If there’s one myth the merch industry managed to dispel in 2002, it’s that licensees and retailers have lost all faith in event films. Last year’s crop of blockbusters – Spider-Man, Star Wars: Episode II – Attack of the Clones, Harry Potter and the Chamber of Secrets and The Lord of the Rings: The Two Towers – proved that when licensors rein in expectations and manage programs realistically, a healthy bottom line for all partners is not only achievable, but probable.

‘After the dark age of Episode I, licensees and retailers lost confidence in feature films,’ says Nick Austin, CEO and co-founder of Vivid Imaginations, U.K. distributor of Toy Biz’s Spider-Man toy line. ‘It’s taken a long time for people to realize that it wasn’t the blockbuster movie concept that was wrong; often it was the movie itself and its merchandising strategy. Now, movie merchandising has recovered its integrity as a business proposition.’

But is that enough to convince licensees and retailers to take larger positions on feature films? The short answer is no. Four years in film merch darkness have cast a far more realistic light on the level of opportunity and return even the biggest blockbusters can offer.

‘About five or six years ago, retailers felt that they would be missing out if they weren’t supporting everything,’ says Tim Rothwell, senior VP of marketing and merchandising for Universal Studios Consumer Products Group. ‘That made for a free-for-all environment in which retailers couldn’t put the appropriate amount of focus on the event that would drive business at the time. I think they have become wiser – as have the studios.’

Jay Foreman, president of U.S. toy manufacturer Play Along, concurs: ‘Retailers are playing feature films with feature space. The feeling is that if the movie is good enough, they’ll be able to chase it; and if it’s a potential franchise, they’ll be able to catch up the second year if they went a bit short at first. Better to go short and be clean, than to go too long and be stuck.’

As a licensee, Foreman assesses opportunities by keeping in mind the difference between a film that delivers at the box office and one that delivers merch sales. While not mutually exclusive, the two are very different. ‘I think Monsters, Inc. and Shrek are perfect examples of properties that delivered great films and huge box office numbers [US$256 million and US$267 million respectively] but just didn’t drive product,’ says Foreman. ‘Studios need to understand that just throwing money at promoting a film is not enough. They have to think about all of the angles of the movie that are going to help make it merchandisable.’

The current consensus is that films based on proven properties have the best chance of merch success. And while it’s not a constant the industry can rely on, with Spider-Man, Sony and Marvel proved that film and classic merch programs can not only co-exist but complement one another.

Play Along, a toy partner on Universal’s holiday 2003 pic Dr. Seuss’ The Cat in the Hat, is looking to strike a similar balance by mixing film product with classic Cat merch, such as packaging book-based plush with a read-along storybook illustrated with images from the film. ‘We’re going to be gearing, designing and styling the line more closely to the classic look so that as the merchandise starts to hit, the consumer recognizes the product – while tying into all of the promotion around the film at the same time,’ says Foreman. The toys will incorporate a lot of ‘try me’ features to get consumers to interact with them. ‘We’re working with retailers to ensure that we have a feature location so that it’s easy for consumers to spot the merchandise and see a demo.’

And while licensors and licensees industry-wide could raise expectations and royalty rates in light of recent hits, most say that generally will not happen. After all, many viewed Spider-Man as a can’t-miss, but Sony kept its royalty rates and guarantees in check. ‘I’ve never been a guarantee-driven manager,’ says SPCP executive VP Al Ovadia. ‘It’s about the right partner with the right product and distribution. We’d rather work with the top companies with a lesser guarantee than a secondary or tertiary company that was willing to step up to a target guarantee. If your partner is well-positioned, manufactures domestically and can respond faster to demand, you will more than make up for that variance with real sales.’

And even though it could, Sony is not being ‘absurd in the guarantee structure for the Spider-Man sequel because the first film was so successful,’ claims Ovadia. ‘We use licensees’ success with the first movie as a barometer for where we should begin discussions, but if you want to continue to have the right partners, you don’t want to price them out of the market.’

Licensors and licensees also agree that royalty rates should remain at reasonable levels in the foreseeable future. ‘Nobody can go out and ask for 16% to 20% royalties,’ says Play Along’s Foreman. ‘First of all, it’s not realistic because it puts too much pressure on the licensee and too much pricing pressure on the line. And nobody can promise a winner.’ Foreman and others believe that royalties will fall in the 8% to 12% range, with 14% as a maximum.

Steve Manners, managing director of Copyright Promotions Licensing Group in the U.K., believes the industry will begin to see more of a stepped royalty system – starting the licensee off at a certain level and raising the royalty a bit once the licensee has achieved its guarantee. ‘You can’t push the royalty rate too hard on something like the clothing area, which is completely dictated by the price points at which the retailer will actually sell the product,’ says Manners. ‘If you want better product, you’ve got to be flexible on royalties – otherwise the manufacturer doesn’t have the margin to produce interesting product.’

It could also scare away potential partners. ‘Four or five years ago, licensees felt they had to sign on for the big properties even if they were paying more than they thought they should,’ says Manners. ‘Now, if it gets too rich for them and they feel like you’re being too aggressive, they will walk away.’

Instead of putting pressure on royalties and guarantees, licensees feel that studios will be looking for more promo power: Will the licensee go on TV? Will they purchase or organize feature space at retail? How will they promote the line? ‘Studios are going to be more concerned with making sure the line gets the proper presence and promotional push than they will be about getting those two or four extra royalty points they looked for in the past,’ says Foreman.

The take-away lesson from the 2002 film merch boom is that licensees and retailers have reason to stay in the feature game. Advises Foreman: ‘Even though the recent successes have been more action-oriented, there’s no doubt that a studio like Disney or DreamWorks is going to come out with another Toy Story or The Lion King in the next couple of years. And no one is going to want to miss that opportunity.’