potential of feature film blockbusters.

Industry analysts can't calculate exact earnings decreases for the last quarter of 1998 because Equity hasn't revealed how much of a writedown it will take due to the problems from "Babe."

Revenues for the nine months ended Sept. 30 dropped to $84.4 million, down 12% from the same period a year earlier. Net income fell 75.3% to $1.5 million.

Copyright January 1999, Crain Communications Inc.

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