PowerCore founder: ‘Toys-to-life’ isn’t dead yet

Disney pulled the plug on its toys-to-life product Disney Infinity last month. That knocked the wind out of the toys-to-life market, where toys are integrated into video games. Activision started the market with the launch of Skylanders in 2011. It grew to become a multibillion-dollar category, but then it got too crowded last year.

But Jia Shen, CEO and founder of PowerCore, thinks that the toys-to-life space is just getting started. Shen, the cofounder of social-gaming firm RockYou, has started creating toys-to-life products with the makers of games that are already popular, such as Mino Monsters. Many of these titles have hordes of loyal followers, so it makes sense to create toys and other merchandise that can integrate with the games, Shen said in an interview with me. He thinks that players will be happy to pay to get a souvenir, collectible, or something that can activate an item that affects gameplay.

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PowerCore offloads the toy-game burden, which is too heavy for many developers. Shen says PowerCore offers companies and brands a new way to extend their digital experiences into the real world with smart toys and branded merchandise through the PowerCore platform.

PowerCore, which is based in both Tokyo and East Palo Alto, Calif., raised $2 million in March from investors including 500 Startups, East Ventures, Golden Gate Ventures, and Cherubic Ventures. It has opened its online store, and Shen has signed deals with the makers of Battle Tails, Mino Monsters, and Business Fish.

Here’s an edited transcript of our interview.

GamesBeat: How are you approaching toys-to-life?

Jia Shen: We’re doing it a bit differently from everyone else. We’re not doing it as a single franchise like Disney Infinity or Skylanders. Our goal is to create it as a platform to allow people — specifically mobile game companies that already have cool IP. They’ll be able to take their stuff into the hardware world. Stuff that’s popular in the U.S. and Japan. We’ll take IP that people already want merchandise for and create a games-to-life experience for it. Each piece of merchandise — not just toys — that’s tagged with our stickers will be able to do some pretty cool stuff.

You can take these characters and scan them directly into the game. It works through near-field communications (NFC), but we also support the camera. NFC on Android is a lot nicer. Kids love it. From a services standpoint we provide a software development kit (SDK), a Chartboost type of integration, and we also do all the hardware creation, the chip authentication, encryption and all that.

GamesBeat: Is your company in Japan or the U.S.?

Shen: We’re working with game companies in Japan and the U.S. Some of them haven’t been announced yet. In the U.S., we’re working with Mino Monsters, with a company we used to help called BattleTails. We’re working with some toy companies in Los Angeles acquiring IP. In general, a lot of people are scared of toys-to-life, but they need to get into the space.

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The Disney Infinity exit is an interesting reflection of the good and bad in the space. If you think about how toys-to-life is conventionally done — which is a weird thing to say since it’s only been around four years — it’s still very much like console development. They do episodic content. Buy the package, and you go with what’s in it. There’s never been a good free-to-play version, which is actually where I think it’s at its best.

There’s a toy company called Loyal Subjects down in L.A. They have the Transformers license, Ninja Turtles, Power Rangers, you name it. For an older demographic, they do blind boxes, just like the gacha mechanics in games. That’s the best way to take toys and hook them into toys-to-life.

With Skylanders and Infinity, it’s pretty much one-to-one. You get a character as a toy, and you get that character in the game. It’s centered around those characters in one big narrative, and the development is actually really expensive. That’s the big thing with Infinity. You build an entire Star Wars experience, but it’s more about the open-world experience, leveraging how people perceive the toys. Putting them into a free-to-play experience. It’s an interesting contrast to how both Skylanders and Infinity do it.

Both companies made a ton of money, but when you go into hardware, if you mess up certain things, you lose a lot of money too. With Skylanders, they did $200 million in Q4 last year. Nothing to be shy about. But the development costs and the inventory gets really expensive if you do it wrong.

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GamesBeat: Some people were doing custom 3D printed toys. Have you gone that direction as well, or do you start with something standard?

Shen: Toys-to-life, or what they call in Asia offline-online — it’s important for us to gauge how successfully a franchise can be merchandised. We start with made-to-order product lines. This is an example of a League of Legends hoodie. This thing is made to order. You can do this stuff on demand. We start with that to test out what demand is like.

Pixar has always been a great movie company, but their biggest problem that no one ever paid attention to — their licensing and merchandise sucked. If you think about Up, it’s a great movie, but nobody wants to buy an old man or an Asian boy scout. The one major success there was Cars, which wasn’t a success from a critical standpoint, but because it was closer to something like Lego — a blank toy [which] you can brand with a lot of characterizations — it worked much better.

Not all games are good for merchandising. For us, it’s important to gauge that. We do it through a lot of different metrics. But even after you do that, you want to make sure you don’t buy in too much merchandise. Inventory killed Infinity. It’s important to manage that problem.

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GamesBeat: How does made to order differ from custom? How much flexibility or difference is there in each toy?

Shen: We make it right after it’s ordered. But essentially, it’s custom. Like with this League toy, my name’s on it. It has my stats. If you play League of Legends, it actually has my build and the champ that I use.

Companies do things for us like geometry correction. They can export straight from in-game geometry. But that’s still using a sandstone type of 3D printing. That stuff’s just not as nice. The best thing to compare to … it’s like inkjet printers versus laser. That’s like inkjet. When it comes out, it’s kind of cool, but you can see the fuzzy edges. To achieve that level of customization with sandstone is expensive. A figure like this would hit [$50 to $60]. Injection molding is more like $5 or $10. You can see the difference.

Give it another year, though, and it’ll be there. This is an example of high granularity, like a 0.5 micron 3D printer. This is how we do the prototyping. It’s getting a lot better. We use this to do the injection molding. It’s a nice shortcut compared to how it used to be. Before, people hand-sculpted toys, which is great, but … if you look at Hot Toys or Sideshow Collectibles, the really big Marvel statues and the like, those used to be done by hand. Now it’s all digital. They do the sculpt based on that, sand it down, do the injection molding. It speeds up the process a ton.

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GamesBeat: Is there a way to make the toys much more cheaply at this point?

Shen: If you go custom, you definitely can’t go injection-molded; 3D printing — there are a couple of cool manufacturing processes coming down that will make it better. If you do a steel mold, you can make millions of toys with that one mold. You can do different types of castings, plaster or whatever, and they’ll last for tens or hundreds. That’s where you have variation.

We dabble in the designer toys world. We’re doing a lot of stuff at the San Diego Comic-Con in a month and a half. This is an example of Japanese soft vinyl. It dates back to just after World War II, the first mass-produced toys in Japan. It’s a very old process, but it’s kind of chic these days. The aesthetic is very different. It’s pretty cool.

GamesBeat: What about the competition at Jumo? They were doing limited editions with very quick turnaround.

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Shen: The costs are all over the board, depending. But limited edition is definitely the way to go with this. The model we typically pitch free-to-play game companies is a pyramid of volume. You have your base volume of stuff, and at the top, you have highly customized options. You basically lose money creating those types of things. But the point of limited edition is to establish market value. If everything was like a Hot Wheels, where everything’s a dollar, you don’t feel any level of exclusivity associated with it.

Funko is a company that’s doing a good job of this. They can create small runs of stuff relatively cheaply on quick turnaround. But they do different types of limited editions. As long as you can manage your inventory, it creates higher demand.

Hot Wheels, no matter what, each car is a dollar or two. These things are going for $10 to $20. This one retails for $14. This one will retail for $20. These are moving in serious volume. The main thing is the exclusivity aspect.

GamesBeat: What about the approach where they had different attachments you could add on? It seemed very expensive. But I wonder if there’s another way to do that without making it so costly.

Shen: The important piece for us is that manufacturing the toy and doing the electronics for it … if you tie those together, that’s really expensive. That’s where it gets nasty because you have to integrate different types of manufacturing processes. What we standardize is this pedestal. That’s the direction we’re going. No matter what you manufacture, there are certain forms you can mount and integrate directly with the toy.

If you want to put the electronics directly in the toy … it’s a pretty big change to the manufacturing process. Factories that are good at making toys usually aren’t as good at the chip part. One of the key pieces that makes our life hard is that each one of these things is unique. That’s different from an Amiibo or Skylanders toy. We have a standard base, though, with a light-up technology. You can drive light into the toy through fiber optics. It’s designed around an [application program interface] concept, basically. You design the toy any which way, and the base is what interfaces. All the expensive stuff is in there.

GamesBeat: How much are the toys selling for if you buy them in a store?

Shen: [The toys are] $14. We’re doing a lot of stuff for Comic-Con, launching exclusives there and working with artists.

GamesBeat: Are any of these free-to-play characters the most popular yet?

Shen: The Mino Monsters stuff is moving pretty well. We’ve made three toys for them so far. The interaction with the game itself … I forget how many monsters they have. It’s a lot. But the way the interaction works, it’s not just those three characters that go into the game. Those three characters enable access to different types of areas as well as different types of characters. It allows you to do a gacha draw, basically. That’s usually the mechanic we push for. For most gaming companies, that integration is relatively easy.

Another issue with Disney Infinity, if you go out and try to do an entire character set, it’s just an insane process. You make Iron Man, and you make Hulk. You know you’ll move those. But because of licensing requirements, they had to make other characters, too, that weren’t as popular. It’s a risky proposition. For us, it’s more important to put out merchandise that people definitely want.

This is where the advertising aspect comes in. The digital reward part of it is entirely managed on the fly. You can change it any time. Based on what the targeting is, when an event is running inside a game, the interaction can vary. That’s an important piece of what we do. We’re trying to extend [lifetime value (LTV)] for game companies.

The best time for a game company to work with us is either right at the beginning or when their users are starting to plateau. They have a dedicated user base. They’re making money. They know what user acquisition and LTV look like. We help them extend engagement. Users that are already spending money, they’ll want to have some kind of merchandising that goes along with it.

Opportunities are all over the place. Clash of Clans is a good example of a game that doesn’t do merchandise. But anyone who spent significant amounts of time in it would want merchandise for it. There’s a brotherhood associated with it when you find out someone else plays Clash. That social aspect of it, the broadcasts and the trophies — that’s happening throughout mobile free-to-play gaming. That’s the type of thing we’re pushing.

GamesBeat: Where do you think the potential for innovation lies? It’s interesting to see what Rovio did with AR in the Angry Birds movie. They integrated that stuff in the closing credits. They’re getting good at cross-media promotion.

Shen: That’s the most important piece of this. You can think of it in business terms, but a better way to look at it — when we first started playing with toys, we’d imagine things. I’d pretend I was racing or fighting or whatever. Toys-to-life takes the make-believe aspect and puts it in your hands. That’s why Frozen sold so well. Before, the Disney paradigm was “Put out a movie, sell merchandise.” Now it’s, “Put out a movie, sell merchandise, and the merchandise interacts with the digital aspect.”

The digital aspect doesn’t have to be just games or just one game. That’s one of the biggest mistakes in free-to-play right now. For companies like Disney, the more important piece is to be able to integrate with everything they license. As a fan of a specific universe, I’ll be able to integrate any which way I want.

When you talk to most of these big companies, they’re made up of three business units that don’t talk to each other. You have the guys creating the story, the IP, and they sit in their own world and don’t care about everyone else. Then you have the people making the toys, who are more of a merchandising and licensing arm. That’s the direction Disney is refocusing on. And then, [there are] the game people. It never resides all in the same place.

Every company makes the same mistake. “We’ll all do it inside our own company.” And it always goes bad. Different DNA, different pedigree. It’s better to let the best people do what they’re best at. The main thing is to be able to manage the crossings better, story to game to toy. That’s why Marvel is killing it. Every time they do even a little basic tie-in, you feel like it’s part of a deeper universe. That’s a non-business aspect, but it’s part of why it’s so cool.

GamesBeat: Do you worry that some people will think demand isn’t there anymore? They see things like the Skylanders shortfall and Disney’s exit as signs that they shouldn’t dive too deep into toys.

Shen: The cool part about it is that if you tie yourself to a specific franchise or a specific game — everything has a lifespan. Guitar Hero had a lifespan. You have to let people relax and chill on it sometimes.

Our vision is entirely in contrast to that model. Demand for toys and merchandise in general is actually better than ever. The question, then, is why toys-to-life isn’t working for people, and the answer is that they do it the most expensive way possible. If you’re doing an Infinity type of toys-to-life, you’re creating a ton of toys. You make them very expensively. Then you create a triple-A game development cycle with multiple studios doing something every single year. The risk on that is crazy.

We’re challenging people to flip that on its head. We have two models. Model one, find a game that’s already popular. They’ve already created what I call the “irrational demand” in free-to-play. They’re already making people want to do stuff they didn’t want to do before. You have a system that creates that demand, so the risk is low. From there you sell merchandise with a toys-to-life aspect.

GamesBeat: It’s kind of like the old days, where instead of doing an Indiana Jones social network game, the Lucas people would put Indiana Jones into a Zynga adventure game. Something already popular.

Shen: This is more synchronous because the merchandise is directly tied to the IP. The concept of being able to take a piece of merchandise and get something digitally is pretty straightforward. I play a lot of Destiny, or I used to. If you did a toys-to-life integration, where you just sold the guns or the orbs, and I’d be able to get an extra chance at a premium loot drop, that would sell like crazy. No question about it. Let’s call that a bad integration because it looks like you’re trying to milk Destiny players for all they’re worth, even though a large part of the demographic will happily go for it. If you make something that’s part and parcel of the game, that feeds into the game mechanics, that’s much better. It’s a lot of fun.

The second approach — we talked about this from a game standpoint. If you think about it from an IP standpoint — let’s talk about Angry Birds or Disney with Star Wars. The problem with what they’re doing is they’re taking a toy and tying it to one experience. That experience is very expensive to develop. The funny thing is they’re doing all sorts of licensed game development out there. The better way is to let other people do the game development. It’s a hit-based model. Then you can integrate all that together with your merchandise plan.

GamesBeat: And only do merchandise for the games that are hits?

Shen: They can choose to integrate with every game that has the IP. That’s the point of our platform, what we sell. It’s digitally managed. You can turn integrations on and off. You can change promotions any way you want. Say one game is already popular. You don’t need to drive more players to it. You want to extract more revenue. You can change what the integration does.

A game that has pretty good monetization mechanics but needs more user acquisition … you put out an event that says, “Today, all Star Wars toys get you characters in this new game!” This [is] where we talk about it as an advertising platform. Every Star Wars toy out there, you can make them do whatever you want. As a player who has it, one, you’re always going to hold on to the toy, and two, you’ll always be looking out for new ways to use the toys digitally.

Initially this is about games, but it can be about all sorts of stuff — events, things like the Angry Birds movie. You can put together more offline-online integrations. It’s truly toys-to-life because you’re experiencing it wherever you go.

GamesBeat: Where do you think the competition is now? Are other folks in Asia doing something like this?

Shen: The people we run into are either hardcore digital rewards people or hardcore [Internet of things (IOT)] people. Nobody’s thinking about it from a platform or advertising standpoint. It’s because of what people are good at and what they focus on. If you’re a toymaker, if you develop hardware, it’s about creating that cool toy in the end.

We don’t think about competition so much. If someone has a cool toy, our job is to help them find a partner and sell it. IOT companies more often have a go-to-market problem. They’ve created something awesome, but they didn’t think about how they were going to sell it, who their consumer is. Our job is to find the addressable market, figure out what fits into it, and manage it as an overall platform. Whatever hardware works with it, we’re looking for those companies.

We have a couple of cases of this already. We meet people who have a really cool toy or a really cool game, but they don’t have a proper home for it. We match them with an IP and a game and integrate with PowerCore. Or we match a game with an IP and a toy. Then they start to manage it.

GamesBeat: Bit Toys, out in Seattle, are they doing something different?

Shen: I know them pretty well.

GamesBeat: They did the one thing with 2K’s wrestling game, the coin.

Shen: They’re going at it slightly differently as far as the main piece. I’ve never thought of them as a competitor. We’ve actually used them as a sourcer. They have really good experience doing manufacturing and supply chain in China. We’ll continue to use them.

The long-term thing for us is that we don’t want to be designing toys. We’re pretty good at it now. But there are other people who are way better. Our job is the marketing aspect, the advertising, doing the platform. Everyone knows that doing toys is a much lower-margin business than doing anything digital. Our long-term interest is doing everything digital. The extent of what we want to do manufacturing-wise is these integration points and the chips associated with them. That’s the stuff we consider core to our product.

GamesBeat: What do you think about demand as far as creating a collectible versus enabling gameplay? Nintendo said that Amiibos are very successful as collectibles, but nobody’s using them to play Wii U games.

Shen: It’s absolutely true. That’s why, looking at the Nintendo business and the Disney business … it’s hard to quantify because the activation rates are so bad. When I pitch clients on how they should think about it, it’s all about the virtual economy. You can do whatever merchandise you want. It doesn’t become toys-to-life, and it doesn’t create any interesting dynamics until the economy has some legs to walk on.

That’s why I used the Destiny example. Their economy really works. Whether you like it or not, you grind and grind and grind. They’ve trained you to do something that you consciously know is a waste of time, but you do it. It’s cathartic. You feel good. You want that new weapon. That’s why you always have to start with the economy and why free-to-play is the right place to go.

I can claim what I want, but it’s pretty straightforward if I say that a premium item or a limited-edition item in a game … if you tell people that they need to do some real-world interaction to get it, they’ll absolutely do that. I don’t think there’s much of a leap of faith there. What we’re trying to do a better job with, different from basic loyalty programs, is making merchandise that people care about. The gameplay aspect is where we start, and the toy is the backfill on that formula. You definitely don’t start with the toy and try to jam it into a game. Free-to-play, with a proven model, has to be where you start.