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Business Unit Analysis: Multimedia Learning Platforms (MMLPs)

5.1 BU Strategy Who US: 73% of gross 2012 sales. International: 27%

1. Distributors a. US: resale to schools, school districts b. International: resale to retailers 2. Retailers a. Wal-Mart, Toys R Us and Target are top 3 customers, forming 55% of gross 2012 sales b. Physical stores, online stores c. US: top 3 retailers made up 48% of gross 2012 sales d. International: Walmart, Toys R Us made up 7.3% 3. Direct consumers a. Children below 10, parents b. LeapFrog.com, App Center, iTunes Store What 1. Hardware Kid-tough design and materials for rough-and-tumble play a. LeapPad 2: US$100. Touchscreen tablet with cameras, 4GB storage b. Leapster: US$55. Handheld game system c. Tag: US$40. Stylus-based reading system 2. Content Educator-approved pedagogy and materials covering subjects such as English, Math, and reading skills a. Game cartridges: US$25. For LeapPad, Leapster b. Ultra eBooks: US$20. For LeapPad c. Apps: US$5-25, about 500 types featuring LeapFrogowned or licensed characters

d. Books: US$20. For Tag How 1. Advertising and marketing a. Direct consumers: integrated approach using traditional and social media. Learning Path recommendations personalized to parents b. Retailers: well-established relationships. In-store ads, signs, and features on promotional newsletters c. Public relations: brand and product-specific media coverage, annual Toy Awards 2. Online services Learning Path and Apps Center (AC) are key differentiators that make LeapFrog unique a. Learning Path: for parents to check kids progress, receive product advice. Available in US, UK, Canada b. AC: purchase of software. Available in US, Canada and other countries with less stringent web content control c. Online store: purchase of hardware, with home delivery 3. iOS and iTunes Store a. Free or US$1. b. 8 basic apps currently, developed through 3rd-parties 4. Research & Development 2012: US$36.6m expenditure (6% of sales)

a. Design: in-house team and external consultants. R&D critical in strengthening product portfolio. Platforms created using licensed technology e.g. Java b. Content development: mostly in-house, but started 3rdparty liaisons in late 2011 c. Remaining development: outsourced 5. Content curator

a. Offer 3rd-party developed apps on AC, alongside LeapFrog-generated content b. 3rd-party apps labelled under developer 6. International expansion a. Make AC and Learning Path accessible to users in more countries b. Create content in different languages

5.2 Issues with Current and Future BU Strategies 5.2.1 Loss of value proposition LeapFrogs hardware is specially designed to withstand rough-play by kids, and also has simple kid-friendly functions and buttons. These used to be strong selling-points, as parents did not have to worry about children spoiling these MMLPs easily, especially given their high cost. However, the explosion of offerings in accessories for the iPad and other tablets has seen the emergence of kid-friendly casings that make these tablets equally kid-tough. Hence, parents may see the purchase of a fully-functional tablet as a better investment for their kids, since these protective cases can be removed when the child is older, and the tablet put to other uses. Furthermore, parents have the option to kid-proof and hand-down their old tablets when they upgrade and purchase a new tablets for themselves. Toymakers have also started offering more MMLPs, with Toys R Us and Mattels Furby each creating their own line of kid-friendly tablets. Being kid-tough is thus inadequate as a differentiating factor as these offerings have similar characteristics. Decreased demand for LeapFrog toys from end-consumers, and potential protectionism by retailers with in-house brands, will see a fall in orders from retailers, which make up a substantial proportion of sales. This is especially easy since retailers do not have long-term contracts with LeapFrog.

The value proposition of LeapFrogs content perceived by consumers is in its educatorapproved label. However, the ambiguity and lack of an official standard or regulatory body for such a label makes its true value less credible, and would also be difficult to bring across geographical boundaries when it comes to international brand establishment. Such a value proposition may also not be unique to LeapFrog, as competitors can easily create similar labels for themselves. Nonetheless, the extensive use of LeapFrog products in US schools lends some credibility to the quality of its content, hence repeat purchases are more likely. The main difficulty LeapFrog faces is convincing new international customers to purchase its products. LeapFrog currently plans to release a new LeapPad in 2013, and this may be a misallocation of R&D resources. With falling demand for higher-priced toys, stiff competition from fullyfunctional tablets, and loss of hardware value proposition, sales of the new LeapPad are expected to be dismal. It may be wiser for LeapFrog to direct more resources into its international marketing efforts, or in online services development. 5.2.2 Entry into highly saturated apps markets LeapFrog has realised the inevitable need to enter the iTunes and Android apps markets due to the widespread popularity of these platforms. Since its foray into iOS apps in 2011, it has created 8 simple apps with the help of 3rd-party developers, 1 of which is free and the rest at US$1. LeapFrog has noted that these distribution platforms are heavily populated by thousands of other apps that are mostly free. While it can be argued that LeapFrog content is educatorapproved, the international market may not recognise any marginal utility over other free apps. Apart from moving into a highly price-competitive segment, this also conflicts with LeapFrogs current apps on its AC, which cost US$25. These apps would undoubtedly contain more premium content that are tailored to heightened experiences on its hardware, but the large difference in prices may cause potential consumers to purchase its cheaper non-AC apps instead. This is especially if they already own tablets or other smart devices, since they would not have to purchase additional LeapFrog hardware. Existing LeapFrog hardware users may also

hold off future purchases on the AC, in anticipation of cheaper versions for smart devices that their families most likely already own1. LeapFrogs foray into creating apps for other platforms hence creates strategic conflicts between its premium AC content and lower-priced alternative apps, which may lead to cannibalisation of both hardware and software sales. The near-zero contribution margins from these apps would also see a large proportion of profit being eroded. LeapFrog may also face difficulties convincing overseas audiences to purchase its general apps since there is little brand recognition, hence decreasing the possibility of using these apps as teasers to encourage fullfledged hardware and AC software purchases. 5.2.3 Brand erosion and higher fees LeapFrogs greatest shift in focus comes from its intention of becoming a content curator, rather than creator. In offering 3rd-party apps on its AC, which carry the labels of their contentowners, LeapFrog could be perceived to be accepting these apps as of similar quality to its educator-approved content. This greatly erodes LeapFrogs brand value and poses a threat to the value proposition of its premium content, which is the companys core competency. Furthermore, LeapFrog has to compete for the attention of content developers with iTunes and Android, which have far greater market shares and outreach in the apps realm. Developers may hence require greater incentives to create content specifically for use on LeapFrog hardware, since sales would be far lower in quantity. This may translate into higher royalty or purchase fees, causing lower profit margins for LeapFrogs MMLP content.

5.2.4 Concentration of sales

Bulk of LeapFrogs sales lie in the hands of 3 retailers, 2 of which are both national and international. In 2012, Wal-mart, Toys R Us and Target accounted for 66% of the US segments gross sales, and the former 2 for 27% of the international segment as well. By having
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Deloitte, Jan 2013: 65% of 35-44 year-olds in developed countries own smartphones or tablets http://www.marketingcharts.com/wp/topics/demographics/tablet-adoption-less-age-dependent-thansmartphone-ownership-in-developed-markets-25824/

just 3 customers accounting for such a substantial proportion of the companys gross sales, LeapFrog exposes itself to significant buyer risk. This risk is further compounded by the fact that no long-term agreements exist between LeapFrog and its retailers, who make all purchases through one-time purchase orders. Economic factors that adversely affect retailers, such as increased competition from online retailers, reduced access to credit given the tighter bank lending environment, and store closures, would inevitably affect LeapFrogs sales too. For example, the bankruptcy of one of its customers in 2012 caused bad debt expense of US$3.1 million.

Moreover, without long-term agreements, pricing, shelf space, cooperative advertising or special promotions with each retailer are exposed to renegotiation and amendments periodically. Any alterations to the disadvantage of LeapFrog would adversely affect its operating results. THE REST CAN LEAVE OUT OF THE REPORT FOR NOW. IF STILL GOT SPACE THEN WE WORK IT INTO THE OTHER SECTIONS.

Generic Strategy and Core Competency [to insert contents here and there]
Leapfrog has developed an expertise in developing software which effectively combines learning and fun. Their success in evident in the US market where more than 100,000 classrooms make use of their learning technology. Leapfrogs software is developed using a combination of in-house R&D and external consultants. For in-house R&D, they have assembled a team of specialists from a variety of backgrounds, including education, child development, software and hardware engineering. Their development of content is consistently based on a pedagogical approach which is based on established educational standards, a key factor in convincing parents to use their software.

Leapfrog has identified the need of parents wanting to track their childs learning. With this as a point of focus, the company has developed an online platform known as the LeapFrog Learning Path. This platform allows parents to have access to personalised insight to their childs progress. As kids engage with Leapfrog content, parents can monitor how well their ch ild

is developing. In this process, LeapFrog has created an ongoing relationship with parents, allowing them to constantly appreciate the value that their products and platforms provide.

Key Issues [to work this section into other parts of the report]
LeapFrogs strengths clearly lie in their software and content development. In terms of hardware, what they offer provides no significant advantage compared to other tablet manufacturers today. With this as a point of contention, it is arguable that their hardware sales are largely driven by the appeal of the software and content that LeapFrog can provide.

Leapfrog has recently started to push out their software on competitor platforms such as itunes and the google android store. This is a disconnect from their profit model which is driven by hardware sales as well. By allowing consumers to gain access to LeapFrog content through competitor devices, LeapFrog will be effectively cannibalising their own hardware sales.

LeapFrog does not have a strong international presence. Their branding is weak overseas compared to what they have established in the United States and Canada. This may prove to be a stumbling block in expanding to new markets as a lot of resources will need to be spent on branding. The riskiness of such a move is evident in the fact that there are already many players in the tablet education market who offer relatively cheaper content. Moreover, being a late entrant, consumers have already adapted to these existing alternatives who provide satisfactory content as well.

Furthermore, as LeapFrog continues to expand overseas, the acquiring of patents is crucial in maintaining their competitive advantage in software and content. However, given how wide and large the app-driven education market already is, LeapFrog may find difficulties in obtaining international patents from countries who want to protect their own software industries.