I've Seen The Future of Kids' Entertainment, and It Belongs To Misha Lyalin

By Sarah Lacy , written on March 29, 2012

From The News Desk

I almost walked out of the best interview I did in Russia.

Misha Lyalin and I did not immediately hit it off. At all. It didn't help that I didn't do as much homework as I should have on the company, that I felt like a hundred year old embalmed world leader, and that neither of us had slept much in the previous 24 hours.

Lyalin is the CEO and chairman of ZeptoLab -- makers of the insanely popular (100 million downloads and counting) Cut the Rope games, where a sophisticated physics engine and your finger conspire to feed a near-endless supply of candy to a monster named Om Nom. He made a series of bold statements like "we're competing with Disney" and "the TV is dead" and "100% of people play our game" that first hit me as arrogant and, for a journalist, pretty useless.

So I called him on it. I told him I wanted to hear the story of the company, and he said, "That's already been written everywhere. You could go to TechCrunch or BusinessInsider to read that. That's not what you write." Throwing my own arrogance back at me: Well played, Sir.

So rather than leave, I put the notebook down and apologized and suggested we start over and just have a real conversation -- 100% off the record. And it was one of the best I had in Russia. Lyalin and I talked for more than two hours in a frank conversation about the challenges and opportunities of being a small Russian company with an entertainment tiger-by-the-tail and millions of dollars in potential funding, partnerships, and acquisitions banging down his door. Lyalin sees his mission as very simple: Protecting the two twins who started the company, who don't want to sell and don't want to leave Russia -- they just want to make cool games.

I came away impressed and rooting for them.

But more than that, I came away with the view that properties like Angry Birds, Cut the Rope, and possibly Moshi Monsters are disrupting old media entertainment in a dramatically bigger way than things like Napster and YouTube have before. Why? Because kids go absolutely apeshit over them. That scares more than just Electronic Arts: That scares Hasbro, Mattel, ToysRUs, and Disney.

Kids' entertainment is different for three reasons:

1. The astounding quality of Pixar aside, particularly its upcoming film "Brave" that's powered by $100 million in new proprietary software, sometimes its the most simple stuff that resonates the most. It's awful, but consider Barney, shot on a crappy sound stage, and kids love it. While not for kids, consider how powerful the most simple animation like SouthPark can be. It's all about the writing and being cute. Kids' entertainment just doesn't require the sophistication of a Hollywood blockbuster.

Games like Angry Birds or Cut the Rope are simple, adorable, and convey a realm of emotions kids can relate to. Frequently, that's enough.

I was at a dinner with Hollywood super agent Ari Emmanuel last year, and he talked about the day he stormed into his office, demanding his staff find whoever was behind Angry Birds, because it was a phenomenon his kids couldn't get enough of. He knew it was the next huge content brand. Only problem? Peter Vesterbacka was behind it, and he has refused to do a deal with Hollywood.

Sure, there will be an Angry Birds movie. But Vesterbacka doesn't want it to go through the normal machine. Ditto with toys. Vesterbacka is hoping to open his own retail stores in China a la Apple. And when he finds bootlegged Angry Birds merchandise in China, he loves it. It proves how powerful the brand is. It doesn't cannibalize his business, because he is in a different business that doesn't need to give a dollar to middlemen, who help profit from the brand's toys, games, movies, and appeal. The market hasn't yet proven whether Vesterbacka is right or wrong: But the potential is terrifying for Hollywood gatekeepers.

2. IPad vs. TV. I've never been very sympathetic to the idea that people will cut the cord on TV for one simple reason: I just love TV. The TV in my living room is so big, people high-five my husband when they walk in the house. You have to move your head from left to right to follow the pitch during a ballgame. When former gadget reporter Greg Kumparak came in my living room, he winced at its size. In case you aren't getting the picture, it's big.

When I want a break from work, I like the immersive, passive experience of TV. But that's because I'm old. But kids love to interact. They want to touch, hug, grab, and take things to bed with them. We've all seen how kids are captivated by iPads, how naturally the interface comes to them. The only things that seem to transfix kids more than a big glowing TV screen is one they can interact with and control. And yeah, sure, a steady diet of video games isn't great. But most parents would take something kids can interact with over sitting in front of a dumb, passive TV screen.

So iPad has an advantage over TV, hands down. And getting content on the iPad doesn't need gatekeepers. You don't need agents, you don't need a deal, and you don't need to sell some fat, white man in a corner office on why kids would love your show. You just need to hop through the comparatively minor hoops of the App Store. Score another one for the cartoon apps and games.

3. Kids' entertainment isn't just about animation. Animation is only the start. It's about the whole multi-billion dollar ecosystem. Ever since the phenomenon of Angry Birds, the talk of toy-expos has been the next great app. Moshi Monsters hit it big once it went physical with magazines and toys that were advertised in Toys "R" Us ads during the Holidays last year. Toy-makers have swarmed around Plants v. Zombies and Cut the Rope too. In response, ZeptoLab recently hired Tanya Haider, former SVP International Consumer Products at Nickelodeon & Viacom Consumer Products, as their head of licensing and merchandising.

What makes the kids market so lucrative is it's not just a TV show. It's not just a movie. It's the whole ecosystem of entertainment. Kids want the action figure, the backpack, the Happy Meal, and the theme-park ride. There are dozens of little touch points, where parents pay for a brand experience and the brand experience is highly emotional. It gets back to kids' hunger to interact with something they love. What Angry Birds and Cut the Rope are both trying to do is take control of and democratize that part of the equation too.

It's a dramatically new way of doing business that most toy makers don't get. In the past, the industries have been tightly coupled. The most ludicrous example in recent years was "The Pirates of the Caribbean" movies, created solely to make the ride more relevant. And the movie has nothing to do with the ride. The most egregious example from my youth was He-Man, a show entirely conceived by Mattel to sell action figures. Astoundingly, it worked. I watched it and loved it, and my brother had all the toys. It still has an emotional pull. If you were born in the 1970s, I dare you to watch this and not experience a wave of delicious nostalgia.

Disney isn't making all those Pooh Bears. Jim Henson Studios didn't make those Muppet glasses I got at Burger King. Why would they? That's what an industry based on licensing allows. But these companies are born in a modern age of merchandise knock-offs.

This is where apps like Angry Birds or Cut the Rope have a stranglehold on anyone who markets to children: If brands are being created in the App Store, they have a direct line to kids. Do they really need Mattel, Hasbro, Disney, and Dreamworks? They don't trust them. "Why enter into a marriage, if you know it'll only end in divorce?" says Lyalin. (There were a lot more reasons for his mistrust, but that all falls into the off-the-record bucket unfortunately.)

These companies are creating original content. But make no mistake -- if they succeed, they disrupt a lot more than just Hollywood.

Photo credit: Geoffrey Ellis