MAT Mattel Inc

Toy makers this year are planning a slate of toys that focus heavily on established brands and new technology, but the greatest innovation involves games that incorporate digital apps with physical components.

The newest lineup, presented over several days at the American International Toy Fair in New York City, showcased twists on classic properties like Connect 4 and Where's Waldo, as well as new launches like Jakks Pacific Inc.'s (JAKK) Monsuno action figures. But the greatest buzz centered on the social and casual gaming category, with a not-so-subtle nod to the emerging market for tablets and other touchscreen devices, which are influencing how Americans play games.

The tech innovations unveiled by behemoths Mattel Inc. (MAT), Hasbro Inc. (HAS) and many smaller players comes amid a challenging backdrop for the toy industry. U.S. retail toy sales declined 2% last year, to $21.18 billion, according to market researcher NPD Group, which said consumers spent more on higher priced toys at the expense of mid- to lower-priced items.

Industry executives concede the U.S. market has matured to the point where overall sales typically expand or contract by a percentage point or two. That forces toy makers to expand sales either through market share gains in the U.S. or by increasing sales abroad, particularly in emerging markets.

Games and toys that merge physical toys with Apple Inc.'s (AAPL) iPad applications were presented with great fanfare. Mattel's Apptivity allows users to place physical toys, such as a Hot Wheel or WWE wrestler, on the screen of an iPad and interact with a virtual game.

Hasbro is planning to launch three so-called "zAPPed" games this year, based on well-known franchises--The Game of Life, Monopoly and Battleship. The company also inked a deal earlier this month that grants it the exclusive license to develop and produce toys and games based on Zynga Inc. (ZNGA) properties, which include FarmVille and Mafia Wars. Hasbro says the agreement caters to how people now play games and how toy makers market and build brands to meet that shifting interest.

Toy makers also touted a slew of gear tied to a handful of blockbuster film releases this year, including "Battleship," "Brave," and "Batman: The Dark Knight Rises."

Danish-based LEGO Group, which reported a double-digit increase in U.S. sales last year, in January began selling Batman legos and will sell a line based on Marvel characters later this year to coincide with the release of "The Avengers." LEGO is also selling a "Lord of the Rings" collection for the first time this year.

Soren Torp Laursen, president of LEGO's American division, told Dow Jones Newswires the company was also aiming to address the girls market this year with the launch of the LEGO Friends line that includes mini-doll figures that can be customized. Roughly 85% of LEGO's sales in the U.S. are to boys, so the newest line is the company's way to target a broader girl audience, said Laursen.

Tech-focused innovation remained a key driver of new product launches this year. Li & Fung Ltd.'s (LFUGY, 0494.HK) Techno Source division, for example, showed off the Kurio--an Android tablet that allows for parental control but still gives parents and older siblings full access to the device's features.

Some toys lines unveiled this year were built with a specific play pattern in mind. Jakks Pacific's new Monsuno line began as a metal, diecast core that was eventually weaved with a character-based storyline that will be featured in an animated television show airing later this month. Monsuno is the first line Jakks Pacific is launching in which it will own the entertainment content.

Jared Wolfson, a marketing director at Jakks Pacific, said kids could play with the action figures even if they didn't watch the show, though he said the television content is important to help drive the brand's relevance in various international markets.

Anita Frazier, an NPD Group analyst, said while the toy industry saw less innovation in 2011 than in prior years, she expects toy companies will continue to develop toys that work with apps or are accessories for app devices. She said the industry can also remain relevant in a digital world by selling more building sets, as they offer a play pattern that is more difficult to replicate with a digital substitute.

-By John Kell, Dow Jones Newswires; 212-416-2480; john.kell@dowjones.com

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