Platform strategy and walled gardens in the toy industry

Around the holidays, I spent a lot of time shopping for toys for a few friends’ kids. If you’ve shopped for toys to any degree, you’ll understand very quickly how toy companies leverage interoperability and platform thinking to profit from a user segment that’s highly engaged but whose tastes change rapidly as they grow older.

Complementarity and interoperability

It’s helpful to look back at two interesting architectural principles before we dig deeper into the walled gardens that brands build in the toy industry.

Complementarity: This implies that a system (typically infrastructural) is more valuable when it is used in tandem with another system. E.g. the iPhone is more valuable with apps.

Interoperability: This implies that two systems work seamlessly with each other through some form of mutual agreement which may manifest itself in the design and beyond it. This involves the definition of interfaces (agreement in design) and agreement on standards, licensing, and property (agreement beyond design).

LEGO – Building dreams

When you think toys and interoperability, the first thing that comes to mind is, of course, LEGO. Lego, and for that matter any building block set, works on the idea of interoperability. A few core components form the infrastructure and the other components attach on as complements. Once a kid is entrenched enough with the core infrastructure, the company can keep selling complements to the kid. The good thing, from LEGO’s perspective, is that you only need one lego set to get entrenched with a kid. Every subsequent lego set is interoperable in a way that the value of owning multiple lego sets, especially those with widely varying themes and scope, scales non-linearly.

LEGO benefits much from interoperability within itself. In that sense, it believes in the philosophy of internal APIs (plug points). However, it doesn’t try hard to be interoperable with non-LEGO sets. As a result, we have a fairly fragmented market of players, all building their closed interoperable worlds.

Another thing LEGO does rather brilliantly is sell dreams rather than building blocks. While there are generic sets, most sets lay out various recipes in which things can be put together. Some ‘dreams’ may require unique complements, which may be valued higher by kids. As a result, some kids also create an alternate market for the barter of lego blocks. Back when I was growing up, LEGO was not this innovative with selling ‘dreams’ but we still had a vibrant barter market for specific LEGO blocks. An alternate market for barter is a very effective way for driving word of mouth.

 

Hot Wheels – Interoperable worlds

While LEGO is fairly obvious, a more interesting example that I stumbled on, while shopping this Christmas, was Hot Wheels. LEGO’s infrastructure and component layers are almost indistinguishable but Hot Wheels has two very distinct layers. The racing tracks act as infrastructure while the cars are the complements that work with these racing tracks. The brand uses platform strategy in two very interesting ways:

1) The racing tracks (infrastructure) themselves are interoperable across toy sets and tracks from one set easily plug and play with toys of the other set.

2) The cars, as complements, are again very interesting because small variations in car design create desire for ownership of more cars. Also, cars lend themselves very well to an alternate market for barter, much better than building blocks alone.

As a result, once a kid buys a Hot Wheels set (starter sets are cleverly designed to have just one car with a racing track combination), there is an non-linear increase in value every time the kid buys more cars or complementary tracks. Unlike blocks, racing tracks become more interesting as they get arranged in more complex connections so that ownership of multiple sets is highly desirable. Again, all of this is built as a walled garden. There is a high degree of interoperability and complementarity between a brand’s products but low interoperability and complementarity with other brands’ products.