CEO's Notebook

In a field full of giants, sometimes it takes a real magician to win a license

In November, Harry Potter, J.K. Rowling's famous boy wizard, will make his cinematic debut. Warner Brothers awarded most of the movie's licensing rights to Hasbro and Mattel. But $20-million toy maker Schylling Toys will also make several products based on the Harry Potter books, including kaleidoscopes, pencil boxes, and windup models of the Hogwarts Express. Inc. reporter Kate O'Sullivan recently met with CEO David Schylling in his conference room, which is crammed with Pooh, Madeline, and Curious George toys, to learn how this small company wins the rights to hot properties.

Inc.: Did you have to bid against other companies for the Harry Potter license?

Schylling: We did have to bid. I don't know who the other bidders were because it was a confidential process. The licensing exec at Warner Brothers will let you know that there are two or three others in the running, but it's kind of like a sealed bid.

Inc.: What did the guarantee end up being?

Schylling: The guarantee was six figures, which is much more than usual. I would estimate it was seven figures for Mattel.

Inc.: You've mentioned that you often try to get a license for a few toys and then hope to add more products later. Is that what you did with Harry Potter ?

Schylling: We initially contacted Warner Brothers with a larger product selection and quickly realized that, given the amount of interest in this property, we were going to have to pare it back and take just a small piece of the pie. In order to get the license at anywhere near a reasonable price, we had to scale back, because the more you ask for, the more the guarantee costs.

Inc.: Give me an example of a time you were in a bidding war for a license and how you won it or lost it.

Schylling: We've actually never lost. That's a result of being so careful about what we go after and staying away from the hottest, trendiest licenses.

Inc.: With the exception of Harry Potter.

Schylling: With the exception of Harry Potter. That is something new for us. But we didn't go after it because it was a movie. We went after it because 20 million books were sold.

Inc.: Did you have to give that a lot of thought before deciding to go for the license?

Schylling: There was a lot of soul searching. We've been ramping the licensing program up for a while here, starting small and then starting to think big. When we did Pooh with Disney, that was incrementally that much bigger than the Curious George license we had with Universal [Studios]. So there's been a natural progression, and now it's time to swing for the fences.

Inc.: How do you make a license worthwhile at the end of the day?

Schylling: Don't try to [make products] that aren't in your core competency. I had a lot of ideas for things we could do for Harry Potter, like some resin figurines, watches, and an alarm clock ... things that we hadn't done before. When we scaled it back, we realized that these things just weren't in our core competency .... The time is ticking from the minute you sign that contract, so you've gotta be quick. You're going to lose time developing the product when you could be earning your royalties instead. And if you're doing something you've never done before, that takes more time.

Doing the Deal

Licensees have to make a lot of promises to get the rights to a character like Harry Potter. They usually negotiate three main points with the licenser:

The guarantee: A percentage of expected sales for the property that the licensee must pay at the end of a license's term -- usually two years -- even if the company hasn't sold a single piece of merchandise. While guarantees vary, licensers frequently demand about 50% of the sales forecast. Marty Brochstein, executive editor of The Licensing Letter, notes that companies competing for a license often try to outbid one another by promising bigger guarantees.

The advance: The percentage of the guarantee that the licensee pays at the beginning of a license contract, usually 25% to 50% of the guarantee.

The royalty: The percentage of the wholesale price that the licensee pays to the licenser on each sale. Royalties apply toward the total guarantee due at the end of the license's term. For licenses for classic, literary-based characters like those Schylling pursues, royalty rates range from 8% to 12%. Royalties can go higher if the property is event based -- that is, tied to a movie like Star Wars or Harry Potter. Some low-margin products like candy or personal-care items traditionally have lower royalty rates. --Kate O'Sullivan

CEO's Notebook

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