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Wall Street Journal, June 27, 2000
By ROBERT JOHNSON
Staff Reporter of THE WALL STREET JOURNAL
The Labowitz brothers are finding success in selling toys to people who won't play with, or even unpack them -- to say nothing of letting their children do so.
Based in Los Angeles, Aaron Labowitz, 31 years old, and Jason Labowitz, 29, are the founders and owners of Entertainment Earth, an Internet retailer of toys with a difference: It makes a profit.
Entertainment Earth, which specializes in action figures, expects sales to double this year to about $3 million with pretax profit margins of roughly 20%. It is thriving at a time when the overall toy market has found the Web tough going.
Walt Disney Co. closed down Toysmart Inc. in May, pulling the plug on the online toy retailer just nine months after acquiring a majority stake. Similarly, Viacom Inc.'s Nickelodeon unit turned off the lights at its Red Rocket retail toy site last month.
So what is different at Entertainment Earth? "The main thing is that Jason and I know our niche market so well because they're just like us: People who love to collect action figures," says Aaron Labowitz, who holds a bachelor of arts degree in finance and entrepreneurial studies from the University of Southern California and the company title as chief executive.
Jason, a graduate in prelaw from the University of California at Santa Barbara, is Entertainment Earth's president. He and Aaron personally own more than 1,500 plastic action figures apiece -- from Jackie Chan to Darth Vader.
He says, "We're the place for the 25- to 35-year-old action-figure collector who doesn't go to toy stores. He wants figures in the original box that are in such mint conditions they have never even had a price sticker."
Bill Jensen, executive editor of Playthings Magazine, a New York-based monthly that covers the toy industry, says Entertainment Earth's Web site is especially inviting to collectors. Clicking through the Labowitz's inventory on a recent day, he says, "They offer hard-to-find items such as the 12-inch 'Defense of Naboo' figures from the latest 'Star Wars' movie last year."
Entertainment Earth features action figures based on movie, sports and rock music that are manufactured mainly by such major companies as Mattel Inc. and Hasbro Inc. The distributor is also aggressive about ordering new products from such smaller manufacturers as Todd McFarlane Productions Inc. -- creator of superhero "Spawn."
When a niche action figure is released by a manufacturer, Entertainment Earth often orders a small batch, say 50 cases of 12 action figures each, compared with the 2,000 cases of a mainline figure from, say, "Star Wars," that it would order. Even if the 50 cases sell out overnight, the company often doesn't reorder.
Jason Labowitz explains, "We'll wait to see how demand shapes up for something that may have relatively narrow appeal. We have to be constantly aware that this is a niche business, and no one really knows the size of that niche."
Knowledgeable people in the toy industry say that although the sales of action figures grew about 20% to $1.1 billion last year, and account for about 15% of the overall U.S. toy market, there are little data on what percentage of sales go to adult collectors.
"We aren't a toy retailer going after the mass market. We don't spend on television or radio marketing," says Aaron Labowitz. He estimates his typical costs for acquiring one customer at $14, less than one-third the amount that is average for Internet retailers.
Once acquired, Entertainment Earth customers can be unusually loyal. "Their service is so good that I don't even shop the Web for alternatives," says Jochen Till, a 25-year-old college student in Munich, Germany, who says he owns about 300 action figures -- mostly characters from various "Star Wars" movies. He adds, "Everything I buy from Entertainment Earth is always in mint condition, with unopened packaging, which is very important to me."
In fact, Entertainment Earth's most distinguishing marketing pitch is its money-back guarantee if toys aren't pristine when received. "Mint condition means that even the box containing the action figure is that way. The cardboard mustn't have little dents or worn corners," says Zane Lubin, a business consultant based in Burbank, Calif., who advises the Labowitzes.
Mr. Lubin says the simplicity of Entertainment Earth's operation is also unusual for a young retailer with its sales volume. Consider that the recently defunct Toysmart had 170 employees, who produced sales of a mere $6 million last year during the critical Christmas season -- only about twice the total expected by the Labowitzes for all this year, using just seven workers.
"They haven't spent much time on a business plan. They buy mostly on cash they take out of the shoe box, and they put it back when they sell something," Mr. Lubin says.
The brothers opened Entertainment Earth in 1996, storing their inventory in Aaron Labowitz's garage. Although Jason had studied Web site programming, he says, "I had no industry contacts and no knowledge of the toy and collectibles market, except what I had learned from a customer's point of view."
They had both started collecting "Star Wars" action figures and later branched out into wrestling. That was the way Entertainment Earth's action-figure lineup diversified too, most recently into such rock 'n' roll figures as Janis Joplin and the Beatles.
Their dream for Entertainment Earth is to eventually manufacture some action figures. "There's an endless supply of ideas for new ones from books and movies." One possibility: Characters from J.R.R. Tolkien's "Lord of the Rings" fiction trilogy.
The most coveted customers, says Jason Labowitz: "People like me. I just have to have them."