THE GOOSEBUMPS' DEAL GOES BUMP IN THE NIGHT
Scholastic's fight with Parachute Press leaves a bloody mess
As R.L. Stine sat in his Manhattan apartment in early 1996 cranking out the latest of his Goosebumps kiddie horror books, a real-life thriller was unfolding across town. Stine's wife, Jane, had showed up at Scholastic Inc., where she spent her career before starting her own publishing company. With her was partner Joan Waricha, Scholastic's former editor-in-chief. According to court documents later filed by Scholastic, Waricha demanded return of the merchandising rights to Goosebumps, which the pair had launched through Scholastic four years earlier.
Scholastic refused. After all, Goosebumps had sprung from nothing to sales of $100 million--10% of Scholastic's annual revenues and more than half of profits. "World War III began that day," a former Scholastic employee recalls. "And it killed the brand."
Everybody blamed fickle kids last February when Scholastic announced that Goosebumps sales had cooled, sending its stock tumbling 40% in a day. But it turns out that the very team that turned Goosebumps into one of the biggest book-merchandising successes had a big hand in crippling the property. Having launched the series with a standard-issue publishing contract, Stine and Waricha's company, Parachute Press Inc., and Scholastic became locked in a bitter battle when the spoils grew to be far greater than anticipated."HELD HOSTAGE." According to court documents and current and former Scholastic employees, the two sides fought over money, the brand's direction, and control of the green "G" logo. While they battled, projects with Walt Disney, Hallmark Cards, Hershey Foods, and PepsiCo went into limbo. A full-length film by Fox Family Films stalled. "It became impossible to close a deal," says Woody Browne, a Voorhees (N.J.) consultant for five licensees. "Goosebumps was held hostage."
The showdown came to a head last fall when Scholastic, claiming breach of contract, stopped paying advances. Parachute responded by filing suit in late November. Alleging that Scholastic repudiated its financial obligations, Parachute claims Scholastic has voided its rights to publish 54 more books.
Though neither side will directly discuss the case, the charges and countercharges are now flying in court. Scholastic, which had $1 billion in sales last year, accuses Parachute of paralyzing deals, and in court papers provides a detailed account of the tortuous power struggle. In a response filed in late January, Parachute disputes much of Scholastic's version of events. And in a letter sent to BUSINESS WEEK, Jane Stine calls Scholastic's account "inaccurate [and] inflammatory." She adds: "We want to reject any notion that Parachute harmed either the Goosebumps property or Scholastic."
Stine and Scholastic Chief Executive Richard Robinson agree on one thing: Goosebumps exemplifies a wrenching change in the role of children's publishers as storybook characters mushroom into multimedia icons. "We have to behave more like licensing companies and less like loving book publishers in order to protect our rights," says Robinson, a former English teacher whose father founded Scholastic in 1920.
Kids' titles are the fastest-growing segment of publishing, with U.S. sales soaring 30% since 1990 to $2.86 billion and hits spun into TV shows, movies, and CD-ROMS. Their trademarks grace shoes, backpacks, and other products that last year generated $1.57 billion, according to the New York-based Licensing Letter.
Scholastic was just branching out of traditional publishing with hits like The Magic School Bus when Waricha and Stine proposed a scary series in 1991. Parachute, then nine years old, had a concept and a client--Robert L. Stine, a former Scholastic editor and children's author. Mixing horror and humor, Goosebumps struck a nerve with the 8-to-12 set. As Stine pumped out a book a month, Scholastic sold an astounding 200 million copies in five years. "Nobody could ever have imagined this success," Jane Stine says.
Books were just the start. Merchandising, virtually nonexistent at Scholastic, became a $60 million division. That included the TV-production unit, which with Fox created a top-rated children's show. "Scholastic quickly became the Disney of children's-book publishing," says analyst Peter Appert of Alex. Brown & Sons Inc. in San Francisco.
But the series' unparalleled popularity drove Stine and Waricha to seek a contract to match. Parachute, which last year had about $36 million in sales, cut a deal that was about standard for the industry: They kept roughly a third of Goosebumps' merchandise sales and 6%-8% of book revenues. "We enter deals very conservatively," Stine says. "When a property gets that popular, it should command more money." So as the contract came up for renewal in January, 1996, Scholastic says Waricha asked for a greater share of profits and control of merchandising. When the company turned them down, Scholastic claims Waricha said she would "devise a strategy to force" it to give in. Parachute denies that account.
Parachute had powerful leverage. Scholastic controlled merchandising, but Parachute had the right to approve deals. It called in Robert Thorne, a Hollywood lawyer best known for parlaying the prime-time TV career of the Olsen Twins--Mary Kate and Ashley--into multimedia stardom. Thorne became known around Scholastic as "Thorne in My Side," weeding through offers and reassessing licenses. Using this strategy, Scholastic claims, "Parachute blocked Scholastic's performance at every turn." Jane Stine says Parachute was simply exercising "its right to be consulted and approve important transactions."
Fox Family Films, Scholastic alleges, was the first casualty. Fox had bought worldwide rights to Goosebumps and was working on a deal to make a movie that was to come out last year. But on Mar. 15, 1996, talks came to an abrupt halt, Scholastic says, when Waricha challenged Scholastic's rights to make deals. Fox officials were furious.SPREAD THIN. Parachute would not discuss any specific deals. But people close to the negotiations on Scholastic's side claim similar problems also delayed a $30 million cross-marketing promotion it had just signed with PepsiCo to splash the Goosebumps logo across soda cans, toys at Taco Bell and Pizza Hut, and on bags of Fritos. Parachute protested the contract and reopened the talks, the sources say. After several months, they arrived at an identical deal.
In April, 1996, Stine, Waricha, and Thorne demanded a $10 million signing bonus, stock options, a board seat, and control of branded merchandise, Scholastic says. When Scholastic refused, it claims Thorne handed over a draft complaint seeking $50 million in damages. That suit was never filed.
The tension was showing. Scholastic employees were spread thin and various divisions began blaming each other. "The book group at one point was saying, `If you hadn't brought all these tchotchkes in here, we'd be selling books now,"' a former high-level employee recalls. In the Stine household, Jane was Robert's editor, and they sometimes fought viciously, she says. "I threw him in the closet once and left the apartment." Robert now has a new editor.
By November, 1996, the two sides finally hammered out a new contract. Robinson handed over to Parachute the rights for merchandising, but kept control of book publishing and the TV show. But peace came too late. Last year, Goosebumps sales tumbled to just $30 million.
Moreover, the truce was short-lived. Last September, Scholastic charged Parachute with breaching the new contract. Claiming that Parachute was making merchandising deals and issuing press releases without Scholastic's required consent, the publisher began withholding payments and demanded that Parachute return $10.5 million in advances. Parachute dismisses Scholastic's charges as "unfounded" and replied with its November lawsuit. Parachute claims Scholastic is infringing on the Goosebumps trademark by publishing the series.
For now, Stine continues to churn out a book a month--and Scholastic remains the publisher. "It is quite unpleasant, but we still work with them every day," says Jane Stine. Wary of the cost of overdependence, Scholastic is aggressively diversifying. As for Parachute, it's trying to rev the promotional machine back up. On his 54th birthday in October, the normally low-profile R.L. Stine launched a new Goosebumps section at Disney World. The Fox movie deal is back on, with Tim Burton signed to produce. "We're striving to make Goosebumps an evergreen," Jane Stine says. But that may require a plot twist as dramatic as any her husband has dreamed up.By I. Jeanne Dugan in New YorkReturn to top