What’s missing: Creator Platform for LEGO Bricks
When I think of my childhood, the first toy that comes to mind is the LEGO system. Me and my brother had the whole city with things like a Police Station or the Space Shuttle and other themes like Western or Pirates.
At one point we sold all of it in a rather professional manner on eBay. I still have the Excel sheet how much fees we paid and how much net profit we made on every item.
For example, this Western set had an RSP at its release in 1996 of $85. We sold it in 2004 for $33.
Today you would get for that amount only the packaging and the instructions — the whole set is at least 7 times as expensive as we got in 2004. The “part-out value” (meaning if you sold the bricks separately) is usually even higher.
My brother (who also studied economics and is currently working in banking) tells me that is was still the right decision to sell: Putting the profits into a stock index would have worked out almost as good.
I reply
- We didn’t do that. Heck at that time I didn’t even know of the existence of ETFs (lack of financial education in schools is a problem).
- There were a few opportunities to panic and sell in times of a crash. Then liquidity works against you and can’t be seen as an advantage.
- Besides the accrued value on paper, there is value in being able to look at those sets or play.
Getting back into the Game
I only researched this because I recently got back in touch with LEGO. The reasons are a) my son is slowly reaching the age where he can handle LEGO and b) my wife had a certain set based on the movie Home Alone on her Christmas wish list.¹
She got her wish and I don’t regret it. The set is incredibly detailed and full of little gimmicks. We’re building it right now, it’s fun!
Having said that, with €250 it’s expensive. That’s if you get it at one of the rare times it is in stock. I had to pay the “scalper fee” to get it duly for Christmas.
L(uxury)EGO
I’m stunned by the prices in general. Maybe limited editions targeted at adults can be pricy — but all the regular offerings like the LEGO City line (which don’t have to pay a license fee) are as well.
Keep in mind that a LEGO brick is at its core nothing else than formed plastic. You won’t find “Legonium” on the periodic table of elements. I was well in my 30s till I realized that, I just never thought about it before. It’s even more absurd to pay premium for plastics when with all other toys we pay premium to get them in wood (instead of plastic).²
From what I read the sole costs for materials are diminishingly low. What’s capital intensive are the machines to stamp out the bricks. Meaning, it’s a scale game. Well, LEGO is the biggest toy manufacturer of the world and in the universe of — for the lack of a better word — “Lego bricks”, competitors are too small to make a dent in market share statistics.
But instead of passing savings to the customer, it seems that the LEGO group wants to dial their monopoly rent to 11. Here is a comparison video of the standard helicopter set from 2018 with the one from 2021. The new one has 33% less pieces for the same price.³
It seems to me that in the last 20 or so years in which I lost sight about the Danish company, LEGO has become a sort of luxury item, comparable to Swiss watches: Retail pricing doesn’t reflect cost, it reflects demand.
Why LEGO wins
So, why is demand at an all time high in 2022?
Of course, Childhood nostalgia is a big driver. Kids from then are now having money, buying what their parents probably never wanted to buy them. LEGO is so old, it can reference itself.
Matthew Ball did a great job explaining why people love some franchises in a very sticky fashion in the context of movies: Star Wars can screw up three cinema releases in a row — and yet fans rush to praise The Mandalorian shortly after. The same mechanics are at play with toys.
Exacerbating this trend are the plethora of licensing deals. You can build playgrounds where Marvel super heroes fight alongside DC super heroes against Super Mario alongside Sonic in Hogwarts.⁴
The nostalgia of LEGO combined with the nostalgia of Home Alone was too hard to resist to, at least for 90s kids like my wife and me. That license deals saved the company from the dead makes therefore all the sense in the world.
Additionally we’re both knowledge workers, we don’t have the built-in satisfaction of doing something with our own hands for a living. A great part of the LEGO appeal is to build something nice looking just from pieces. Yes, with a manual building is not that complicated — it’s painting by numbers in 3D. But still, the completed structure transfers a sense of accomplishment.
Asset Bubbles everywhere
On to the financial motivation. Examples like my Fort Legoredo are extrapolated into the future. Most have heard that some LEGO Star Wars sets cost as much as a car. These products can be classified as Veblen good: LEGO charging more for sets targeted at adults makes them more desirable.
In a way scalpers who purchase sets only to sell them the next day on eBay drive up prices. Not only do they introduce an unnecessary middle-men that wants to get paid, LEGO likely notices that a set is sold out in 15 minutes and concludes “I need to raise prices so I don’t leave money on the floor”. That’s not bad per se, it’s capitalism.
Naturally, the cost basis back in my day was way different. You can say one paid the “intrinsic” value. By that I mean prices were predominately correlated with gaming value. Today you pay the intrinsic value + the speculative value of further price increases. Sort of like with housing nowadays.
It’s no coincidence that LEGO rose in par with other asset classes. Zero interest rates and bored markets in Covid times have left their mark. It would be funny if a Gamestop rich kid “diversified” into LEGO sets.⁵
“Builders of Tomorrow”
As with all luxury goods brand value plays an important role. You wouldn’t dare to let your kids play with something unproven and probably unsafe, right?
It’s interesting that “Lego” describes a certain category of toys (brand name = category). That’s true in popular other products as well, but for sought-after hardware there is usually a noname alternative. But where is the Amazon Basics “toy bricks” product? Why can’t I walk into Costco and get a bunch of stones for the cheap from the store brand?
The marketing department is on fire over at LEGO. Over the years there have been some very memorable ad campaigns.
In a way they had an easy message to get across: Buy LEGO toys for your kids and they will become more creative and use their imagination more. I think this clashes with reality when 90% of customers only build according to the instructions, and modern sets don’t have enough pieces to get creative to begin with. But marketing-wise it’s very clever.
Branching out into other entertainment genres like games and movies is also a testament of that. I really like the LEGO movies with their meta commentary and sense of humor. I haven’t seen the Ninjago TV show, but I have heard kids love it. This manifested LEGO as a universally understood cultural icon.
Competition is for Losers
This established standing is hard to beat. I have found competitors (namely Cobi, Blue Brixx, CaDA).
Note, it’s perfectly legal to offer bricks that are compatible with LEGO and look and feel the same. The patents exclusivity period is over. More interestingly, the LEGO brick was itself a copy of a British toy manufacturer.⁶
But given what we know about the brand and their market dominance, why should a franchise choose something else? And given that we know that folks want to play with their loved franchises, why should a (grand)parent choose something else?
I don’t see how you can break the entrenched, monopolistic rule by simply offering a copy of the original but slightly cheaper.
A business model that has been around for 60 years is proven. But a business model from that era has at least one attack vector: the Internet.
Unbundle LEGO!
The best challenger strategies are asymmetric — they go after what the incumbent would never change. I think in the case of the LEGO group that’s the bundle of hardware (bricks) with intellectual property (model design instructions).
Like with other things we still find it hard to pay for intangibles. I know iPhone users who are stingy with 99 Cent Apps or Tesla drivers who wait in front of free chargers. That’s why the bundle works so great for LEGO.
Unbundle this and customers would notice the absurd pricing for plastics.
It’s true that the creative work that goes into constructing sets is immense and deserves to be paid well. The model designers LEGO employs are most often (like in the case of Home Alone) doing fantastic work.
By splitting the designs from selling the actual bricks, we could unlock potential in the value chain. Brick manufacturers concentrate on fabricating the bricks while lots of amateur model designers from around the world compete on the best designs.
LEGO model designer is a dream job for many. As of today only a handful of people located in Denmark can make their living with it.
A decentralized⁷ Creator Economy
What I think of is a platform where every hobby designer can upload their custom builds and manual. Users can download the manual as PDF or open them in an App with step-by-step instructions.
The needed bricks can be brought over from already purchased sets, bought somewhere else, or bought right next to the manual on the website. The advantage in the latter case: The pieces are exactly what’s needed for the particular build.
In addition to the respect of the community I would let the creator choose how to monetize. Either they charge a fixed fee per download⁸ or they charge a percentage of the revenues made from selling the custom brick packs. The commission is preferred since it alignes incentives very well. Creators bring traffic to the platform. The more traffic, the more sales.
The platform would be part of the so called Creator Economy: Individuals create something and monetize it via an online network/marketplace. Li Jin also dubbed it the Passion Economy, which is especially fitting with LEGO.
Half-baked is better than nothing?
LEGO is not unaware of the potential of the crowd. In 2019 the company bought BrickLink, a fan made site that hosts a gallery of designs.
More popular is LEGO Ideas, where amateurs can send in designs. When a model hits more than 10,000 supporters, it enters the “Review” phase. At that point it’s up to the LEGO managers to pick the selected few winners. The winner will get 1% of total net sales. Now that’s something!
But the selection process can seem very arbitrary and disregards lots of popular builds. I don’t think LEGO is to blame for most of the downsides when you consider surrounding conditions like limited production capacity, needed profit margin, kid-friendliness. Nevertheless there here and also include:
- It’s winner-takes-all, runner-ups don’t get much of a return.
- It’s only applicable where LEGO can get the IP rights.⁹
- The candidates also go through a redesign — the finished set on sale doesn’t have to look anything like the submitted one.
I think there is still room for a similar platform in which the community takes full ownership. I’m almost certain that a site run by fans without artificial limitations develops a different dynamic and produces 10x or 100x the output of great models.
One could draw analogies to my article about Netflix vs. YouTube: The judgement power of the masses and the willingness to thrive of the many individual players will outcompete a (planned) central identity most of the time.
An Attention Booster & Expansion Stage
Remember this little ML App that went viral on Twitter a while ago?
How cool would it be if the App could tap into a vast pool of free instructions. An integration into our new platform would be beneficiary for both parties.
If we look a few years in the future, we can predict a step change in our business model. Just like Uber starts to make sense once the driver is automated away with self-driving cars, technology could replace a certain part in the value chain for the platform as well: In this case it’s selling 3D printers into every home that can download the instructions and print the needed bricks. Then the platform would offer a Nescafé Espresso-like model: Buy our printers subsidized and we make money on every printout.
3D prints would introduce a new kind of freedom to think of all different sizes and pieces — economies of scale are not important anymore. This brings us full circle: a product that fosters creativity, achievable for everyone. Just like the original LEGO was.
This is the fourth installment in my series in which I publish product concepts.
Why not keep the idea for myself? I believe in the power of open communication. There’s a great chance somewhere, someone has a related thought — if so, or in case you have other feedback, let’s connect and learn from each other. Contrary to public perception, ideas on its own are worthless if not paired with the right execution (hard).
[1] She is also responsible for the Nintendo Switch in our household. My father was big with PCs and saw consoles as a distraction to learn how to deal with PCs. Also I had to learn to type with ten fingers.
[2] Leaving aside environmental issues with plastic. For those interested, alternatives based on wood exist.
[3] The LEGO group is my goto example that the bad side of “shareholder capitalism” can also be experienced if the company isn’t publicly listed.
[4] I would love to see a massive online world game (or Metaverse as it’s called now) filled with all the license figures. The blocky aesthetics on the characters would make the different franchises feel cohesive and part of a bigger world. Also: Minecraft would have been a really great fit.
[5] For sure, if I’m someday somehow a millionaire, to gather the perfect LEGO town would be nice hobby where I would spend my money. Because you can share it with your children.
[6] Not that this hinders LEGO at suing competitors and fans left and right.
[7] Note that “decentralized” isn’t an architectural decision about Blockchain or Web3. It could help with distributing value to creators, though.
[8] I would not recommend charging per download because a PDF is very easily pirated.
[9] In theory this applies to the envisioned platform, too. But just like on YouTube, copyrighted material might fall through the cracks and built the initial critical mass of content.
