LeapFrog pins hopes on a pen-shaped computer for 'tweens'

By Lauren Weber
Newsday

About a decade ago, Michael Wood was a California lawyer who couldn't find a good toy for his toddler son. So he did what any good father does: He invented one.

His tinkering led to LeapFrog, the Emeryville, Calif.-based company that single-handedly invigorated the market for electronic learning toys with its popular LeapPad system.

But now, after 1 1/2 years of uneven sales, the company has seen its hold on the market weaken dramatically. Other companies have entered the market, and traditional names such as Fisher-Price have similar products.

At the same time, electronics makers see in toy consumers a way to expand their sales beyond grown-ups and are repackaging such things as cell phones to appeal to kids.

LeapFrog, proficient at combining toys and technology, is trying to revive its fortunes with a daring new bid for a youth segment far removed from its preschool audience: the fickle "tween" market of 8- to 12-year-olds.

Last month, LeapFrog unveiled its Fly pen-top technology, a pen-shaped computer that, when applied to special paper, can make music, calculate sums and even translate English into Spanish.

A tiny camera in the pen recognizes and responds to markings on the paper. Draw a rectangle with some lines and you've got a piano. Tap the "keys" and the computer plays notes. Select the translation function, write a word and the computer "speaks" it in Spanish.

The pen will be available in the fall for $99. Paper will be sold separately.

The question is whether the gadget will capture enough kids' imaginations to propel LeapFrog out of its slump.

Last week, the company reported a loss of $8 million for 2004 — down from a profit of $73 million the previous year. Sales slipped 6 percent.

Investors have lost confidence, bidding LeapFrog's shares down 77 percent since October 2003.

"They're a victim of their own success," said Sean McGowan, a toy industry analyst at Harris Nesbitt.

"They went from nothing to 80 percent market share in about four years," but that success sparked imitators and a host of innovations from rivals, he said.

LeapFrog acknowledges as much. "You're going to have competition when you create something so successful," said president Jerry Perez. He argues that LeapFrog still can hold off rivals.

"We know how to make it fun and interesting for a child to learn."

But McGowan said the situation, complicated by distribution problems at the company, will get worse before it gets better.

"One of their big challenges is that success came so much stronger than everyone expected. They got this explosive base of LeapPads. But once you have one, you don't really need another one."

As for the Fly, "it's a very fascinating technology," he said. But "I'm not sure that (the initial version) is going to set the world on fire."

LeapFrog is hedging its bets. "We've been very careful to not focus on Fly as the only thing we've got going," said Perez. The company is also pushing its

L-Max Handheld system and some new LeapPad items.

If the Fly does take off, LeapFrog has learned the hard way to look over its shoulder.

"We certainly always plan that we won't be the only ones in a market at a certain point in time," Perez said. "It's all a question of whose content is the best."