A lot of attention has been given to tablets and gaming consoles these days. Tech news outlets are crammed with headlines about Apple Inc. (NASDAQ:AAPL)’s iPad, Google Inc (NASDAQ:GOOG) Android tablets, Sony Corporation (ADR) (NYSE:SNE)’s PlayStation 4 and Microsoft Corporation (NASDAQ:MSFT)’s Xbox One. The gadget and games market seems utterly saturated, leaving little room for new competitors to squeeze in.
However, two niche gadgets could unexpectedly make a mark in the tablet and console market: LeapFrog Enterprises, Inc. (NYSE:LF)‘s LeapPad Ultra tablet and OUYA’s Android-powered Ouya console. Let’s take a look at where these two products came from, and how they could claim a slice of this crowded market.
A kid-friendly tablet
LeapFrog Enterprises, Inc. (NYSE:LF) made a name for itself by developing tablet devices for children. The first generation of its LeapPad was released in 1999 and became a hit in specialty toy stores. Unlike mainstream tablets, the LeapPad had a robust build with no Internet access, making it an ideal first computer for young children. The LeapPad came with a pre-installed suite of educational and kid-friendly games. Additional proprietary software could be downloaded via a tethered connection to a PC or Mac.
LeapFrog Enterprises, Inc. (NYSE:LF) also designed a version of the LeapPad specifically for toddlers, which were shaped like school buses and featured books that could be flipped upwards. Another version was created for infants, which had a small cushion underneath the device that could allow the tablet to be comfortably placed on the parent’s lap.
In the summer of 2011, the company released the LeapPad Explorer, which included a camera to allow kids to take pictures and make their own movies. Many parents noticed the safe, educational value of the LeapPad Explorer, which cost $100, and Wall Street warmed up to the stock as well. Since the release of the LeapPad Explorer and its successor, the LeapPad 2, shares of LeapFrog have risen more than 120%. The LeapPad is sold on a classic razor to razor blades model, in which the tablet is sold at a very thin margin to drive sales of higher-margin software cartridge purchases.
Child-proofing the Internet
LeapFrog Enterprises, Inc. (NYSE:LF) is now getting ready to release the LeapPad Ultra, its first Internet-enabled device. The company has never released a tablet with Internet connectivity due to concerns that kids could use the devices to access inappropriate online content. To address these concerns, the Ultra can only access a “walled garden” of company-approved websites. The Ultra will retail for $150, and is scheduled for a summer release.
Although LeapFrog’s LeapPad has become increasingly popular with parents in English speaking countries, specifically the United States and the U.K., the company is still unprofitable. However, it is inching back towards profitability. Last quarter, LeapFrog Enterprises, Inc. (NYSE:LF)’s loss of $0.04 per share was a major improvement over the loss of $0.14 it reported in the prior year quarter. Revenue also rose 15.1% to $82.9 million. Both profit and revenue topped analyst estimates.