LeapFrog's Game 

The local toymaker wowed Wall Street, but the educational frenzy it spawned may not be in children's best interests.

Toy stories used to be simple. Just ask anyone at Pixar Animation Studios: Seven years ago, the Emeryville digital-filmmaking powerhouse pitted a toy cowboy named Woody against a toy spaceman named Buzz Lightyear in a children's flick that reaped more than $350 million at the box office. Crucial to its plot was a competitive market environment that made Woody obsolete and Buzz the latest gadget, but the rival toys eventually found common ground in the affections of Andy, their ten-year-old owner.

These days, it's hard to imagine Andy would have time for either toy. Neither, after all, would help him develop phonemic awareness, expand his vocabulary, or engage him in higher-order thinking. Nor could they drill him on multiplication tables or state capitals. Buzz' only nod to interactivity was a blinking light that he claimed shot a laser beam, and Woody went mute when Andy or another human entered the room.

The same year the movie came out, in fact, the real toy story was just getting started in a glass-and-steel nouveau warehouse a few blocks from Pixar's headquarters. It's the story of how newcomer LeapFrog Enterprises revolutionized a stagnating toy industry with an interactive reading aid called LeapPad, an electronic tutor that plays perfectly to the anxieties of busy parents. It's also the story of how these parents -- spurred on by the industry's trend-following marketing machine -- have increasingly turned what was once playtime into school time, stuffing kids' rooms with overtly educational toys in a perhaps-quixotic quest to give their offspring a jump on classmates. And of how that's not necessarily a good thing.

LeapFrog was born of a parent's frustration. It was 1990, and the three-year-old son of Orinda technology attorney Mike Wood was struggling to associate letters on a wooden alphabet puzzle with their phonetic sounds. Sitting on the floor and practicing them by straight memorization tried the patience of both father and son. What Mat needed, thought LeapFrog's future CEO, was a toy that would make phonics fun.

"At the time, I represented a talking greeting-card company. I thought it would be great to take their technology and use it to make each alphabet letter talk. When you squeezed the letter, it would make its sound," says Wood in a rare free moment between his executive duties and his three kids -- now teenagers -- at home. "The idea was that simple. But I went shopping and there was nothing like it. And I couldn't shake the idea."

Five years later, the lawyer teamed up with his former legal secretary and another business associate named Robert Lally to found LeapFrog. (Lally is now president of LeapFrog Schoolhouse, the company's preschool and K-12 division.) Their first product, the Phonics Desk, was just what Wood had imagined for Mat, although his son was too old by that time to benefit from it.

Given the market, LeapFrog has been staggeringly successful. It has managed to dominate the only toy demographic with sales growth -- the so-called preschool/electronic segment, which ballooned 77 percent last year in an otherwise flat industry. As a result, the manufacturer has become a powerhouse in retail circles, commanding its own section in stores like K-Mart and Target. And its LeapPad -- a computerized plastic housing for interactive books that drill preschool kids on reading, math, geography, and other subjects -- catapulted past longstanding toy heavyweights like Hot Wheels, Barbie, and Pokémon to become the nation's best-selling toy in 2000 and 2001.

Fueled by a cash injection in 1997 from Knowledge Universe, an educational venture fund started by former junk-bond king Michael Milken and Oracle chairman Larry Ellison, LeapFrog's rise has been nothing short of phenomenal. Its sales more than quadrupled from $71 million in 1999 to more than $313 million last year. Its now fifty-plus products, ranging from infant to high-school learning devices, continue to fly off the shelves of Wal-Mart and Toys R Us, and have firmly established the company as a rare prince on a Wall Street of peasants. Last year, it boasted five of the ten best-selling items in the industry's overall preschool segment, and eight of the top ten in the preschool/electronic niche. Growth has been so rapid that many new hires find themselves working in the halls of LeapFrog's ultramodern headquarters because the building can't accommodate the company's expansion rate.

Its greatest moment to date, however, came at the end of July, during a week where an abysmal stock market prompted cancellation of four of six scheduled initial public offerings. LeapFrog braved the jump, and was rewarded: The value of its shares soared 22 percent on the first day of trading, triple the year's average first-day gain for an IPO. And that day, with the closing bell of the New York Stock Exchange, Wood sat at the helm of a publicly traded company that, as of last Friday, was worth $790 million.

How did LeapFrog spring to the top of its industry so quickly? In part, the company simply played it smart. Unlike many bravado-over-substance start-ups, it successfully sought access to deep pockets and sound expertise; along with Knowledge Universe's controlling investment came the toymaking wisdom of KU's president Tom Kalinske, a former top executive at both Mattel and Sega who knows what works -- and what doesn't.

Those toy giants occasionally tried to create educational products, and inevitably failed, Kalinske notes during a recent visit to LeapFrog HQ. "For an entertainment company, education is simply too hard," he says. "You don't understand how to do it correctly, and have to invest too much to learn to do so. A Barbie shopping toy may teach numbers, but it is not geared to show what a seven-year-old needs to understand math. It's much easier to do the next version of say, Sonic the Hedgehog, which you know will sell thirty million, than it is to learn to build in curriculum."

But LeapFrog did its homework: From the start, it took pains to bring potential critics into the fold. The company has relied on hundreds of academics, teachers, and parents to shape its products, so much so that it's become a challenge to find a prominent child-development expert who hasn't at some point been solicited by the company to provide feedback, review products, or serve on LeapFrog's advisory board. Wood, furthermore, has instructed his designers to make every product play on educational concerns. And perhaps most importantly for shareholders, LeapFrog has managed to condition parents torn between the Tickle Me Elmo, the GameBoy, and LeapFrog's Learn to Read Phonics Desk System, that they should, as Wood puts it, "choose the toy that also teaches."

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