Master Chief scratches at his armour. The rubber-and-plastic uniform, complete with bulky headgear, chafes under the bright lights of a crowded convention centre. So the hero of Halo, Microsoft's blockbuster video game franchise and a licensing coup for Montreal-based toymaker Mega Brands Inc. , is taking a break from striking poses for TV cameras and retailers at the New York Toy Fair to slouch around Mega's booth.
You have to feel for Master Chief, given the load weighing on his cybernetically enhanced shoulders: not only the salvation of a human race besieged by the alien armies of the Covenant but now the revival of a deeply indebted and tarnished manufacturer of construction toys. Mega, a family-run upstart whose chunky Mega Bloks snatched swaths of market share away from the Lego Group early in the decade, has had a nightmarish couple of years born of a badly bungled expansion. As Lutz Muller, a long-time industry analyst, observes, "It was the worst acquisition I've ever seen in my life."
Enter Master Chief. The recent deal with Microsoft Game Studios to turn the latest instalment of Halo Wars into studded-brick play sets is part of Mega's effort to "cool up the brand" and broaden its inroads into the tween market. This is, in part, a defensive manoeuvre against Mega's resurgent archrival. Lego, which itself had a near-death experience in 2003 stemming from an ill-advised expansion, has shed divisions, fixed its balance sheet and refocused on what it does best: selling plastic bricks to prepubescent boys. Now, the Danish giant is launching an attack on Mega's stronghold: toddlers and preschoolers, whose parents still favour Mega's big, colourful blocks, and the lower price tags attached to them.
The New York Toy Fair in mid-February is toymakers' last major opportunity to build buzz and secure shelf space for the end-of-year holiday season. At Mega's booth, head of PR Harold Chizick is in carnival-barker mode. At the Halo display, he points out the marbleized effect on the "micro" bricks (smaller pieces aimed at older kids). The game is rated 13+, although most of Mega's consumers are still learning to hold a spoon. But Chizick says kids as young as 7 play Halo with their older siblings: "It's all part of age compression, of children getting older faster." But it's Battle Strikers, a magnetized twist on traditional battling tops, that elicits Chizick's most glowing predictions. Mega hopes to turn the line into the next Bakugans, the playground hit from Toronto's Spin Master Ltd.
Chizick's effervescence noticeably diminishes when CEO Marc Bertrand appears. Bertrand wears the ordeal of the past two years in his forced smile, carefully worded answers and air of fatigue. After taking over the company from his father in 2002 and-along with his younger brother, Vic-overseeing the period of its most rapid growth, Bertrand had to engineer one of the largest toy recalls in recent history after dozens of children were hurt. Still, he tries to get into the cheerleading spirit. "We're No. 1 in preschool, and every year we're stronger there than Lego," he says. That's true; the problem is, the rest of the business is falling apart. A month and a half after the fair, Mega released disastrous 2008 results: a $459-million loss-more than its total sales-with 70% of that coming in the year's final quarter (all currency in U.S. dollars unless otherwise noted). The company's shares, which once approached $30 (Canadian), are now a penny stock. "It's a really sad story," says Anthony Zicha, an analyst with Scotia Capital Inc. But an all-too-common one, too: The father builds a company; the kids run it into the ground. By mid-April, one analyst was questioning whether Mega could even continue as a going concern.
Mega's slump and Lego's revival is just the latest chapter in a rivalry between the two family firms going back two decades. Now, as Mega fights for survival, it faces a competitor that's three times its size, highly profitable and toughened by hard-learned lessons. "[Mega]had the success they had not because they were that good, but because we were exceptionally bad," says Søren Torp Laursen, president of Lego Americas. Patting his hips to indicate a spreading rump, he adds, "Like us once, they expanded, they got complacent." But Lego is no longer that pudgy pushover. "We're not like that now. At all."
I: A FALTERING GIANT
Founded by Danish carpenter Ole Kirk Christiansen, Lego introduced its iconic brick in 1958, patenting the interlocking system that enabled the studded pieces to fit together firmly while still allowing kids to separate them. The toys' versatility-the six basic bricks can combine into more than 900 million arrangements-in time turned Lego into Europe's largest toymaker, and Christiansen's grandson into Denmark's richest man. From the start, the company was renowned for its quality control: It kept manufacturing close to home and ensured that each new Lego piece could fit with any other one ever made.Report Typo/Error