LEGO: Impossibly simple licensing.LEGO: Impossibly simple licensing.

Danish giant LEGO has turned its business around in recent years and has extended its reach into licensing with a sharp eye focused on both detail and the bigger brand picture.

Visiting Billund in Denmark, where the LEGO headquarters is located, is like visiting the United Nations. There are people from all parts of the world and from all professional disciplines, speaking many languages. The draw, of course, is one of the best-known brands in the world, an impossibly simple concept that billions of people the world over have played with and can relate to.

The company has experienced peaks and valleys in its 78-year history, recently experiencing an upswing in revenue in the last few years thanks in part to new licensing deals with brands such as Lucasfilms' Star Wars and Harry Potter. In 2008, LEGO posted a 19 percent increase in revenue to $1.83 billion and 2009 looks to be another stellar year for the company.

LEGO's current head, Jorgen Vig Knudstorp, was appointed chief executive officer after the company posted losses in 2004. Since then, LEGO has swept off the cobwebs and worked hard on its core business and is now bucking every downward trend. Sales and profits are up, distribution issues are resolved, new markets are flourishing and a small licensing team manages the challenges of being guardians of one of today's hottest brands.

LEGO video games (now the biggest licensed category for the brand) have set an industry standard for a successful collaboration between two brands. LEGO video game brand extensions include Star Wars, Indiana Jones, Batman and, more recently, Rock Band. The deals are an example of two plus two making five when brands join forces and they are fun and commercially successful (an estimated 35 million copies of the LEGO games are in the market.)

Tom Stone, managing director of TT Games, which develops the games, says it took two and a half years to figure out what children wanted from a LEGO game. In a classic tale, the gaming industry didn't take the idea of the first game, LEGO Star Wars, very seriously. But as Stone says, LEGO carried the day and it soon became an irresistible proposition. "LEGO is so well known that you have an opportunity to use the brick and the mini figure to parody great scenes and characters. LEGO gives you permission to do this," says Stone.

LEGO Harry Potter, covering the first four years at Hogwarts, launches this year.

Andrea Ryder, LEGO's head of licensing, says licensing has been a constant process of exploring how the brand can extend. Some categories haven't yet been completely successful (stationery, for example) and some, such as children's furniture, are unusual. There are even detailed collectors' books charting every LEGO product that's been made.

Innovation is key to success—LEGO's own designers do it, fans do it and new business divisions come up with niche products such as the recent LEGO architecture range, construction sets that create small-scale interpretations of iconic buildings from regular bricks. The challenge for licensed products is to sit at retail with core products and appeal to a similar audience and support the brand.

As a licensor, LEGO is demanding and can be unpredictable and unconventional. "Beware LEGO," says Ryder, with only half a smile. "We will challenge you because we expect creativity."

To understand better what makes LEGO licensing successful, License! Global talked to three recently appointed licensees about their experiences working with the Danish company. Taking a lead from LEGO, they were happy to be open about the rich, but sometimes frustrating and confounding, journey they have been on, which has resulted in better product and strongly cemented relationships. Products from each of these licensees will continue to improve and relationships will continue to strengthen over time.

The three licensees are: U.S.-based consumer electronics specialist Digital Blue, which has launched its first LEGO products (including a camera, boom box and MP3) in the U.S.; Danish plastics manufacturer Plastteam, which counts LEGO as its first license; and lighting company IQ, which produces self-powering lights for children.

In all cases, the licensees have had to develop entirely new products to carry the LEGO branding; there's no chance of just adapting the brand to something already in existence. That's not how LEGO works.

The relationship between LEGO and a licensee can be slow to emerge. Digital Blue spent four years talking to LEGO and LEGO agent Kidz Entertainment persevered in talking to Plastteam, which had never taken a license before, even as the company came under new ownership. Kidz Entertainment was also instrumental in IQ's relationship with LEGO, suggesting the license to the company's inventor-founder Sun Yu.

Once around the table with LEGO, licensees are immersed in a creative process that requires astonishing attention to detail and understanding of the LEGO brand, but also leaves the licensee with an open brief to develop. "They never told us what they wanted," says Morten Rossell, Plastteam's vice president of product development. "We came up with what we thought would be best and it was a relief that we were all thinking along similar lines."

Within the creative process, LEGO's receptiveness to new ideas is constantly praised. "We sensed LEGO's openness to creative ideas right from the beginning. We presented lots of concepts in different categories, some of which were a complete surprise to them," says Tim Effler, Digital Blue's vice president of concept development. "LEGO allows you to do unique things—to create completely new products."

LEGO's Ryder uses the phrase, "Obviously LEGO; never seen before" to describe the statement that licensed LEGO products should inspire. This is much harder than it seems because LEGO is deceptively simple.

"Everyone understands the brick. It's a cultural icon. You get it by seeing and touching it, without even knowing its name. But that doesn't make extending it simple," says Effler.

Digital Blue talks of "meshing" its products with LEGO: "For example, we looked at how many children were making animated clips for YouTube that featured their LEGO mini figures and wondered how to match what was going on in reality with the camera we were making," he adds.

Others describe the process as gradually learning LEGO's DNA. "We are Danish so we understand the simplicity of LEGO. That's the point. But it doesn't happen in a moment—it comes from working hard at it," says Rossell.

IQ's Yu admits he thought he knew about LEGO because he had played with it as a child. "But I realized in fact I didn't know anything about it at all." After Yu was invited to attend a seminar in Billund on the subject of systematic creativity (a term that exactly describes building with LEGO) he said it affected product development immediately. IQ's next range of brick-inspired lights, for example, will all stack together.

Going to LEGO, being on site at Billund, watching creative technicians at work, having LEGO visit your company—all this physical cross referencing is vital to getting to the bottom of the brand. It would be hard to be a LEGO licensee without this level of interaction.

And, as with any worthwhile journey, there is challenge, too. "Yes, we were fed up with them all and I think they were fed up with us all, too," says one licensee. Passions can run high and the approvals process is exacting and challenging in its attention to detail and the need to adhere to a far bigger brand picture. Because LEGO is a toy, there are also stringent rules for safety that apply to licensed products.

"LEGO is picky about things other licensors aren't concerned with, but it makes a better product," says Yu. "I had four men in a meeting from health and safety, engineering, etc., and I thought, is this a little too much. But undoubtedly the products are much better as a result."

When Plastteam decided its storage boxes would stay as close as possible to the core LEGO brick, it thought it could just enlarge the brick. "How simple!" says Rossell. But after weeks discussing measurements, the first prototypes were dismissed by LEGO as being "way out" in their dimensions. The error was a matter of a few millimeters, probably not noticeable by the consumer, but vital to LEGO. "We have demands for use and LEGO has demands for the look," says Rossell. He admits it wasn't easy pursuing such tiny alterations but in the end it's been worth it because what is produced is "perfect" LEGO. In a similar technical challenge, IQ has had to push the boundaries to reproduce the rich, dense color of LEGO plastic in its lights.

Then there's the challenge of getting retailer and global distributor acceptance, when products can be perceived as very close to being toys and therefore potential competitors to existing products. This is especially eye opening for companies that are new to licensing and creating new products. Julie Gibbons, Digital Blue's vice president of sales and marketing, says it can also be a challenge for the retailer to see a LEGO product outside the LEGO aisle.

For these licensees, the development represents considerable investment, but each hopes the year of planning will bear fruit quickly. IQ, for example, launched its first lamps in September last year and forecasts about $60 million in retail sales for 2010.

The next stage is to improve products and launch new ones. Gibbons predicts that things may get more challenging as products have to extend further, in line with evolving play patterns for both LEGO and the consumer electronics market.

IQ's next products include more items based on the mini figure, such as a keychain light, but also some more artistically rooted and sophisticated lights based on the LEGO brick.

Plastteam launched 15 storage items, lunch boxes and drink bottles this year and intends to come up with 10 to 15 new products each subsequent year with classic LEGO as inspiration.

What next for LEGO licensing? The company is now managing the retail hunger for all things LEGO and licensing is vital to support the brand, requiring huge effort and investment from all involved, but playing a relatively small part in terms of revenue generation compared to the core toys.

At Nuremburg this year, there will be licensed LEGO products as diverse as Kickers shoes and children's furniture and there is a major project in the pipeline. Like for any expanding licensed range, efforts are now being taken to improve how the varied products look when merchandised together in stores. To this end, LEGO is working on design and packaging guidelines for cross-product branding.