At the intersection of the children's book and toy industries sits the interactive book, a hybrid format that has represented one of the fastest-growing segments of the toy industry since LeapFrog Enterprises introduced its LeapPad in 1995. Interactive books are electronic devices that work in conjunction with specially created book titles, often based on recognized children's literature. Preschoolers and young elementary students learn to read by following along as the device speaks the words aloud, or by reading the book themselves, touching unfamiliar words with their finger or a stylus to hear the device pronounce them. The units are packaged with one or more books, with additional titles available for separate purchase.

The NPD Group, which tracks toy industry sales, classifies interactive books within the preschool electronics segment, which also includes children's laptops, educational handheld devices and electronic science toys. While sales were flat in 2003, annual growth rates in previous years have been over 50%, according to Michael Redmond, NPD senior toy analyst. LeapFrog, whose net sales increased 20% in 2003, is the dominant player and has been driving innovation in the segment, Redmond added.

LeapFrog is now the third-largest toy company in the U.S., behind Mattel and Hasbro. In addition to its flagship LeapPad, it manufactures the My First LeapPad and several other extensions. All told, the company has sold more than 10.3 million devices in the LeapPad family since 1999.

Some 120 LeapPad titles are available at retail in this country, with aggregate sales topping 40 million units (LeapFrog's SchoolHouse division sells 200 curriculum-based interactive titles into schools). Tom Prichard, LeapFrog's senior v-p, marketing, said half of LeapFrog's 500 employees, including 125 educators, are dedicated to content development, which he identified as a distinct competitive advantage.

Growing Competition

LeapFrog had the market to itself until last year, when both Fisher-Price and Publications International premiered their own interactive readers. Mattel subsidiary Fisher-Price introduced its PowerTouch Learning System in August. It differs from the LeapPad in that children touch the words with their finger instead of a stylus and because it features auto page detection. (LeapPad requires the user to press a button when turning to a new page.) "What's great about PowerTouch is that it's intuitive," said Miriam Kelley, Fisher-Price's v-p design.

Fisher-Price's customer research led it to launch PowerTouch. "One of preschool parents' key concerns is finding products that help develop pre-reading skills," said Linda Mancuso, v-p marketing. In 2004, the PowerTouch book library will more than double, to over 25 titles, including beginner readers, intermediate readers and School Skills books.

Publications International, which publishes 300 children's book titles per year, is best known for its soundbooks, which comprise two-thirds of its list. In late 2003 it introduced the Story Reader, which does not require a stylus and is priced lower than its competition. The company has sold one million Story Reader units and five million books to date. It will add 37 new books this year, for a total of 47—it expects to have 200 by the end of 2005—and will introduce new interactive devices, including ActivePoint, which works similarly to a LeapPad, and a Color-Along Sound Activity Book with a $6.99 price point.

The interactive book market will get more crowded with the entry of toy company Playhut later this year. Playhut has announced its intention to launch an EZ Reader line, starting with books featuring Little Signz, a proprietary license for which Kappa Books has coloring and activity rights.

Prichard at LeapFrog worries that the growing competition could have a negative impact on quality, which would discourage consumers from the whole category. "The toy industry is about chasing a fad, and education is hot," he said. "We're concerned there will be products that don't deliver on their promises."

At the same time, competition can be good for innovation within a category. "I like the idea that there are more [companies] that have entered the business," said Dawn Symiest, a buyer at Borders. "We need to keep the manufacturers working hard to gain customer loyalty and produce a great product, and competition does that."

Kerry Cunnion, Publications International's executive v-p, retail sales and marketing, sees each product as unique: "I could see a customer buying all of them, since you're doing different things with each."

Literary License

As with any primarily mass-market line, interactive book marketers rely heavily on licensed titles. About half the books for the LeapPad feature licensed characters, while 85% of Fisher-Price's PowerTouch titles are licensed. Publications International, which holds rights to 52 licenses, launched the Story Reader with 10 Disney-licensed books.

Many of the properties are TV- or film-based, but a healthy percentage have their roots in children's books. Among LeapFrog's licenses, for example, are Mr. Brown Can Moo, Can You?, Guess How Much I Love You?, The Little Engine That Could and Where the Wild Things Are, as well as Richard Scarry and Arthur; it introduced a range of Dr. Seuss books this year. Fisher-Price's book-based properties include Clifford the Big Red Dog and the spin-off Clifford's Puppy Days, I Spy, Angelina Ballerina, Franklin, Berenstain Bears and Arthur.

Prichard noted that the challenge is to combine the educational content LeapFrog has developed with an audience-pleasing and engaging license. "The question is, how do we integrate the education into this great [licensed] program?"

Book-based interactive titles range from wholly original to nearly identical to the printed book. Licensors and/or publishers typically are brought into the process at six or seven points during development, according to Jeff Cronk, director of marketing for the LeapPad. These include the original "map" of the book, script, artwork, recording session and final version. A reader might notice a difference between a closely adapted LeapPad title and the original book if looking at the two side by side and page by page, Cronk said, but not when using the LeapPad title alone. "You'd clearly notice it's enhanced, but you wouldn't notice how it was changed," he explained. "It's seamless."

The authors of the original books are sometimes involved in production. Author Sam McBratney recorded Guess How Much I Love You? so that LeapFrog could capture the cadence of his speech, for example. And Marc Brown recorded some new material for Arthur Writes a Story, published by LeapFrog for its SchoolHouse division, so that when children touch a picture of him on a spread, they can hear him talk about what he was thinking when he wrote that passage of the story, or other related topics.

Complementary or Competitive?

When LeapFrog first appeared, many publishers questioned whether interactive books would cannibalize sales of their original titles. Prichard said some publishers still are contemplating that issue, but he believes more are starting to see the potential for interactive books to enhance sales of basic books. "More [publishers] want to work with us than we can take on right now," he reported.

"I believe customers expect to find all types of books in a bookstore, so having a small selection of interactive books is good for our image," said Symiest of Borders. "I believe in these as a great way to encourage parents to help get their children interested in reading."

Author Brown, who works with both LeapFrog and Fisher-Price, agrees. "What excited me about this particular way of a child taking in a book was that I felt it offered kids, some of them reluctant readers, another way to learn to read," he said. "It's a very positive way to empower a child." LeapFrog's titles are adaptations of the Arthur chapter books, while Fisher-Price produces original titles for a younger audience. "We consider [interactive books] an important and growing part of our publishing program," Brown said.

Brown pointed out that authors and publishers were a bit frightened of the new format when it emerged, just as they were when CD-ROMs came on the scene. "I admit I was one of those," he said. But now he's a fan of the technology. "Things change," Brown continued, noting that kids are tech-savvy and like all kinds of media, including books, computers, TV and musical instruments. "Kids have more choices today. It's important to take notice of that and embrace it."

Bookstores: A Growing Channel?

Most interactive book devices are sold in toy stores and discounters such as Wal-Mart, Kmart and Target, but manufacturers said they are interested in increasing their book-trade presence. "We'd love to see a better presentation in the book channel," said Prichard, who reported that Borders, Books-A-Million and Barnes & Noble stores stock the products in quantities ranging from a few titles to 18-foot displays. "We haven't capitalized on this opportunity yet."

Cunnion said the Story Reader and associated titles are not in the major bookstore chains yet, although some independents carry them. Noting that bookstores stock a selection of the company's soundbooks, Cunnion expected book-trade distribution to increase for Story Reader as well.

Borders sells LeapFrog's LeapPad and My First LeapPad, along with a selection of 20 to 40 books per store. Some locations have a LeapFrog spinner rack, while others devote a permanent endcap or two-sided slatwall fixture to the books and readers. While the books sell better, Borders sells a "good number" of the devices as well, Symiest said.

How the products are merchandised within mass channels depends on the manufacturer's roots. Fisher-Price's PowerTouch is typically displayed in the electronic learning aid section within the toy department, whereas Publications International's Story Reader is more likely to appear in the book department.

Kmart sells all three brands: LeapPad with 20 to 55 titles, Story Reader with seven titles, and PowerTouch with seven to 10 titles, according to Caryn Klebba, Kmart spokesperson. "Kmart customers are looking for quality, value price and an assortment of the books," she said.

While bookstores represent a relatively small channel of distribution so far, all the manufacturers stress the importance of quality book titles. "We're in the business not to sell the Readers, per se, but to sell the books," Cunnion said. "Story Reader is just a means to the end of the publishing program."

Cronk of LeapFrog noted that the variety of books available gives the LeapPad a lifespan of two to three years, a long time in the toy business. "[Customers] buy a new interactive book, and that makes the LeapPad new again," he said.

"It's very important to us that a book stands alone as a good title and is not dependent on its interactivity," explained Fisher-Price's Kelley. "It's important to us that the story hangs together."

Most observers believe the interactive book category will continue to grow, and industry trends support that prediction. "With the current nationwide emphasis on education and reading," Klebba concluded, "these products have a strong viability in the marketplace."