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PROFILE/1stjc/mark2nd BEN SULLIVAN Staff Reporter At heart, Steven Muellner is a salesman. He’s hawked potato chips in the midwest, vertical blinds in Santa Monica and now as president of Woodland Hills toy maker Applause Inc. peddles Grovers, Elmos, Darths and Tweeties by the shipload. With more than $150 million in net revenue in 1996, Applause is the nation’s top privately-held licensor of toys and accessories stemming from feature film characters. The company counts Disney, Universal and Fox among its partners, and has held rights to produce plush toys and plastic knickknacks for such merchandising wonders as “The Lion King,” “Space Jam,” “101 Dalmatians” and “Star Trek.” Q: Licensing of film merchandise is growing, to the point where secondary products often bring in more revenue than ticket sales. What’s driving this trend? A: Licensing in its current form began to take on a more serious tone within retailing in the U.S. about 10 years ago. Today it accounts for something in the neighborhood of half of all toys sold. The box office is now just one element, and probably not even the driving element, of the profitability of a film product. So going into a film that has high licensing probabilities, the studios are considering the profit from licensing as probably more important than the box office. Q: Walk me through the process. If a studio’s making a film with licensing potential, at what point are you called in? A: Each of the studios is really quite different, but all of them will bring in their licensing partners 12 to 18 months prior to the release of a film. Depending on the closeness of the partnership, it could be four years prior to the release of the film. We have a relatively strong relationship with the Disney folks, for example, and we have at least their preliminary schedule of movie releases going three to four years out. We don’t actually start working on those movies this far out, but we start the creative juices going, discuss with them characters and things like that. Q: Does the licensing potential ever affect the film itself? For example, making one character more cuddly because it’ll sell more dolls down the road? A: It does. I’ve heard of a very specific instance where (a studio) determined the hair would be longer on a female lead character because of the “playability” it would lend to the dolls that would then be sold. The initial concept was to have the hair shorter. Q: People complain about what a cut-throat group movie folk are. Do you have to be as shark-like? A: Much less so. I’ve yet to experience my first shark fest. My observation is that for all the talk of the industry being very tough, I notice that actors, writers, directors and musicians all flow fairly freely back and forth between one studio and another. The same is definitely true on the license side. I run into the same companies that might be holding a license for Warner Bros. and also for a Disney, Fox or Universal. Q: Does Applause hold licenses or just manufacture for companies that do? A: It’s done in both ways. We actually buy the licenses for almost all of our domestic business, but it changes dramatically when we go international. In international it is probably more likely that the specific distributor might buy the license for his particular country and then we serve as the manufacturing source for them. This is important because the purchaser of the license will have to meet a minimum number of sales. If Applause holds the risk, we have to meet a guaranteed number of sales. And if we don’t meet the number, we just have to pay the studio the difference. Q: When you buy the license to a product, what are you getting? A: One answer is we get the incredible consumer awareness that is tied to a Tasmanian Devil, or a Bugs Bunny or a Mickey Mouse or a Darth Vader. There is incredible consumer awareness around these characters because hundreds of millions of dollars of advertising effort has gone into building a built-in customer base. We basically are paying for the privilege of knowing that when we introduce a product there is immediate consumer demand. Do we have the right to carte blanche produce anything? The answer is a quite definitive no. When we get a license with any one of our licensors, it is very specific for products. It would be specifically written into the contract what it is we can manufacture and sell, as well as specifically in what channels. Many of our licenses go so far as to specifically name retailers across the United States that we can and can’t sell to. Q: What keeps the studios which already have their own retail stores in some cases from taking it one step further and manufacturing this stuff themselves and putting you out of business? A: They probably have discussions on that very subject once a week, or once a day. (laughs) What prevents the studios from doing the same thing? We have established relationships, methodologies and 165 sales people in the U.S. with established contacts and methodology for distributing our product. We have, in fact, a company, which for the studios to eliminate they would have to replicate. Any good business is designed around the principle of win-win. It is my assumption that as long as we make it more profitable for the studios to deal with us than to do it on their own, then this relationship will continue. If at some point they determine they can do what we do just as well and make more money without us, then I would expect them to make that decision and do it. Q: Why don’t you manufacture domestically? A: The costs are prohibitive. Most of what we do is hand produced. There’s really nothing that just gets cranked out in a machine. And because of the costs of labor in the United States you would be prohibited. (He holds up a plastic Grover figure). This piece was molded and then mass-produced in the color blue. Somewhere in China there’s a line of people that have five or six paintbrushes in their hand and five or six different paints on the table. They’ll paint the white stripe on the body, then use the other brush for the red stripe, then a slightly different color red for the bow-tie, and then another brush to paint the eyes. You can see the steps involved here. And even as good and efficient as people can get doing this, it’s time-consuming and would be very difficult to do in the United States. In fact you couldn’t do it. Q: Are there toy manufacturing opportunities in Los Angeles? A: There is no major toy manufacturer doing anything of any quantity in the United States today. That would suggest to me that the time has passed for any realistic opportunity for producing toys in America, and definitely for L.A. as well. If we were to start our business fresh today and had to decide where would we do our manufacturing, there’s probably a zero probability that we’d even consider California. Having said that, I consider this to be the perfect spot for a company such as ours to be located because of the access to the Hollywood film industry. SNAPSHOT: Steven Muellner Position: President, Applause Inc. Born: Minneapolis, 1950 Education: B.S. business & journalism, University of Minnesota; MBA Cornell University Career turning point: Earning MBA in mid-career Most admired person: Ronald Reagan Personal: Married, one daughter

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