__ Ralph Osterhout knocks himself out to make bots for tots - and brats, spies, and troublemakers. __
Walk into the offices of the Osterhout Design Group, a cluttered loft of high tech toymakers in San Francisco, and you feel young again. Well, to be more exact, you feel 8 again, because your first impulse is to grab everything in sight and start jumping around like a ninja munchkin. The tools of troublemaking are everywhere, planted by the company's 53-year-old founder and chief hell-raiser, Ralph Osterhout, who gleefully describes his role in life as "benign anarchist."
Hanging from a pegboard is the fabled Yak Bak. The first $10 plaything to incorporate solid-state sound-recording microchips, this little burp machine sent the toy market into convulsions when Osterhout introduced it a few years ago. Nearby is the Mega Mouth, a new pocket-sized, battery-powered bullhorn. Scattered all around are Osterhout's amazing toy pens. They shoot laser beams, let you play alien war games on a tiny LCD, and scrawl invisible-ink messages that can be read only with an attached infrared light. A beta model of the bizarre Blabber Mouth pen is topped by the head of a smart-alecky character whose lips animatronically move to mock whatever you say.
Osterhout has been making stuff like this since he burst onto the toy scene in the early '90s. He arrived, as he sees it, with the perfect résumé: He was a refugee from the covert world of high tech weaponry. His inventions were all about racket and fun, they usually weren't educational, and they helped revolutionize the business by taking electronics technology widely used in the military - miniature recording chips, tiny radio-frequency receivers, infrared detectors - and working it into products that clicked with kids all over the world. Hasbro, Mattel, Tiger Electronics, and Yes! Entertainment all scooped up designs from Osterhout's company, Machina, and he emerged as one of the hottest designers in toydom. At its peak, in 1996, Machina generated $12 million in yearly revenues, employed dozens of the best industry engineers, and even caught the eye of Hollywood. Steven Spielberg called to pick Osterhout's brain about the latest trends in tech toys. The William Morris Agency signed him up for potential alliances with film studios hungry for sexy movie gadgets.
Then, alas, it all tanked. Osterhout's conceptual brilliance wasn't matched by his business skill, and last May, Machina flamed out in a spectacular bankruptcy. There were rumors of mismanagement, missed deadlines, missing paychecks - and the reality of a disastrous product recall. Buried under a mountain of debt, Osterhout was forced to pull the plug on his shop.
But - hey kids!- he's back, mounting a new assault with his Osterhout Design Group, launched just after Machina went under. The company is skimpily underwritten with $14,000 of Osterhout's own cash, but he is already talking big, churning out ideas for next-generation digital playthings. He's promising better-than-Furby dolls and action figures that interact with eerie realism and striking intelligence, along with more of his cheap, ingeniously designed miniature communicators. The Blabber Mouth, ODG's first new product, is hitting store shelves in time for Christmas. But that, Osterhout says, is just a glimpse of what's behind his magic curtain. "We're going to be huge in 2000," he says.
Can the big brat do it again? Plenty of people worry about his ability to manage a company. But few question Osterhout's brilliance. "He's a dynamo," says Howard Bollinger, senior vice president of product concepts at Hasbro. "You can take the most way-out idea, something you didn't think was possible, and Ralph will figure out how to do it."
Fast, cheap, small: That's the basic formula for success in 10-buck toys. On a balmy morning in the cramped ODG quarters, where powder residue left by construction workers still coats the floor, Osterhout is explaining these facts of life to a group of four designers in their twenties who are brainstorming concepts for a toy airplane. A ponytailed guy launches a makeshift balsa-wood plane while Osterhout lectures, commands, beseeches. Sitting at the head of the table, he cuts a fatherly figure, with his neatly trimmed hair, softly rounded face, reassuring voice, and the pullover sweater vest he wears most every day.
Osterhout is ailing - he has a mild case of pneumonia - but that doesn't seem to faze him. He's hemorrhaging arcane toy information, peppering the engineers with questions that he usually ends up answering himself.
What should we make the wings from? Pause. "Expanded polystyrene," he barks, "probably 2-pound density." What about the switch? Someone suggests using a solenoid instead of a servomotor, but Osterhout is incredulous: "You need to have a religious awakening, my friend. Nobody uses solenoid."
And the fuselage? Everyone's still thinking about it when Osterhout brays, "A plastic straw" - it's light, it's moldable, and (the clincher) it's inexpensive. Osterhout figures the plane has to cost less than $4.50 to make. Still, setting aside 80 cents for the motor, 83 cents for the capacitor, 60 cents for the box, a dime for the propeller, and a nickel for the switch, the total is already almost $2.40. "And we don't even have a plane yet!" he whines.
Such is the everyday reality of cheap toys, where every penny looms large - because every year the toys have to be more sophisticated and still go for $10 to $20. The situation wasn't so tricky before people like Osterhout came along and started juicing things up. "Kids keep getting older at a younger age," says Dave Capper, a general manager at the toymaker Sound Bites, who notes that as early as age 6, young fun-grabbers are already abandoning stationary dolls and mute action figures to demand playthings that come alive with electronic movement, sound, interactivity, and special effects.
Electronic toys now account for more than half of the $20 billion toy business, and the tech-toy gold rush has set off a mad scramble involving market leaders Hasbro and Mattel, subsidiaries like Tiger and Sound Bites (both owned by Hasbro), and a handful of independent players like Playmates, Bandai, Radica, and Takara. "The toy companies are all screaming for cool tech that they can sell at the magic price," says Osterhout. "They're desperate."
More and more, big companies are relying on independent inventors to bring them ideas. More than half of all toys come from these hired guns, some working in basements (like Furby's creator, Caleb Chung), others in modest lofts like the one that houses ODG. The major companies typically can't hold on to the best tech-toy designers, who often go freelance ASAP so they can lock down lucrative royalties. There are now about 200 active inventors and design groups filling the pipeline, though the top 10 percent generate most of the action. Over the past five years, Osterhout has usually been high on the list in terms of toys produced and revenues generated.
Colleagues point to several things that make him stand out. While many toy engineers specialize in one technical feature (sound chips, for example), Osterhout - whose engineering skills are self-taught - is a Renaissance geek. "His range of knowledge on all things technical is unbelievable," says Hasbro's Bollinger, and this has enabled Osterhout to broaden his line to include sound toys, LCD visual toys, toys that communicate by radio frequency, and toys that fly.
Moreover, Osterhout has an uncanny knack for pushing his inventions through the clogged toy-industry idea chute. Most independents never get near the big CEOs, but Osterhout is on a first-name basis with all of them. His ability to cite specifics on manufacturing costs and sales projections helps close deals, but first he warms them up with pranks, jokes, wild-eyed ideas, and tales of his life in espionage.
"If you're the president of Playmates, you can go into a boring executive meeting, or you can talk to Ralph for half an hour," says Olivier Beraut, former COOand executive vice president at Machina. "What are you going to choose?"
Osterhout's greatest strength may be that he knows, instinctively, what kids want. To some extent, he's still living out his own childhood. He talks about it publicly and often, seeming to thrive on the fact that he had a rough time growing up.
"When I read Great Expectations, it was upbeat to me," he says. The son of a manic-depressive woman who was married five times, Osterhout spent part of his early childhood in the Seattle area shuttling in and out of a foster home and a state-run child facility. When his family moved to Santa Cruz, California, in the late 1950s, he endured "emotional hardship and physical unpleasantness" at the hands of a stepfather who was "not a very happy guy." Osterhout mutated into a brainy lone wolf, amusing himself with homemade slingshots, rockets, tube radios, and a pellet gun that he kept buried behind the house. He'd dig it up every so often, wander into a nearby park, and let off steam by shooting at small, defenseless critters.
Osterhout is convinced that his entrepreneurial spirit was forged in this surreal environment. "I wouldn't advocate a rocky childhood for anyone," he says. "But I would say that it causes you to be more independent, and to let your mind race." His imagination often zoomed him into the world of Ian Fleming novels; he saw himself driving the James Bond cars, visiting the exotic locales, using the gadgets.
But Osterhout didn't leave those fantasies behind as he reached adulthood. At age 22, when he was starting his first business - producing underwater equipment - he took several trips to Europe and tried to relive the scenes and experiences of Fleming's novels. "I stayed at the same hotels, went to the same restaurants and villages, smoked John Player No. 10 cigarettes," he says. "I even had blowguns under my car seat."
Osterhout and a friend decided to build a miniature one-person submarine - similar to subs he had seen years earlier in the Bond film classic Thunderball. Osterhout launched a company called Farallon, sold a prototype to the Navy, and soon got noticed outside the industry. In 1971 Playboy ran a photo of his minisub, flanked by topless women. With a second-generation company called Tekna, Osterhout used injection-molded plastic chassis to give his submersibles greater speed, then proceeded to make other products for the diving industry, pioneering the development of colorful, injection-molded plastic scuba gear like masks and fins. He designed the first digital depth gauge for diving. His vehicles also appeared in the later Bond movies The Spy Who Loved Me and Never Say Never Again. Osterhout was living out his fantasies. And Tekna was taking in about $14 million in annual sales at its peak.
But one of his former employees at Tekna, Lou Slocum, says Osterhout was already starting to exhibit the lack of focus that would resurface in subsequent business ventures - overspending on certain projects and letting products go out the door with technical glitches. "Ralph is someone who spends a lot of time putting out fires," says Slocum. "And if you look closely, you see that he's the guy who caused the fire to begin with."
Not that these tendencies slowed him down long: Osterhout was soon diving headfirst into his next adventure. By the mid-'80s, Tekna's products attracted the attention of the Navy Seals, who asked Osterhout to help design high tech underwater military equipment. He quickly moved from underwater to underground, setting up a division called S-Tron that was sealed off behind code-locked doors. In this top-secret environment, Osterhout designed a laser vision system that enabled Seals to emerge from the water in darkness ready to start shooting, using night-piercing scopes. He also developed the first molded-plastic, airtight, and watertight night-vision goggles, which were used in Operation Desert Storm.
Osterhout loved the cloak-and-dagger stuff and sometimes went out on exercises with the Seals. He claims that a contingent of Seals once took him to a training-center "kill house" to try out some of his laser-aiming gun sights - on him. After sitting Osterhout down on a couch with an array of targets behind him, they told him not to move. Then there was a blinding flash of light and machine-gun fire.
"And then I saw that all the targets behind me had their heads shot off," he says. "It was amusing."
By the late '80s, Osterhout was restless. "The Cold War was ending, the defense industry was shrinking, and I was ready to move on," he says. He dabbled in a variety of products, but he was soon drawn to the toy market, founding Machina in 1990. The attraction was money.
His first design for Tiger Electronics, the $20 Talkboy FX, had a tiny solid-state memory and voice-recording chip built into a pen. "It was a breakthrough product in the industry," says Tiger president Roger Shiffman, because it was the first to bring digital recording technology to low-cost toys. In 1995 it sold a million units during a 45-day introductory blitz.
Osterhout also designed a credit card-sized audio recorder targeted to adults. But then he learned, from a friend, that the recorder had been a hit with the man's kids during a long, monotonous car drive. "For five hours, the kids recorded burps, farts, and insults," Osterhout says. "I knew I had a winner on my hands."
That was the genesis of the Yak Bak - a colorful, palm-sized recorder that incorporates goofy sound effects and voice distortion. He built it for Yes! Entertainment, the fast-rising toy company headed by former Worlds of Wonder chief Don Kingsborough. The Yak Bak did $38 million in sales its first year, and Kingsborough soon decided he couldn't get enough of Osterhout. The two men were kindred spirits: dynamic entrepreneurs with big dreams, lively imaginations, and mischievous streaks. When Osterhout wanted to sell Kingsborough a water gun, he squirted him in the pants, and Kingsborough laughed and bought the gun.
One of the few times Kingsborough ever tried to say no, Osterhout recalls, was when the toymaker brought him an ordinary-looking toy car.
"You're going to buy this," Osterhout said.
"No, I'm not," Kingsborough replied. Then the car rolled forward, its roof split open, and a tiny plane rose up from inside; the plane's wings automatically folded out, and, powered by a spring motor, it lifted off and soared past Kingsborough.
"I'll take it," Kingsborough said.
Machina became, in effect, the R&D arm for Yes!, producing scores of toys while also continuing to work for Hasbro, Tiger, Bandai, and others. With steady financing coming in from a flagship client, Osterhout expanded Machina dramatically.
By 1996, Machina was inventing toys at a startling rate. "Most inventor groups sell 1 or 2 toys a year, but we were selling 30 to 40 our first couple of years," says former staffer Phil Neal, now of Klistner Industrial Design.
The stuff Machina didn't sell was perhaps even more impressive: Osterhout had all kinds of radical toys on the development table, from matchbox-sized cameras to night-vision goggles for kids to eye-projection TV in a pair of wraparound shades.
"It was the wildest three years of my life," says Neal, echoing others, some of whom referred to Machina as "the pirate ship Osterhout."
Osterhout's chaotic personal life - he has been married four times - sometimes spilled into the office. But his enthusiasm was contagious. When the team was developing a particularly exciting new toy, recalls one staffer, Osterhout would shout, "This is going to be so cool it will make grown men want to touch themselves!"
Amid the chaos and growth, there were signs of trouble. Several former Machina staffers say Osterhout spent money too freely and occasionally mismanaged projects. In one particularly embarrassing episode, a new Machina "cardcorder" was featured on the cover of the Sharper Image catalog - but because of product glitches, the device couldn't be delivered as promised, and Sharper Image had to reprint.
Machina's downfall came with a toy called the V-Link. It seemed like a breakthrough concept. Osterhout reasoned that if he could somehow modernize the old-fashioned walkie-talkie - making it seem more cool, like a cell phone - then info-age kids would gobble up the product. So he designed a 900-MHz radio frequency device that looked exactly like a flip-top phone and added phonelike features, including voicemail. If both you and a school pal had a V-Link, you could punch in his PIN and it would ring him - and if he didn't answer, it took a message. "It should have sold millions," says Osterhout.
Instead, the V-Link was an Edsel. The product was slow in development, partly because Osterhout kept adding more features - not just voicemail, but party line, redial, and so on. That jacked the price up to $80. But the real problem was that Yes! was in a hurry to get the V-Link on store shelves for the 1996 holiday season and shipped it before getting the FCC approval required for all communications devices. When the FCC got wind of it, Yes! was forced to recall the V-Link in the midst of the Christmas onslaught. The toy line never recovered - nor did Yes!, which suffered deep losses that began its slide toward eventual bankruptcy.
Yes! canceled the remainder of its contract with Machina in early 1997. At that point, says Osterhout, "our earnings vaporized." He claims to have sunk hundreds of thousands of dollars of his own money into Machina, but he still couldn't produce paychecks on time - which led to a mini-revolt by some staffers. By May of this year, the fun factory was forced to close its doors.
True to form, Osterhout didn't stay down long. Less than two weeks after Machina's demise, he was back in business with his new firm, though on a much more modest scale. He launched Osterhout Design Group with used furniture and computers he'd acquired through friends, and a handful of holdover designers from Machina. "People who hadn't been paid on time, who had been through the whole awful experience at the end of Machina, were still willing to follow him," says ODG animator and systems manager Dan Haddick, who was one of them. "It's hard not to believe in him."
Osterhout's crash-and-burn episode with Machina hasn't shaken the faith of his true believers outside the company, either. His agent at William Morris, Paul Bricault, still has big Hollywood plans for him. Bricault wants to hook him up with directors and screenwriters in need of gadget ideas, then use him as bait to get major toy companies behind a film. "Hasbro is going to be more interested if we've got a movie and Ralph is attached as the toy designer," says Bricault.
(Osterhout shrugs at this kind of talk from Tinseltown. "It sounds good, but I'll believe it when I see the signed contracts," he says.)
What's more important is that the powers in the toy industry are still behind him - and are lining up to work with ODG. "This is a business that forgives mistakes quickly if you can come up with the next hit," says Tiger's Shiffman. Hasbro's Bollinger adds: "Ralph's ability to succeed is not tied to Machina or any other company. It resides in his brain. One great idea. Boom! That's all he needs."
Osterhout will unveil what he hopes is that next Great Idea - or rather, several of them - at Toy Fair 2000 in February in New York. He and his team have been tinkering away in the ODG labs, turning more of his childhood fantasies into real-world prototypes that the big toy companies then turn into must-haves.
With kids demanding ever-more sophisticated communication devices and feature-packed tech toys, Osterhout hopes to stay ahead with clever technologic innovations. He's convinced that the future of the industry "is all about ultrarealism." He promises that his next-generation action figures will have mouths that form words more realistically, eyes that subtly change expression in accordance with what the doll is saying, improved sound chips to produce more natural voices, and built-in sensors that enable the doll to respond to a range of stimuli. For example, it will start talking whenever a person nears, or coo reassuringly when the room goes dark. Osterhout says the dolls "will become more like a living friend to kids." While the first products made from ODG's designs won't roll out until late next year, Osterhout's engineers have already created the algorithms and designed the circuitry needed for the more lifelike animatronics.
Also on the conference table at ODG sits a plaything that Osterhout is bringing to life in time for Toy Fair: an action figure wedged into the front seat of a red, battery-operated race car. "Watch this," he says, as he turns on a nearby TV. An action cartoon starts playing onscreen. When a character in the show cries for help, the action figure's car revs up and starts racing around the table. Unlike toys such as Microsoft's ActiMates Barney, this one responds to data embedded in broadcast signals, so it doesn't require any extra hardware or a set-top box.
Meanwhile, Osterhout continues to come up with more communicators that will let kids make mischief by way of the latest miniaturized wireless technology. At Toy Fair, another of his innovations will show up in the form of two-way radios that he says will be "much smaller and more covert" than walkie-talkies.
And later next year he plans to roll out yet another crazy spy pen. Currently in working prototype for Hasbro, it transmits written messages across the room, with the note from your ballpoint appearing on the tiny LCD of your pal's pen. Osterhout smiles as he envisions class clowns everywhere beaming virtual notes and driving teachers to distraction. Will he ever grow up? "I don't plan on it anytime soon."
