Transformers Boosts Competition in Toyland

That's because product tie-ins based on movie characters ranging from plastic action figures to multimedia games have propelled earnings growth for some time. Now the companies are scrambling to keep it going as they find new competition on the lower end of the business from one of their biggest allies: Toys"R"Us, which is pushing its own line of private-label toys.

The toy industry is serious business. The NPD Group, which tracks the industry, said toy sales worldwide grew nearly 5% in 2010 to $83 billion, with the U.S. market contributing $22 billion.

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The convergence of toys, media and, entertainment have Mattel and Hasbro competing for licensing agreements from movie studios such as Viacom's (VIA) Paramount Pictures, which made the Transformers series, and Disney/Pixar (Walt Disney (DIS)), which made the Cars movies.

In the case of Transformers: Dark of the Moon, which grossed a staggering $400 million in its July 4 weekend opening, both firms have issued toys, games, and interactive videos.

Representative of the expansion into multimedia, Longbow Research, which initiated coverage of Mattel on May 18 with a "buy" rating, said the company's "Monster High intellectual property," launched a year ago, is "arguably the company's biggest bet in decades."