(Corrects market gain in sixth paragraph of story published Aug. 28.)
Toddler-safe texting has arrived.
Spurred by burgeoning demand for kid-styled tablets, LeapFrog Enterprises Inc. (LF:US) and VTech Holdings Ltd. (303) revamped their tyke-targeted devices to add features that let three-year-olds send short messages to grandma and even watch online videos without stumbling across websites kids shouldn’t see.
“Exposing our children to the Internet at an early age is incredibly valuable, but how do you do it safely?” John Barbour, chief executive officer of Emeryville, California-based LeapFrog, said in an interview.
By tackling parents’ fears about their kids going online, these toymakers are seeking to extend their dominance in a niche category of the booming tablet market that they created two years ago after releasing the first versions of LeapFrog’s LeapPad and VTech’s InnoTab.
With the added Web features in the recently released $150 LeapPad Ultra and $100 InnoTab 3s, they are also presenting more of an alternative to devices from Amazon.com Inc. (AMZN:US), Samsung Electronics Co. and Apple Inc. (AAPL:US) in the larger market for tablets that is projected by researcher IDC to increase 34 percent to 67 million units shipped this year.
LeapFrog and VTech faced little competition early on for tablets made specifically for children -- as opposed to parents handing over an iPad to their kids. The LeapPad became a runaway hit, and its success helped turn around the company’s fortunes. The shares have more than doubled since the first version went on sale in July 2011, compared with a 22 percent gain for the Standard & Poor’s 500 Index. The shares fell 1 percent to $9.83 at 1:19 p.m. in New York. VTech’s InnoTab has become its best-selling product.
That easy ride has ended and it’s not because Mattel Inc. (MAT:US) and Hasbro Inc. (HAS:US), the world’s largest toymakers, have entered the market. Despite these devices being one of the few bright spots in the sluggish U.S. toy industry, they’ve stayed out, saying making tablets is too expensive and risky and will instead focus on creating branded content for mobile devices.
Meanwhile, Samsung announced a kid tablet yesterday that will be released next month, and Amazon’s recent television advertising features a parade of children. It’s offering a monthly subscription service with unlimited kid content, more parental controls and marketing the 7-inch Kindle Fire at $174 as “the perfect family tablet.”
While sales of children’s tablets account for a small part of the total tablet market, which includes Apple’s top-selling iPad, there may be plenty of room to keep carving out this niche with more families now buying more than one tablet, IDC said.
Given that LeapFrog has established itself as a leader in kid tablets and has increasing support from retailers such as Wal-Mart Stores Inc. (WMT:US), the Ultra is projected to be one of the top-selling toys this holiday-shopping season, said Michael Swartz, an analyst with SunTrust Banks Inc. (STI:US) in Atlanta who recommends buying the shares.
LeapFrog executives thought long and hard about adding adult features to the LeapPad because while kids are begging to get online, parents feel the need to hover over them, said Jill Waller, vice president of multimedia learning. VTech also spent months designing a tablet kids could use on their own.
Both companies curated the online experience, limiting access to such sites as PBS.org. LeapFrog makes all these decisions through its LeapSearch browser, while VTech uses filters and also lets parents add or block content.
Another LeapFrog innovation is its texting app, Pet Chat. Users are restricted to sending messages to each other from a pre-determined list of phrases such as “I’m being silly.” Hong Kong-based VTech has Kid Connect, which allows tykes to text another InnoTab or parent-approved smartphone.
“A pre-schooler will have the same ability as everyone else in terms of staying connected to mom and their friends,” said William To, VTech’s North America chief.
Adding Wi-Fi to the Ultra could help make it LeapFrog’s most successful tablet yet, Barbour said. The first two versions were among the top 10 best-selling toys last year, according to NPD Group, and helped boost companywide revenue 28 percent (LF:US) in 2012 for its best growth in nine years.
LeapFrog and VTech are using their status as trusted education brands to win over parents after years of making content and other electronic devices focused on learning. Another advantage is that Wal-Mart and other retailers typically put LeapPads in the toy aisle, which walls them off from adult tablets in the electronics department.
“We don’t want to be in the electronics aisle because mom doesn’t shop there,” VTech’s To said. “Teenagers walk that aisle. Maybe dad walks that aisle. Our target audience is really mom. She is the decision maker.”
Other new entrants are piling into the market as well with inexpensive “family tablets” designed to have it both ways. Parents can configure them to create multiple profiles so only dad can watch “Breaking Bad” while junior is confined to “Angry Birds.” Many, like the $150-priced Kurio 7s from Techno Source, run on Google Inc.’s Android software while LeapFrog and VTech feature their own operating systems.
“You can do anything you want but also hand it to your 6-year-old,” said Eric Levin, division head of Techno Source, a unit of Li & Fung Co. (494) Sales of the 7s should more than double this year to 1 million-plus units, he said.
Closely held Fuhu Inc. takes segmentation further with three devices that each target a few years of childhood, from the 5-inch nabi Jr. for preschoolers at $100 to the 10-inch nabi XD aimed at tweens for $250. After releasing its first tablet in late 2011, the company realized that how kids used the devices varied greatly, even for children just a few years apart, and parents wanted a more targeted experience.
Barbour, the LeapFrog CEO, says he is unfazed by the mounting competition. Many customers loyal to the brand’s emphasis on education will upgrade to the Ultra, he said. Plus, he expects to win new customers switching from low-priced tablets that don’t offer much for kids or have moms in mind.
Even as the company has moved to offering downloads of its software, it will continue to sell cartridges with content such as electronic books and spelling games that are inserted into the tablets. That’s because the cartridges, which sell for as much as $25 apiece, remain appealing to mothers, he said.
“When mom is in Wal-Mart or Target, it’s actually easier for her to pick up a cartridge and use it, then it is to go and download,” said Barbour, who joined LeapFrog as CEO in March 2011 and oversaw the release of the first LeapPad. “Any time mom has to spend time being the head of IT at home, she’s very unhappy. Mom needs safety, she needs trust and she needs simplicity.”
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