CSP2013C Team 4

Capstone Strategic Project
MSMIT CVILLE Team 4
Dave Epperly, Prashanth Lakshmikantha, Stephen Vanaria, Chandan Verma, Rob Wald
June 22, 2013

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Honor Pledge
“On our honor, we pledge that all material in this document is original content written by ourselves, with the
exception of specific sentences, images, and ideas that were discovered or provided to us in the course of
our research and that are explicitly footnoted or cited to indicate their source. We understand that a breach
of this pledge by failing to indicate the source of each specific idea, image, or sentence that we did not write
will result in a failing grade.”
CVILLE Team4
June 21, 2013

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Contents
Capstone Strategic Project........................................................................................................................... 1
Honor Pledge ............................................................................................................................................... 2
1.0 Company Information.......................................................................................................................... 5
1.1 Founding and History....................................................................................................................... 5
1.2 Ownership........................................................................................................................................ 5
1.3 Company Structure.......................................................................................................................... 5
1.4 Customers and Key Products........................................................................................................... 6
1.5 Company Stated Strategy................................................................................................................ 6
1.6 Brief Financial Snapshot.................................................................................................................. 6
2.0 Industry Analysis ................................................................................................................................. 7
2.1 Industry Classification...................................................................................................................... 7
2.2 Business Models and Strategies in Kids’ Tabs and Apps.................................................................. 8
2.3 Rivals............................................................................................................................................... 8
2.4 Substitutes ...................................................................................................................................... 9
2.5 Competitive Analysis: The Five Forces ...........................................................................................10
2.6 Industry Forecast...........................................................................................................................11
3.0 Strategic Analysis..............................................................................................................................12
3.1 Assessment of Strategy: Market Position ......................................................................................12
3.2 Strategy: Concisely Stated.............................................................................................................14
3.3 Major Customer Segments, Differentiation, and Effectiveness......................................................14
3.4 Assessment of Strategy: Most Attractive Segment ........................................................................16
3.5 Assessment of Strategy: Strength and Differentiation...................................................................16
3.6 Assessment of Strategy: Sustainability..........................................................................................17
4.0 Resources and Capabilities ...............................................................................................................18
4.1 IT Investments...............................................................................................................................18
5.0 Financial Analysis..............................................................................................................................20
5.1 Key Ratios and Trends...................................................................................................................20
5.2 Financial Performance Relative to Competition.............................................................................25
5.3 Areas of Investment.......................................................................................................................27
5.4 LeapFrog Stock Price.....................................................................................................................29
6.0 Strategic Motivation..........................................................................................................................29
6.1 Context..........................................................................................................................................29
6.2 Competitors...................................................................................................................................30

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6.3 Capabilities....................................................................................................................................31
6.4 Customers.....................................................................................................................................31
6.5 Sweet Spot ....................................................................................................................................32
7.0 Proposed Initiative.............................................................................................................................34
7.1 LeapFrog Landing..........................................................................................................................34
7.1.1 Child Use Case ........................................................................................................................35
7.1.2 Parent Use Case......................................................................................................................36
7.2 Customer Value Proposition ..........................................................................................................37
7.3 Changes Required for LeapFrog Landing.......................................................................................39
7.3.1 People Changes ......................................................................................................................39
7.3.2 Process Changes.....................................................................................................................40
7.3.3 Technology Changes ...............................................................................................................40
7.4 Technology Details.........................................................................................................................41
7.5 Investments...................................................................................................................................42
8.0 Strategic Rationale............................................................................................................................43
8.1 Enhanced Customer Value.............................................................................................................43
8.2 Strategic Fit...................................................................................................................................43
8.3 Differentiation...............................................................................................................................44
8.4 IT Capabilities Fit...........................................................................................................................44
9.0 Initiative Financial Impact Summary .................................................................................................45
9.1 LeapPad Revenue 2013-2017.......................................................................................................45
9.2 LeapFrog Landing Revenue 2013-2017 ........................................................................................46
9.3 LeapFrog Total Revenue 2013-2017.............................................................................................47
9.4 LeapFrog Operating Margins 2013-2017.......................................................................................48
9.5 LeapFrog Pro-Forma Income Statements 2013-2017 ...................................................................48
9.6 Financial Impact Assumptions.......................................................................................................48
10.0 Conclusion.......................................................................................................................................49
Appendix A: LFL Mobile App Navigation for Parent Mode...........................................................................50
Appendix B: Pro-forma Income Statements................................................................................................50
Appendix C: Financial Impact Assumptions................................................................................................54
Appendix D: Awards ...................................................................................................................................57
Appendix E: Content Partnerships..............................................................................................................58

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1.0 Company Information
1.1 Founding and History
Mike Wood, a corporate attorney for a technology firm, started LeapFrog in 1995 after a prolonged search
for the right tool to help his son learn to read yielded no results. Making use of his background in computer
language processing, Wood developed a prototype toy based on input from educators at Stanford, parental
focus groups, and his own needs. From this initial effort the “Phonics Desk” was born as LeapFrog’s first
product offering.
The Phonics Desk, which helped children associate sounds with letters, filled a clear void in the children’s
education market and sales reached $3 million within a year. In 1997, Knowledge Universe (owned by
financier Michael Milkin and Oracle founder Larry Ellison) purchased a 50% stake in LeapFrog for $50
million. In 1998, LeapFrog purchased Explore Technologies along with their “Near Touch” technology used
to develop interactive books that read stories aloud at the touch of a specialized pen. Near Touch based
products also proved successful, pushingsales to $70million by 1999.
By 2000, LeapFrog sales had hit $200 million. The company held an initial public offering (IPO) of stock in
2002 and by 2003 the company sold their products in over 25 countries.
LeapFrog experienced strong and consistent growth through 2008. However, in 2009 LeapFrog’s revenue
fell for the first time. The company struggled financially and in 2011 the board replaced nearly the entire
management team. LeapFrog’s new leaders quickly re-focused efforts onto “educational entertainment”
driven by technology, a strategy that has proven successful by returning the company to profitability in
short order.
In early 2011, LeapFrog introduced the LeapPad, a purpose-built kid’s tablet that enables children to use
LeapFrog educational entertainment apps much in the same way adults use apps with general-purpose
tablets such as the iPad.
1.2 Ownership
Leapfrog’s stock trades publicly on the NYSE under the symbol LF. The largest institutional shareholders
include Wellington, Wells Fargo, Franklin Resources and The Vanguard Group. Knowledge Universe board
members Owen Rissman and Thomas Kalinske, along with CEO John Barbouralso own significantstakes.
1.3 Company Structure
LeapFrog primarily organizes itself along functional lines. Exceptions include SVP and Managing Director
of EMEA Christopher Spalding, along with SVP and GM Brad Rodrigues, who has accountability for digital
offerings and community development.
Both Mr. Spalding and Mr. Rodrigues report directly to the CEO, which is consistent with the company’s
strategic investments in these areas (see section 1.5 - Company Stated Strategy).

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Figure 1: LeapFrog Organizational Chart
1.4 Customers and Key Products
LeapFrog offers educational entertainment products for children up to 9 years old. Core products include;
the LeapReader learn-to-read system, the Leapster game system, and the LeapPad kid’s tablet. To
complement these products, the company also offers “Learning Path” and “The App Center.” The Learning
Path is an online tool where parents can review personalized feedback and recommendations regarding
their children’s use of and progress with LeapFrog products. Although LeapFrog bundles several free apps
with their products, the App Center offers additional downloadable digital content such as games, music,
and videos, for purchase (up to 500 offerings). LeapFrog also distributes apps on iTunes for both the iPad
and iPhone.
LeapFrog distributes its products through major retailers including Wal-Mart and Toys-R-Us, through
distributors in international markets, and directly to consumers through the company’s website.
1.5 Company Stated Strategy
LeapFrog management summarizes their current strategy as a transformation “from an educational toy
company to a leading educational entertainment company.” While LeapFrog continues to market learning
toys for infants and toddlers, multi-media learning platforms (i.e. kids’ tablets) and content (i.e. apps)
represent the core focus. Additionally, the following growth opportunities representstated areasof focus:
 international expansion
 release of additional digital content developed in-house and via partners
 development and launch of new multi-media learning platforms
 delivery of content via 3rd party platforms
 development of richer “relationships with parents, grandparents, teachers and caregivers”
1.6 Brief Financial Snapshot
During fiscal year ending December 31, 2012, LeapFrog had revenue of $581.3 million and net income of
$86.5 million, increases of 28% and 335% respectively from 2011. The company has $120 million in
cash, with no debt. For additional information, see section 5 (Financial Analysis).

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2.0 Industry Analysis
2.1 Industry Classification
LeapFrog operates in the Dolls, Toys, and Game Manufacturing Industry (339930) according to the North
American Industry Classification (NAIC) system.1 “Toys and Games” is an $852 billion international industry
projected to grow 30% by 2017.3 The U.S. portion of the Toys and Games accounted for $21 billion in
revenue in 2012.4 Though it includes over 700 organizations, 3 companies5 claim 30% of this revenue.
“Toys and Games” is a mature, concentrated, and highly competitive industry.
As the Toys and Games industry increasingly focused on technology, LeapFrog emerged as a leader in the
sub-category known as Education Gaming (or “Edu Gaming”)’.6 Edu Gaming companies deliver educational
software through interactive games. Edu Gaming generated an estimated $5 billion in revenue globally in
2013.7
Figure 2: Industry Classification and Sub-categories
Within Edu Gaming, the purpose-built kid’s tablet computer sub-category, “Kids’ Tabs & Apps”, has recently
become an attractive space (Figure 2 above). LeapFrog’s flagship device (LeapPad 2) is representative of
devices within Kids’ Tabs & Apps. Though LeapFrog’s learning ecosystem consists of many components,
the success of LeapPad has drawn others seeking profit. Several newly minted children’s education
companies have entered, taking advantage of to readily available open-source software, cheap hardware,
and high demand. Figure 3 below depicts selected entrants to the Kids’ Tabs and Apps sub-category over
the last three years.
1 Source: NAICS Association (http://goo.gl/Vs0nX)
2 Statistics and Facts on theToy Industry (http://goo.gl/ULF35)
3 GSVAdvisors and Candlestick Research, 2012(fromLeapFrog Investor Event, February 2013)
4 Source: Toy IndustryAssociation,Inc. (http://goo.gl/mpHKB)
5 Mattel (US), Hasbro (US), & Lego (Denmark) respectively.
6 LeapFrog refersto Edu Gaming as “Electronic Learning Aids”
7 American Revolution 2.0: http://goo.gl/1ZdOq (p. 8, p. 167)

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Figure 3: New Entrants to the “Kids' Tabs & Apps” Sub-category
2.2 Business Models and Strategies in Kids’ Tabs and Apps
Although the Kids’ Tabs & Apps sub-category is still relatively new, distinctions with respect to competitor’s
strategies are beginning to appear. Participants employ one of three general business models and
strategies:
 hardware only
 hardware and software
 integrated hardware, software, and content (apps) distribution
2.3 Rivals
Table 1 below denotes a few of the direct competitors to the LeapPad and the business models employed
by each competitor.
Product (Company Name) Business Model and Strategy
ChildPad (Arnova) Hardware Only
PTab750 (Polaroid) Hardware Only
Tabeo (Toys-R-Us) Hardware Only
Kurio (KD Interactive) Hardware and Software

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Product (Company Name) Business Model and Strategy
Nabi Jr. (Fuhu) Hardware and Software
VINCI Tab (VINCI – Rullingnet) Integrated Hardware, Software, and Content
(apps) Distribution
InnoTab (VTech) Integrated Hardware, Software, and Content
(apps) Distribution
Table 1: Competitors and Business Models in "Kids' Tablets & Apps"
Though the sub-category includes many competitors, the majority of the offerings are Android-based
platforms providing “kid-friendly” tablets that rely on the Google Play Store8 to supply 3rd party educational
apps. Few competitors offer compelling, kid-focused hardware & software solutions. Examples include the
Vinci Tab, and the Meep!, both of which package kid-centric software for easy consumption (some
developed by the company, some by 3rd party developers) along with hardware. One competitor separates
itself from the rest: VTech represented in Figure 4 below by their InnoTab 2. VTech attempts to replicate
LeapFrog’s platform, content, and community. As such, VTech represents the only true rival of LeapFrog
within this niche sub-category.
Figure 4: Business Model and Strategy Distribution within "Kids' Tabs & Apps"
2.4 Substitutes
While Kids’ Tabs & Apps continues to grow, compelling substitutes exist that challenge all participants.
Any product or service competing for the attention of parents of pre-school children who are eager to
8 www.gogle.com/play - Mostplatforms offer curated versions ofthe PlayStorethat directparentstoward educationallyfocused content.

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provide their children the best opportunity to learn is considered a substitute for a kid’s purpose-built
tablet. Figure 5 below captures some of these substitutes, loosely divided between products and services.
Figure 5: Selected Substitutes for Kids' Purpose-built Tablets and Apps
2.5 Competitive Analysis: The Five Forces
A five forces analysis of the “Kids’ Tabs Apps” sub-category indicates that substitutes represent the
greatest threat.
At present, neither buyers nor suppliers possess a clear position of power. Though there are many new
entrants to the market, 9 only one – VTech – represents a direct rival of LeapFrog. Meanwhile, industry
leaders are taking steps to deter additional would-be entrants by increasing switching costs through
proprietary ecosystems. Figure6 below plots the top threats to sub-industry profitability.
9 The lowbarrier to entry withinedutainment is facilitated by thespread ofopen operating systems like Android, distribution systems such as
iTunes, and the benefitsofthe scale ofapplication markets.

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Figure 6: Top Threats to Kids Tabs & Apps Profitability
Substitutes maintain several advantages over purpose-built kids’ tablets. Many parents of children who
might buy a purpose-built kids’ tablet already own substitutes. Additionally, as prices of substitutes
continue to fall, demand for kids’ purpose-built tablets will decrease.
Within established app markets (iTunes, Google Play), the norms for pricing of educational content are well
below those of LeapFrog and VTech. Research exists indicating consumers are willing to pay higher prices
for quality,10 however, without overwhelming value propositions, developers of children’s educational
content will likely find it increasingly difficult to maintain price premiums.
2.6 Industry Forecast
As “Kids’ Tabs and Apps” evolves over the next three years, the threat of new entrants will likely subside as
today’s high margins will be difficult to maintain. Beyond 2016, substitutes will be the greatest threat,
eventually morphing into rivals (Figure 7 below). Purpose-builtkids’ tabletswill find it difficult to survive.
10 iLearn II: An Analysis of the Education Category on Apple’s App Store (http://goo.gl/xMxsi)

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As the value leader, LeapFrog will be able stand on its brand and defend its established market position for
the next 3 years.11 Thereafter they will likely begin to rapidly lose revenue from their line of kid-specific
tablets. If they chose to enter, any large competitor leveraging economies of scale would likely win market
share (for example, Amazon’s Free Time service for kids provides unlimited access to books, games, apps,
and video for a low monthly fee).
Figure 7: Five Forces Analysis of the Children's "Edutainment"1 2 Industry Over Time
3.0 Strategic Analysis
3.1 Assessmentof Strategy: MarketPosition
LeapFrog delivers educational entertainment via a proprietary and integrated system of hardware
(LeapPad tablet), software (tablet operating system and apps), and online services (Learning Path).
Introduced in early-2011, the LeapPad quickly achieved market success and remains the top-selling kids’
tablet. Attracted by high growth rates in the tablet and apps category (relative to learning toys), entrants
have introduced competing products (see section 2.0 - Industry Analysis).
LeapFrog competes against these rivals by employing a strategy based on a market position of value
(versus cost).13 VTech, LeapFrog’s closest rival, offers the InnoTab, and with this product has essentially
imitated LeapFrog’s entire business model. However, VTech emphasizes its cheaper overall cost.14 Figure
8 below compares the total cost of ownership, including the cost of both the tablet and apps, of the
InnoTab versus the LeapPad.
11 Seeking Alpha - Leapfrog: Growth AtA ReasonablePrice(http://goo.gl/hYTQA)
12 During the 1990’s the children’s ‘edutainment’marketclosely resembled the ‘Kid Tabs & Apps’marketoftoday. We used historic analysis from
the report Whatin the World Happened to Carmen Sandiego? The EdutainmentEra: Debunking Myths and SharingLessons Learned
(http://goo.gl/joHYL), toderive insights aboutthe past, present,and futureofthis industry.
13 Based on the Value-Cost Framework; Ghemawat1991; Postrel, 2000; Tirole, 1988; all citedby Walker,2004-2009.
14 VTech’s website (http://tinyurl.com/o9gfcos) explicitly highlights cost differencesofthe InnoTab versus the LeapPad.

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Figure 8: Total Cost of Ownership: InnoTab versus LeapPad
To deliver value, LeapFrog focuses on innovation, quality, and brand. The company’s core activities support
and reinforce these value drivers. For example, to support innovation, the company maintains all software
and hardware design in-house. To support quality, LeapFrog’s product development processes leverage
internal experts in fields such as child development, child psychology, and educational research. The
company has also created a comprehensive curriculum based on a proprietary database of over 2600
skills critical to a child's development. To support its brand, LeapFrog carefully curates the content in its
App Center, and one of four in-house experts must approve all new content. Furthermore, the company
only develops content that provides educational benefits. Figure 9 depictsthe company’s activity system.15
15 Porter,1985
$80
$3.26
$99
$8.71
Tablet Cost Avg Price Per App
Total Cost of Ownership: InnoTab vs LeapPad
Innotab
LeapPad

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Figure 9: LeapFrog Activity System
3.2 Strategy: Concisely Stated16
The following statement represents a concise summary of LeapFrog’s strategy:
Grow learning platform revenues by 10-15% annually through 2016 by providing children with
personalized, life changing educational entertainment at the most critical period of their development,
designed by educational experts according to a proprietary, award-winning and research-proven pedagogy.
3.3 Major Customer Segments, Differentiation, and Effectiveness
Parents today face an overabundance of choices to entertain their children. The educational value of these
choices varies greatly, and it is often difficult for parents to find the right choice for their children. At the
same time, parents are increasingly dissatisfied with the state of the educational system within the U.S.17
and the ability of the public school system to prepare children for a future in a competitive global economy.
16 Collis and Rukstad,2008
17 Source: Gallup;“53%ofAmericans Are Dissatisfied with the Quality ofEducation Students Receive in theU.S.” –as cited in LeapFrogInvestor
PresentationFebruary 2013.

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LeapFrog’s products address these problems by building solid educational foundations during pre-school
years.
Table 2 provides a summary of the major customer segments – using age-based segmentation – targeted
by LeapFrog, the value proposition offered each segment, the extent to which LeapFrog differentiates itself
(low, medium, high) in the segment, and an assessment of LeapFrog’s effectiveness18 in serving each
segment.
Segment Value Proposition Differentiation Effectiveness
0-12 months
 Infants develop an understandingof the
world around them.19
Medium20 Medium20
12-36
months
 Toddlers develop early language
skills.19
Medium20 Medium20
3-9 years
 Purpose-built tablet for children
ensures ease of use and durability.
 High quality, expert-driven content
curriculumthat drives development in
over 2600 skills21
 Largest and deepest catalog of over
325 apps.
 Exclusive stories and characters
developed in-house, and licensed from
Disney, Nickelodeon, PBS, and other
partners.
 Online service (Learning Path) that
allows parents to track progress of
children and to gain personalized
expert insights on progress and
recommendations for additional
products and services.
High22 High23
Table 2: Major Customer Segments' Value Proposition and Differentiation
18 Effectiveness in terms ofhowwell LeapFrog performs the “jobto do” as measuredby availablemetrics, including industry awards,marketshare,
and revenue growth.
19 Source: Leapfrog.com.
20 The learning toy (alsoreferredto as Education Gaming) category is verymatureand highly competitive,with participants including Hasbro
(Playskool), Mattel (FisherPrice), VTech,and others (see Industry Analysis). While LeapFrog’s productsin thesetwo segments are bo th highquality
and highly awarded, growth in these segmentsis much slower than thetablet and apps category targeted to3-9year olds. As LeapFrogshifts to
educational entertainment, learningtoys representa shrinkingcontribution to overall revenue(from29%to 19% of overall re venue in 2011and
2012 respectively). These segments, however,remain strategically important as a beachhead for newparents with thehope that as infantsand
toddlers reach3years old, they showinterest in theLeapPadbased on previous exposureto LeapFrog.
21 Source: Leapfrog.com, LeapfrogInvestorPresentation, February 2013.
22 Figure 10 providesadditional details regardingLeapPaddifferentiation versus competition.
23 For this segment, all metrics,includingawards, marketshare,and revenuegrowth,indicateeffectiveness.

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3.4 Assessmentof Strategy: Most Attractive Segment
The most attractive segment for LeapFrog is children 3-7 years old as research24 indicates that children 8-9
years old show much less interest in LeapPads. Additionally:
• The learning toys (targeted to infants and toddlers aged 0-36 months old) category is a much more
mature, highly competitive, and slower growing category. Participants include Hasbro (Playskool), Mattel
(Fisher Price), VTech, and others (see section 2.0 - Industry Analysis). Although LeapFrog’s products in this
category are both high quality and highly awarded, they do not possess a high degree of uniqueness and
differentiation. Consequently, LeapFrog’s learning toys have lower margins.
• LeapPad enjoys both a high degree of differentiation and effectiveness in the segment for pre-
school/primary schoolchildren. This segment is also more profitable as evidenced by significantly
improving financial performance (see section 5.0 – Financial Analysis) since the introduction of the
LeapPad. Additionally, LeapPads enable a long-tail business model25 helping LeapFrog to smooth out the
cyclical/seasonal nature of the toy industry. Typically, these companies make most of their revenue and
profits during the 2nd half of the year, particularly in December.
3.5 Assessmentof Strategy: Strength and Differentiation
With its sole focus on educational toys over the past 18 years, LeapFrog has created substantial resources,
capabilities (see section 4.0 – Resources and Capabilities), and a unique activity system. Evidence of this
strength and differentiation isfound in the following areas:
• Industry awards: the LeapPad has received at least eight different industry awards - the highest number
among all of its rivals – since its introduction in 2011, including the Toy Industry Association People’s
Choice Award for 2013, and the Toy Industry Association Educational Toy of the Year for 2013.26
• Sales: the LeapPad is the #1 selling Kids’’ tablet.27
• Financial strength: indicates significantly improving return on equity driven largely by increasing profit
margins (see section 5.0 – Financial Analysis).
While LeapFrog clearly differentiates itself as a value leader based on high quality “educationally
nutritious” offerings, exclusivity, and higher overall pricing; a group of Android-based devices position
themselves at the opposite end of the market, offering thousands of applications at low prices. VTech
(represented within the strategy canvas by their InnoTab 2 in Figure 10 below) offers a mix of the two,
cheaper applications along with the attempt to copy LeapFrog’s high quality. The strategy canvas clearly
illustrates the position of LeapFrog versus the competition with emphasis on 3 general areas: higher
prices, an educationally exclusive focus, and a closed system.
24 Negative reviews ofthe LeapPad for 8-9year olds include:http://tinyurl.com/occkasm, http://tinyurl.com/pfsedje, http://tinyurl.com/oskxygt
25 Source: http://en.wikipedia.org/wiki/Long_Tail#Business_Models
26 Source: LeapFrog.com
27 Source: NPD Group, RetailTracking Services

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Figure 10: LeapFrog Strategy Map
3.6 Assessmentof Strategy: Sustainability
Despite LeapFrog’s current success, substitutes in the form of general-purpose tablet computers remain a
growing strategic threat. A substantial number of households already own a tablet,28 and research
forecasts strong sales of tablets globally through 2017.29 Additionally, tablets are increasingly present in
classrooms. From 2011 to 2012 access to tablets within classrooms rose 15%. During that same period,30
the percentage of public school technology officials that identified tablet usage as a top priority increased
from 25% to 40%.31
As children are increasingly exposed to general-purpose adult tablets either in the household or in the
classroom, it will be much more difficult for LeapFrog to maintain children’s interest in a kids’ purpose-built
tablet. Furthermore, new entrants exist today that possess similar resources and capabilities, albeit
perhaps on a lesser scale. For example, Kidaptive (www.kidaptive.com) is a Silicon Valley, venture-capital
backed start-up that offers educational apps for the iPad, and the company offers a similar capability to
LeapFrog’s Learning Path which provides personalized feedback and insight to parents regarding their
children’s learning progress. The emergence of Kidaptive is part of a broader trend in the industry as
substitutes morph over time to become more like direct rivals.
Given their current strategy, significant deterioration of LeapFrog’s uniqueness and differentiation is likely
to occur over the next five years. Left unchecked, the results will be evident in LeapFrog’sbottomline.
28 Source: PewResearch,2013; 28%of U.S. households earning $50,000to $74,999, and 56% of U.S. households earning$75,000 or more
owned a tablet as ofJune 2013.
29 Source: IDC, 2013; by 2017, global tablet sales expected to by 352million in 2017, which is 174.5% growth over 2012.
30 Source: PBS Teacher Technology UsageSurvey,2013
31 Source: Education Week/MDR, 2013.

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4.0 Resources and Capabilities
LeapFrog’s investments in resources and capabilities reflect management’s awareness of where the
company enjoys uniqueness and differentiation. For example, LeapFrog maintains a substantial in-house
hardware and software engineering team focused on the delivery of a proprietary purpose-built kid’s tablet
(including OS). This allows the company to have complete control over the user experience, consistent with
LeapFrog’s market position focused on value. Similarly, LeapFrog outsources manufacturing of the
LeapPad, consistent with the company’s desire to avoid competing on cost (versus direct rivals such as
VTech).
4.1 IT Investments
LeapFrog IT investments have resulted in the creation of significant resources and capabilities for the
company.32
(1) Substantial, focused, and talented in-househardware and software engineering teams.
(2) The most award-winning and best selling purpose-built kid’s tablet available in the market. The
LeapPad includes proprietary hardware and software (Linux-based operating system).
(3) A content (apps) development process that leverages both in-house and external educational research
and expertise that is focused on a proprietary database of over 2600 different skills essential to children’s
development.
(4) A rigorous quality control and testing process utilizing specialized usability labs where approximately
1,200 families participate in over 1,100 testing sessions per year. Additionally, approximately 250
families per year participate in in-home testing. Both the Learning Path and the quality control/testing
process produce significant data that is maintainedby LeapFrog for sophisticated analyses.
(5) The largest education-focused content catalog in the industry.
(6) An online resource – the Learning Path – that provides personalized feedback to Kids’ and provides
parents an ability to track the progress of their children’s use of LeapPads, along with recommendations
about additional apps availableto purchase.
(7) An extensive website (LeapFrog.com) that provides the company with a direct channel through which
the company can interact with its customers globally. Web site capabilities include e-commerce, customer
support, and extensive content for parents relating to not only use of LeapFrog products and services, but
also significant resources (articles, etc.) relating to children’s education, learning, and growth.
LeapFrog.com uses technology from Amazon (AWS/EC2-infrastructure), and Oracle (RightNow-service and
support).
32 Source: Company 2012 10K, investor presentations, and leapfrog.com; see alsoactivitysystemdepicted in Figure9

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(8) Sophisticated social media relationship management. LeapFrog maintains an active social media
presence on Facebook, YouTube, Twitter, and Pinterestusing technology fromOracle (Vitrue).
Table 3 below represents an assessment of how each IT investment contributes to LeapFrog’s value drivers
(see also section 3.1 - Assessment of Strategy: Market Position), and the extent to which the investment
contributes to the company’s strategy, including evidenceof this contribution.
IT Investment
Associated
Value Driver
Cost to
Imitate
Competitive
Advantage
Evidence of Uniqueness
(1) Quality,
innovation,
brand
High High LeapFrog 2012 10-K, Figure9: LeapFrog
Activity System
(2) Quality, brand Low Low #1 Selling Kids’’ Learning Tablet*
*Source: NPD Group/Retail Tracking
Services & LeapFrog
Winner of 18 Toy of the Year Awards
Over the Past 13 Years!
Winner of Two TOTY’s 2013: People’s
Choice Award and Educational Toy of the
Year
90%+ of all product reviews* received
four stars or greater [*Based on reviews
at Amazon.com, Walmart.com,
ToysRUs.com, and LeapFrog.com.]
(3) Quality,
Brand,
High High #1 Selling Kids’’ Learning Tablet
Industry awards
Largest and deepest education-focused
content catalog
(4) Quality, Brand High High Unsurpassed quality control – no
documented evidence existsthat rivals
possess this level of sophistication with
testing and quality control.
(5) Quality, Brand High High Over 325 education-focused apps

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IT Investment
Associated
Value Driver
Cost to
Imitate
Competitive
Advantage
Evidence of Uniqueness
(6) Quality,
Innovation,
Brand
Medium Medium 13 million connected parents*
*Source: LeapFrog
Rivals, including VTech, offer the same
capability, although with less
sophistication.
(7) Quality, Brand Medium Medium Net Promoter Score of 50 “Excellent”
No other rival possessesthis high of a
score.
(8) Quality, Brand Medium Medium 13 million connected parents*
*Source: LeapFrog
Given social media is a very fluid and
dynamic, it is very difficult to assessthat
LeapFrog has a significant competitive
advantage here.
Table 3: IT Investments and Contribution to Strategy
Clearly, LeapFrog’s IT investments contribute to both top and bottom-line financial results, allowing the
company to describe itself as a technology company in the toy industry.
It is worth noting that due to changing market conditions several IT investments, including the company’s
tablet hardware, software, and the online tool ‘Learning Path’, do not currently contribute significantly to
competitive advantage, particularly in the face of the emerging threatof substitutes.
5.0 Financial Analysis
5.1 Key Ratios and Trends
Over the period 2010-2012, LeapFrog’s transition to an educational entertainment company led to a
remarkable turnaround in the firm’s financial performance, increasing ROE over 28% (Figure 11 below).
LeapFrog’s transition period has been marked by an improvement in all three ROE levers (Figure 12
below). Profit margin has proven to be the most important lever as it has increased over 9% since 2010.
This improvement is largely attributable to a 34% increase in sales ($148million) during the same period.

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Figure 11: LeapFrog ROE
Figure 12: ROE Levers
LeapFrog engineered this turnaround through two parallel efforts. First, the firm shifted away from
educational toys to focus more on kid’s tablets and apps (as previously noted). Second, the firm improved
its operating efficiency making better use of its assets.
LeapFrog’s strategy shift is apparent from the growing importance of multimedia learning platforms as a
source of revenue. In 2012, multimedia learning platforms accounted for a full 80% of its sales, an
increase of over 10% from the previous year and part of a four-year trend (Figure 13). LeapFrog’s 28%
revenue increase ($126 million) in 2012 (Figure 14 below) is largely attributable to the LeapPad and
follow-on sales (e.g. apps and accessories)33.
33 Source: LeapFrog 10K, 2012
-40
-30
-20
-10
0
10
20
30
40
2008 2009 2010 2011 2012
Return on Equity
-15.00
-10.00
-5.00
0.00
5.00
10.00
15.00
2008 2009 2010 2011 2012
Profit Margin
0
0.5
1
1.5
2
2008 2009 2010 2011 2012
Financial Leverage
0
0.5
1
1.5
2
2008 2009 2010 2011 2012
AssetTurnover

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Figure 13: Net Sales by Product Segments
Figure 14: Net Revenue by Year
LeapFrog’s financial statements also illustrate the company’s progress to grow internationally. In 2012
international sales accounted for 27% of total revenues, a 7% increase from 2010 (Figure 15 below). This
trend is likely to continue with LeapFrog’s release of the LeapPad in France34 and its plans to localize more
content for international markets35 . International growth is a sensible objective given LeapFrog’s
international sales comprise a much smaller percentage of overall revenue compared to competitors
(Figure 16 below).
34 Source: http://www.journaldugeek.com/2012/06/12/leapfrog-leappad/
35 Source: http://tinyurl.com/lxl2m7n
64% 69% 69%
80%
34%
30% 29%
19%
2% 1% 2% 1%
2009 2010 2011 2012
Total Revenue by Product Segment
Other
Learning
Toys
Multimedia
Learning
Platforms
$380
$433 $455
$581
2009 2010 2011 2012
Net Revenue in Millions

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Figure 15: International Mix of Global Sales
Figure 16: International Sales as a Percent of Total Revenue versus Competition
As previously mentioned, LeapFrog’s turnaround relies on a two-prong approach, and its financial
performance is not entirely attributable to a shift in strategy. A series of efficiency improvements also
bolstered the firm’s financial performance. Since 2010, LeapFrog improved its days sales outstanding
(from 129 to 106), accounts receivable turnover (from 2.84 to 3.44), and its total asset turnover (from
1.44 to 1.53) (Figure 17 below).
80% 75% 73%
20% 25% 27%
2010 2011 2012
International & Domestic Revenue as a Percentage of Total Sales
International
US
27%
44%
46%
LeapFrog Mattel Hasbro
International Sales as a Percentage of Total Revenue in 2012

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Figure 17: LeapFrog Efficiency Ratios
LeapFrog’s new strategy and its operating gains have significantly improved its financial health. LeapFrog
has virtually no debt, and sits on $120 million (28% of 2012 revenue) in cash (Figure 18 below). Over the
period 2010-2012, the company turned healthy liquidity ratios, into industry leading ratios (Figure 19
below). Overall, the firmis well positioned to make strategic investments to maintain momentum.
Figure 18: LeapFrog's Growing Cash Balance
Figure 19: Financial Health Ratio Comparison
128.69 126.33
105.95
2010 2011 2012
DSO
2.84 2.89
3.44
2010 2011 2012
AR Turnover
1.44
1.46
1.53
2010 2011 2012
Total AssetTurnover
$19,479
$71,863
$120,000
2010 2011 2012
LeapFrog Cash & Cash Equivalents
0
0.5
1
1.5
2
2.5
3
3.5
2010 2011 2012
Quick Ratio
0
1
2
3
4
5
2010 2011 2012
CurrentRatio
LF
Hasbro
Mattel

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5.2 Financial Performance Relative to Competition
LeapFrog's strategic shift and focus on digital educational entertainment also enabled the company to
outperform much larger competitors36. As Figure 20 below demonstrates, Leapfrog’s ROE surpassed both
Mattel and Hasbro in 2012. In addition, LeapFrog turned over its inventory 1.5 more times than
competitors (Figure 21 below); another indicator of the LeapPad’s37 growing importance to the company’s
financial performance.
Figure 20: ROE Comparison versus Competition
36 LeapFrog is comparedto Hasbro and Mattelbecausefinancials for direct competitors in the tablet space arenot available. AlthoughVTech’s
financials are available,it is not a good comparison.VTech is a globalfirmtradedon The Stock Exchange ofHong Kong Limit ed and its product
offerings range fromtelecommunications products to contractmanufacturingservices.
37 LeapPad1was released in early 2011. LeapPad2was released in mid-2012. 2012marks the first full-year ofLeapPadsales.
-40
-30
-20
-10
0
10
20
30
40
2008 2009 2010 2011 2012
ROE
LF
Hasbro
Mattel

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Figure 21: Inventory Turns Comparison
Comparing LeapFrog’s financial documents to competitors provides additional insight into how the firm
differentiates itself. Relative to traditional mass production toy companies Hasbro and Mattel, LeapFrog
has higher COGS (Figure 22 below) and lower gross margins (Figure 23 below). These comparisons align
with the company’s strategy to invest more in value drivers such as innovation, quality, and brand to over-
deliver educational quality.
Figure 22: COGs Comparison
0
1
2
3
4
5
6
7
8
9
10
2008 2009 2010 2011 2012
Inventory Turns
LF
Hasbro
Mattel
0.00%
10.00%
20.00%
30.00%
40.00%
50.00%
60.00%
70.00%
2008 2009 2010 2011 2012
Cost of Sales as a Percentage of Revenue
LF
Hasbro
Mattel

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Figure 23: Gross Margin Comparison
5.3 Areas of Investment
Aside from above the line indicators, LeapFrog’s financials indicate significant ongoing investment in
differentiation. In 2012, the firm increased year-over-year spend in advertising, R&D, and SG&A38 (Figure
24 below). LeapFrog’s significant increase in sales somewhat masks these increases as all costs,
including COGS, are down as a percentage of revenue (Figure 25 below). Regardless of the trend in its
common-sized financials, it is apparent that LeapFrog continues to invest in improving its performance,
and its turnaround is not a short-termgain fromsimple cost cutting measures.
38 According to LeapFrog’s 201210K, SG&A increases are largely attributable to incentive-based rewards to theirstaffbased on the firm’s stellar
performance.
0.00
10.00
20.00
30.00
40.00
50.00
60.00
70.00
2008 2009 2010 2011 2012
Gross Margins
LF
Hasbro
Mattel

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Figure 24: LeapFrog Operating Expenses
Figure 25: Trend of LeapFrog Operating Expenses as a Percentage of Revenue
$0
$10,000
$20,000
$30,000
$40,000
$50,000
$60,000
$70,000
$80,000
$90,000
$100,000
2010 2011 2012
LeapFrog Operating Expenses
SG&A
R&D
Advertising
58.62% 59.10% 57.86%
17.47% 17.13% 15.41%
8.12% 7.42%
6.30%
11.40% 8.68%
7.40%
2010 2011 2012
LeapFrog Expenses as a Percentage of Revenues
Advertising
R&D
SG&A
Cost of sales

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5.4 LeapFrog Stock Price
Despite LeapFrog’s remarkable turnaround and an improving overall economy, the company’s stock trades
below 2012 highs, and it trails (Figure 26 below) both the performance of general market indexes (DJIA,
S&P 500), and the stock performance of competitors Hasbro (HAS), and Mattel (MAT).
Analyst opinion on LeapFrog stock is mixed. Currently,39 three of nine analysts rate LeapFrog a hold, while
five rate LeapFrog a buy, and one rates LeapFrog a strong buy. LeapFrog skeptics40 cite strong competition
from rivals and substitutesas their rationale.41
Figure 26: LeapFrog Stock Compared to Competition and Overall Market
6.0 Strategic Motivation
6.1 Context
The Kids Tabs & Apps industry is somewhat of an enigma. On one hand, it seems poised to continue rapid
customer and competitor growth as it expands within international markets. However, a broader
contextual look at the industry indicates that the good fortune of kid-specific tablets will soon be at an end.
The growth in demand for general-purpose tablets and smartphones42 is illustrated within figure 27 below.
Predictions for the growth of these devices dwarf the analogous best-case scenarios for kid-specific tablets.
39 Source: Thomson/First Call, June 6, 2013
40 One example: http://tinyurl.com/l8oapkk
41 When Toys "R" Us, LeapFrog's second largest customer,announced its Tabeo Kids’ tabletin late2012, LeapFrog's stock dropped 11%
42 iPad, Branded Android Tablets,Kindle,etc.,alongwith smartphones thatare an additionalsubstitute for kid-specific tablets

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It is therefore reasonable to assume that by 2017 nearly every would-be, kid-specific tablet consumer will
already have at least one robust, powerful, mobile, affordable device within their possession. By extension,
it is reasonable to assess that few parents will purchase an additional kid-specific device on top of the
substitute in hand.43,44
Figure 27: Growth in Sales of Mobile “Smart” Devices: 2013 05 BEA “Mobile is eating the world45”
Given this grim outlook for the future likelihood of sales of their flagship device(s), LeapFrog and other
industry participants must prepare now:
Contextual Challenge: Addresspredicted decline in revenues fromfuture lossof tablet sales
6.2 Competitors
Demand for Kids Tabs and Apps is predicted to continue growing through 2017, mostly within international
markets. This growth has drawn the attention of two types newcomers; those who compete with LeapFrog
by copying their value-driven offerings, and those who choose to provide a low cost option.
Companies that copy the LeapFrog model have met with success (again, VTech being the best example).
However, LeapFrog remains the clear market leader. Their reputation (brand) amongst consumers is hard-
won and strong. Additionally, LeapFrog dominates industry awards and accolades from educationally
focused content reviewers. In order to remain on top of the heap LeapFrog must distance itself fromrivals:
43 Especially consideringrecent studies indicating thepervasiveness ofthe “passbackeffect” (passback effect is defined as adults passing devices
on to children vs. children ‘owning’their own device).
44 Source: http://www.joanganzcooneycenter.org/2010/06/02/kids-apps-the-pass-back-effect-marches-forward/
45 Source and quote from: CSS Insight (http://goo.gl/O1tpT)

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Competition Challenge: Create a sustainable business model through continued differentiation from
competitors
Cost-leaders havetwo advantagesover LeapFrog at present:
1. their hardware costs will continue to fall
2. they outsource their contentand can focus on making quality hardware
Consumers of kid-specific tablets have many options and the list grows weekly. Android-based devices
continue to proliferate and continue to fall in price, especially within the very countries that LeapFrog has
targeted for international growth.46
Cost-leader competitors rely on the Google Play market to provide their applications. As such, their cost to
produce content is zero. Meanwhile, the market provides thousands of options that are priced well below
what LeapFrog can afford to charge. In the short to mid-term it will be harder for LeapFrog to justify their
expensive, proprietary, platformin light of cheaper and more capable platforms:
Competition Challenge: Provide a low-cost option without sacrificing value
6.3 Capabilities
LeapFrog has honed its capabilities that specifically address the educational entertainment needs of pre-
school children. They develop sophisticated, educationally sound offerings on sturdy platforms that have
earned trust and loyalty amongst 13 million parents. With a curriculum built by educational professionals
and tested by a network of families they ensure high quality they ensure parents that children receive
“educationally nutritious” content. Further augmented by partnerships with the leading entertainment
providers47 that bring familiar characters and story lines to the learning environment, LeapFrog has
become a perennial winner of the most prestigious industry awards.48 Over time, these capabilities have
built the strongest brand within the industry, allowingLeapFrogto justify a high price for their products.
Unfortunately, they have also been built upon a closed, proprietary system. The result: award winning
content that (without costly conversion) is incompatible with the dominant operating systems of the future.
While other companies take advantage of open markets that attract millions of consumers LeapFrog
remains (for the most part49) closed. In addressing this problem, LeapFrog must face the next challenge:
Capabilities Challenge: Extend the reach of products and services beyond the current closed system
6.4 Customers
As LeapFrog looks to expand in international markets they will face two of the challenges mentioned
above: cost and limited reach. Additionally, consumers where market growth will be greatest have less
money to spend and will have more options on which to spend it. They will expect products to work with
limited connectivity, and across multiple platforms.
46 Aakash Tablet: http://en.wikipedia.org/wiki/Aakash_(tablet)
47 Disney, LionsGate, etc.
48 2012 Toy ofthe Year (TOTY) http://www.toyawards.org/imis15/toyaward/last_years_winners.aspx
49 LeapFrog has a very limited number ofapplications within iTunes,unconnected to LeapPath, and missing a coherentplan ofstu dy.

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Customer Challenge: Meet future customers expectations of platform-independent, affordable, mobile
solutions that thrive with limited connectivity
6.5 Sweet Spot
The overall Kids Tabs & Apps market is illustrated within figure 28 below.
Figure 28: “Sweet Spot” analysis of LeapFrog’s position within Kids Tabs & Apps
In order to ‘hit the spot’ LeapFrog must not only consider the subtleties of the context of their market, their
capabilities, their competition, and customers, they must also address the challenges associated within
each. These crucial challenges are summarized within figure 29:

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Figure 29: Crucial Challenges that LeapFrog must address over the next few years
Of these challenges, most concerning is that of addressing the impending substitution of generic tablet
computers over kid-specific devices. Given LeapFrog’s closed system, if this challenge is not addressed it
will be impossible to get content to customers. Differentiation from competitors within the Kids Tabs
market will not matter if the market itself is overcome by substitutes.
The good news for LeapFrog is that in addressing this most crucial challenge it may also address others
within their capabilities, and with respect to both competitors and customers. If more evidence for action is
required, it can be found within the comments section of an industry blog providing the first glimpse of
LeapFrog’s new kid-specific tablet offering(figure30 below).

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Figure 30: Top 5 comments from an engadget.com posting regarding the FCC teardown of the new LeapPad- set to launch in June
2013.50
7.0 Proposed Initiative
7.1 LeapFrog Landing
Given the crucial challenges LeapFrog faces, it should develop a capability that provides access to cloud-
based, LeapFrog content on general-purpose tablets and phones via a subscription model. This capability,
referred to hereafter as the LeapFrog Landing (LFL), consists of three components:
 an app that can be installed on iOS and Android devices, designed solely to access LeapFrog’s
cloud-based content;
50 Source: (http://goo.gl/ihA1o)

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 cloud-based content such as games and ebooks deliveredthrough HTML5 and JavaScript; and
 a subscription model that provides customers with access to LeapFrog's entire library of cloud-
ready content.
From a customer perspective, LFL expands LeapFrog’s ability to deliver educational content through two
top-level use cases: a child use case and a parent use case.
7.1.1 Child UseCase
LFL essentially transforms a general-purpose tablet or smartphone into a LeapPad. When a child opens
LFL, he/she is presented with a personalized app launcher.51 This launcher contains icons to access
LeapFrog content (e.g. videos, games, ebooks, etc.). The options included in the app launcher are based on
a child’s individual learning needs. The personalized launcher is powered by the firm’s recommendation
engine and adaptive learning engine.52 While a child is actively using the mobile device, LFL will lock down
the device to prevent the child from accessing anything other than LeapFrog content. Figure 31 below
summarizes the top-level child use case.
Figure 31: Storyboard for Top-Level Child Use Case
51 If LFLis configured to use facial recognition, LFLwill launch automatically when an authorizedchild powers up the device.
52 The recommendation engineand the adaptive learning engine are existingcapabilitiesthat already tieintoLeapFrog’s curriculum.

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7.1.2 Parent Use Case
LFL also provides parents an opportunity to engage in their child’s development through a number of
features. Parents can use the mobile app to access reports53 that summarize their child’s learning. These
reports provide insight into how well a child is progressing through the curriculum and identify areas where
he/she would benefit from additional focus. Parents can also use LFL to access articles and learning
activities54 that allow them to assist with their child’s development and reinforce LFL lessons. The articles
and activities are personalized for each child; another feature powered by LeapFrog’s recommendation
engine. LFL also provides parents access to interactive games. These games are grouped into two
categories: single-device and multi-device. Single-device games refer to games a parent and child play
from a single device. Multi-device games refer to games designed for synchronous play between a parent
and child from different devices.55 Similar to other content, interactive games are recommended based on
a child’s individual development. Figure 32 below walks through the top-level parent use case and Figure
41 in Appendix A illustratesthe LFL’s navigation menus for parent mode.
53 This feature is currently provided by LeapFrog’sLearning Path web application,which will be ported to LFL
54 This feature is currently provided by LeapFrog’sLearning Path web application,which will be ported to LFL; however, the recommendations do
not currentlyincludeinteractive learning content.
55 Interactive, multi-device gamesrely on WebSocketsand are onlyavailablewith an internet connection.

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Figure 32: Storyboard for Top-Level Parent Use Case
7.2 Customer Value Proposition
LFL centers around LeapFrog’s core value of providing children with educationally nutritious entertainment.
However, LFL strengthens this value proposition by making curriculum (rather than a device) the
centerpiece of its offering and providingnew features that fulfill additional customer needs.

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LeapFrog's current per-app pricing model weakens its value proposition by obfuscating the benefits of its
extensive curriculum. A child's successful progression through the curriculum inherently requires an
accumulation of individual, high-price transactions. Individual purchasing decisions are encumbered by a
range of questions that challenge LeapFrog's value proposition: is this app worth its relatively high price? If
this app does not work, can I get my money back? Is the current app good enough? Is there a cheaper
alternative? These questions conceal the value of LeapFrog's curriculum, impairing one if its competitive
advantages and undermining the authenticity of its value proposition.
LFL addresses the complications created by LeapFrog’s current per-app pricing model. LFL's subscription
model provides customers unlimited access to LeapFrog's entire catalog of learning resources. This
arrangement unlocks the full potential of LeapFrog’s curriculum, as the benefits of its comprehensive
library are no longer overshadowed by the high costs of individually packaged content. Indeed, there is
more than a nuanced difference between an offer that states “buy this game, your child needs it to
develop” versus an offer that states “this game will help your child develop, if not, you can fire us." With
LFL, customers are no longer buying individual apps to help their child learn compartmentalized lessons;
rather they are buying a comprehensive service that will progressively teach them new skills and expertly
guide themthrough the most critical years of their development.
Aside from making curriculum the foundation of its offer, LFL also introduces features that address
targeted customer needs. Features such as tablet-lockdown, offline content, and facial recognition are
prioritized for the first LFL release because they perform jobs customers need done56. Figure 33 below
summarizes LFL’s priority features fromthe customer’s perspective.
56 Source: Christensen,Clayton,Scott D. Anthony, Gerald Berstell,and Denise Nitterhouse. Finding the RightJob for Your Product. MIT Sloan
Management Review. Spring 2007.

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Figure 33: LeapFrog Landing Features
7.3 Changes Required for LeapFrog Landing
LeapFrog will undergo significant changes as a result of LFL. These changes can be grouped into three
categories: people, process, and technology.
7.3.1 PeopleChanges
LFL relies heavily on new and rapidly evolving technologies, including HTML5, WebSockets, and JavaScript.
These modern technologies move LeapFrog away from Adobe Flash and its proprietary version of Linux
towards an ecosystem characterized by open web standards and popular mobile operating systems.
Although LeapFrog has some experience with these technologies,57 the company needs to build deeper
and broader expertise. LeapFrog will need to fill its current talent void through internal hiring and
outsourcing. LeapFrog should focus the majority of their talent acquisition on internal hires given the
strategic importance of these skills.
57 For example, LeapFroghas a dozenapps for iOS and already hosts some capabilities on AmazonWeb Services

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Customers familiar with LeapFrog will also need to change their buying patterns and transition to steady
and sustainable monthly fees. Although subscription models will be nothing new to target segments,
LeapFrog will need to effectively utilize advertising and other marketing programs to positively influence
customer’s willingnessto pay monthly subscription fees.
7.3.2 ProcessChanges
LFL’s subscription model will require process changes with several functional groups. Finance will need to
adjust forecasting and AR processes built-around seasonal revenue streams to accommodate a more
steady flow of monthly invoices. Marketing will need to develop processes58 that allow them to mine
knowledge from web analytics and customer service metrics. Marketing must also work with product
development and customer service to develop processes that turn this quantitative knowledge into actions
that will drive up customer acquisition and retention.
LFL’s transition to the cloud also requires development teams, marketing, and product management move
away from processes built around big-batch, yearly delivery cycles and move towards agile processes that
exploit the benefits of fast moving, cloud based services.59 This transition to cloud based content requires
terms-of-partnership changes with external content providers. Royalties tied to distribution rights or
individual app purchases will change to a flat percentage of subscription fees regardless of whether
someone uses the app.60
7.3.3 Technology Changes
In recent years, LeapFrog has begun to migrate away from the world of low-tech, slow-moving, device
embedded toys. LFL will accelerate this migration as LeapFrog becomes more dependent on the
technologies that power the fast moving, high performance worlds of cloud and consumer devices. From a
technology perspective, this change will be prevalent in two areas: infrastructure and development
platforms and analytics.
In terms of infrastructure and development platforms, LeapFrog’s current content is heavily dependent on
Adobe Flash and their proprietary Linux OS.61 LeapFrog will port this content to more modern technologies
such as HTML5, WebSockets, and JavaScript. LeapFrog will also need to build a secure, scalable, high
performance infrastructure using Amazon Web Services(AWS) to deliver their ported content.
In terms of analytics, LeapFrog will become more dependent on web analytics once the point of customer
contact moves to the cloud. LeapFrog must develop the resources to properly capture web usage data.62 In
addition, organizations such as marketing, IT, and product development must learn to harness insight from
this data to influence product development, customer acquisition, and customer retention.
LFL's subscription model also increases the importance of analytics that drive LeapFrog's adaptive learning
engine, its recommendation engine, and its child learning reports. These capabilities will become the
58 For example, A/B testing, AARRR conversion funnels, etc.
59Scaled Agile Framework (http://scaledagileframework.com/) or other moremodern productdevelopment methodologies would be a good fit for
the LFLinitiative
60 Over time, usage analytics will helpdeterminethe true value ofpartnershipsand LF will structurepartnerships accordingly
61 http://ianfrench.hubpages.com/hub/Leappad-Tablet-Explorer-is-it-Worth-the-Hype
62 LFLwill lease web analytics fromAmazon Web Services

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foundation of LeapFrog’s customer value proposition; responsible for guiding each child uniquely through a
critical learning period and demonstrating development to his/her parents. This increased importance
requires LeapFrog continuously invest and evolve thesetechnologies to ensurethey drive customer value.
7.4 Technology Details
LFL has four main technical components: (1) client app for Android and iOS, (2) content developed in
HTML563 and JavaScript, (3) WebSocket64 transport gateway, and (4) a content server farm. These
components are described below and summarized in figure 34.
Figure 34: LeapFrog Landing Solution Architecture
 The Client “App” is essentially a purpose-built web browser that can be installed on iOS and Android
devices, designed solely to access cloud basedLeapFrog content.
 Content developed in HTML5 and JavaScript are advanced web applications designed to be used
entirely within a browser (aka LFL client app).65 Content will take advantage of new advances in
HTML5 to run offline. Offline capabilities are achieved through a combination of caching, local
storage, and synching.66
63 For more info on HTML5see http://www.html5rocks.com/en/why
64 For more info on WebSockets see http://www.html5rocks.com/en/tutorials/websockets/basics
65 This component is similar toChrome Apps orwhat Google calls "packaged apps." http://developer.chrome.com/apps/about_apps.html
66 This feature is often referred toas "online-offline" apps. More information is availablehere:
http://www.html5rocks.com/en/tutorials/offline/whats-offline/ Therewill be some limitations based on the type ofcontent or device resource
availability.

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 The WebSocket Transport Gateway are WebSocket servers that provide the full duplex connection
to client devices across the public internet. These servers proxy connections to the content servers.
The WebSocket servers will provide real-time, event-driven, experience that is critical to LFL. The
WebSocket transport serverswill be hosted in the AWS cloud.
 The Content Server Farm will serve LFL content. The serverswill be hosted in the AWS cloud.
7.5 Investments
New investments required by LFL are summarized in table figure 35 below and included within the
financial model in section 9, Initiative Financial Impact Summary.
Figure 35: Investments Required for LeapFrog Landing

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8.0 Strategic Rationale
Leapfrog has been on a path of growth over the last few years. During this period Leapfrog has placed an
increasing emphasis on multimedia content given its higher margins. Due the symbiotic relationship that
exists between its multimedia and hardware platforms, LeapFrog's content success is entirely dependent
on its proprietary tablets. This symbiotic relationship and its dependence on LeapPad are LeapFrog's
Achilles heal. A look to the future reveals the high likelihood of substitutes destroying today’s lucrative kid-
tablet market. LeapFrog Landing is a powerful, strategic maneuver that is both offensive and defensive.
LFL ensures that LeapFrog will sustain leadership within the educational kids entertainment arena by
addressing the highest priority “crucial challenge” faced by the industry. Further, by addressing the threat
of substitutes through LFL, LeapFrogcan also addressadditional industry challenges by:
 providing consumers with an affordable, high-quality and complete curriculum - addressing
Competition/Customer Challenges
 opening its currently closed ecosystem to unreachable market segments on Android-based
hardware and expand offerings for iOS-based hardware - addressing Capabilities Challenges
 allowing LeapFrog to avoid dependence on a proprietary device as the primary content delivery
platform- addressing Capabilities Challenges
 expanding the possibilities for LeapFrog to enhance its current app development skills/experience
through modern technologies - addressing Capabilities Challenges
 meeting future customers expectations of platform-independent solutions - addressing Customer
Challenges
 providing LeapFrog with the opportunity to improve the user experience of Learning Path; currently
a cumbersome and sluggish tool - addressingCustomer Challenges
8.1 Enhanced Customer Value
LeapFrog Landing will provide userswith:
 Excellent overall value – immediate access to the full catalogue of web-ready LeapFrog content
 The ability to access content on both their iOS and Android based devices
 The capability to continue to access content while offline
 Access to an enhanced Learning Path containing automatically updated LFL usage information,
learning reports, and recommendations
8.2 Strategic Fit
LeapFrog Landing is aligned with the LeapFrog's emphasis on multimedia learning content. LFL reduces
focus on hardware and strengthens LeapFrog’s position vis-a-vis the current and future competition from
tablets, mobile devices, and apps. Additionally, it will continue to reinforce Leapfrog’s leadership role
within the educationally focused content delivery field.
LFL also supports LeapFrog management’s goal of generating mid to high single digit growth rates. With
LeapFrog’s current revenue share increasingly coming from the international market in future years,

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LeapFrog Landing offers the potential of low cost expansion into newer international markets thus,
maintaining or increasing margins.
8.3 Differentiation
LeapFrog’s nearest competitor's offerings are quite similar to those of LeapFrog. LFL will create
competitive differentiation by:
 Providing LeapFrog with the opportunity to leverage its vast base of connected parents (13 million)
who are already familiar with the value of Leapfrog’s curriculum – converting them to LFL
subscribers before they choose to utilize substitutes
 Taking advantage of LeapFrog’s branded proprietary curricula to develop apps compatible with
multiple OS - currently offered by few competitors or substitutes
 Offering unique customer valuewith unlimited online/offline contentaccess.
 Making Leapfrog an early mover in the subscriber based online educational entertainment
segment with the potential to increase its market share
Figure 36 below outlinesdifferentiation before and after the LeapFrog Landing initiative:
Figure 36: Differentiation Driven by LFL
8.4 IT Capabilities Fit
LeapFrog currently possesses the technical expertise to develop apps; evident from its current offerings
through LeapPad, The App Center, and their (limited) presence within iTunes. It also outsources much of its
IT infrastructure.67
The proposed initiative will leverage the following IT driven product strengths to deliver the enhanced value
to the customers
 Recommendation engine
 Learning Path
67 Based on LeapFrogjob openings.

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 Adaptive learning
LeapFrog will utilize a cloud based solution offered by Amazon to deliver LeapFrog Landing service to
customers; in-line with its currentIT strategy of outsourcing commodity services.
LeapFrog Landing not only aligns with LeapFrog’s current strategy but bolsters their business model. LFL
will create clear, sustainable differentiation from competitors and prepare LeapFrog to tackle future
competition by providing a strong and unique customer value proposition.
9.0 Initiative Financial Impact Summary
The threat of substitutes to LeapFrog’s core business manifests itself over the next 5 years as forecasted
LeapPad revenue begins a significant, decline. The LeapFrog Landing (Table 4 below) initiative 68
addresses this negative impact to LeapPad revenue, and it provides a platform upon which the company
can build both significant revenue streams and higher operating margins. Additionally, the LeapFrog
Landing subscription service delivers recurring revenue streams, providing both management and
shareholders enhanced visibility into future performance.69
Scenario
Total Project
Cost
Total Project
Operating Income
2013-2017
NPV (10% Discount
Rate)
Payback Period
(In Months)
Worst Case $36,199,000 $53,127,000 $40,279,000 40.92
Most Likely Case $39,022,000 $291,238,000 $220,804,000 8.04
Best Case $101,564,000 $1,203,806,000 $912,129,000 5.04
Table 4: LeapFrog Landing project cost, operating income, NPV, and payback period
9.1 LeapPad Revenue 2013-2017
Although not solely attributable to the LeapFrog Landing initiative, it is important to note (within Figure 37
below) that forecasts indicate LeapPad revenue declines in all scenarios during years 2015-2017.
68 For additional details, seepro-forma LeapFrogincome statementsin Appendix B for all scenarios, periods 2013through 2017, and the
associated assumptionsupon which pro-forma income statementsare basedin AppendixC.
69 As noted before, LeapFrog’s currentproductand service mix leads to highlyseasonal revenueand profits.

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Figure 37: LeapPad revenue 2013-2017
9.2 LeapFrog Landing Revenue 2013-2017
LeapFrog Landing launches in 201470 and generates increasing revenue (Figure 39 below) during years
2014-2017 based on subscriptions (Figure 38 below) from existing LeapPad customers that migrate to the
new service, and fromnet-new customers.
Figure 38: LeapFrog Landing subscriber growth 2013-2017
70 LeapFrog Landing launches in 2014with the 50most popular apps, and in both the most likely and bestcase scenarios,migrati on ofremaining
apps completes in 2014. In the worst case scenario, dueto projectoverruns,the migration ofremainingapps completes in 2015.
$-
$50,000
$100,000
$150,000
$200,000
$250,000
$300,000
2013 2014 2015 2016 2017
LeapPad Revenue 2013-2017 (in thousands)
Worst Case
Most Likely Case
Best Case
0
1000
2000
3000
4000
5000
6000
2013 2014 2015 2016 2017
LFL Subscriber Growth 2013-2017 (in thousands)
Worst Case
Most Likely Case
Best Case

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Figure 39: LeapFrog Landing subscription revenue 2013-2017
9.3 LeapFrog Total Revenue 2013-2017
In all scenarios – worst, most likely, and best – LeapFrog must carefully manage a difficult product
transition as LeapPad revenue declines and as LeapFrog Landing revenue ramps up. While the best case
scenario shows a smooth transition, the worst and most likely case scenarios indicate a choppy transition
as LeapFrog Landing revenue fails to grow as fast as LeapPad revenuedeclines (figure40 below).
Figure 40 - LeapFrog Total Revenue 2013-2017
$-
$50,000
$100,000
$150,000
$200,000
$250,000
$300,000
$350,000
$400,000
$450,000
$500,000
2013 2014 2015 2016 2017
LeapFrog Landing Revenue 2013-2017 (in thousands)
Worst Case
Most Likely Case
Best Case
$-
$200,000
$400,000
$600,000
$800,000
$1,000,000
$1,200,000
$1,400,000
2013 2014 2015 2016 2017
LeapFrog Total Revenue 2013-2017 (in thousands)
Worst Case
Most Likely Case
Best Case

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9.4 LeapFrog Operating Margins 2013-2017
Although, overall revenue growth is choppy, operating margin growth is consistent in two of the three
scenarios. LeapFrog Landing is a software-based service therefore, cost of goods sold (COGS) decreases as
a percentage of revenue. Figure 41below represents operatingmargin growth for years 2013-2017.
Figure 41: LeapFrog operating margins 2013-2017
9.5 LeapFrog Pro-Forma Income Statements 2013-2017
Tables in Appendix B provide LeapFrog pro-forma income statements for the worst case, most likely case,
and best case scenarios respectively:
 Appendix B, Table 5 – LeapFrog worst-case scenario pro-forma income statement
 Appendix B, Table 6 - LeapFrog most-likely scenario pro-forma income statement
 Appendix B, Table 7 - LeapFrog best-casescenario pro-forma income statement
9.6 Financial Impact Assumptions
Appendix C, Table 8 details all assumptions that apply to the financial impact analysis, including:
 definitions of the worst, most likely, and best case scenarios
 project cost model assumptions
 revenue model assumptions
 income statement assumptions
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
30.00%
2013 2014 2015 2016 2017
LeapFrog Operating Margins 2013-2017
Worst Case
Most Likely Case
Best Case

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10.0 Conclusion
The core problem LeapFrog founder Mike Wood sought to solve in 1995 for his son exists today just as it
did 18 years ago. In an increasingly competitive global economy where educational outcomes are in
question, parents seek to provide their children with “educationally nutritious” entertainment to assist with
their children’s learning and development. Since early 2011, LeapFrog has executed an effective strategy
with the LeapPad. Its focus on value by leveraging its unique resources and capabilities has resonated
with parents and children, delivering strong revenue and profit growth. However, the LeapPad is under
assault from general-purpose adult tablets, smartphones, and the apps available for these devices.
Explosive tablet growth in the household and in the classroom represents LeapFrog’s most pressing
challenge, and while the company is experiencing success financially with the LeapPad, it must not be
lulled into a false sense of security. Interestingly, LeapFrog experienced a similar challenge with its
Leapster handheld gaming device; 71 the introduction of the LeapPad was the company’s response.
Unfortunately, the company must once again act quickly to respond to substitutes. If the company does
nothing, it faces significant negative financial impact as LeapPad revenue is expected to decline sharply.
LeapFrog Landing provides the company with a strong response to the strategic threat of general purpose
tablets and smartphones. This new subscription-based service enables customers to access the
company’s research-driven and award-winning educational entertainment via Android and iOS devices,
leveraging the growth of these platforms. Migration to these platforms offers exciting new ways for
parents and family members to engage with their children through interactive game play via other devices
in the household. Through a simple, easy-to-use app that controls access to other apps and the Internet,
children access the same high quality content – including the largest educationally-focused catalog of 325
apps – that currently exists for the LeapPad. LFL delivers this value for a low-monthly fee that recognizes
the downward pressure of app prices. Given the extent of the LeapFrog content catalog and the significant
resources and capabilities that deliver this catalog, this new service is something few, if any, existing or
emerging competitors can match very easily.
Although delivery of LFL requires significant effort and financial resources, this initiative is something
LeapFrog can and should undertake. The transition to a subscription-based service exploits existing
resources, capabilities, and value drivers to enhance LeapFrog’s existing value proposition. The company
has ample cash on hand, and an investment in LFL drives significant recurring revenue and higher
operating margins. Finally, with a move towards Web standards such as HTML5, the company better
insulates itself from shifting platform demand, and it also positions itself to take advantage of emerging
platforms, 72 an existingstated focus of management.
71 See http://tinyurl.com/mt5gezo
72 See also Pandora’s use ofHTML5: http://tinyurl.com/ll5pqdh

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Appendix
Appendix A: LFL Mobile App Navigation for Parent Mode
Figure 41: LeapFrog Landing Navigation for Parent Mode
Appendix B: Pro-forma Income Statements

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Figures in USD Thousands
(000's), Years Ending 31-
DEC
2012
% of
Revenue
2013
% of
Revenue
2014
% of
Revenue
2015
% of
Revenue
2016
% of
Revenue
2017
% of
Revenue
Revenue
Net sales 581,288 100.00% 645,634 100.00% 694,207 100.00% 637,757 100.00% 620,798 100.00% 629,309 100.00%
Cost ofsales 336,344 57.86% 368,011 57.00% 395,698 57.00% 363,521 57.00% 347,647 56.00% 352,413 56.00%
Gross profit 244,944 42.14% 277,623 43.00% 298,509 43.00% 274,236 43.00% 273,151 44.00% 276,896 44.00%
Operating expenses
Selling, general&
administrative 89,599 15.41% 96,845 15.00% 107,602 15.50% 98,852 15.50% 93,120 15.00% 94,396 15.00%
Research & development 36,627 6.30% 51,651 8.00% 55,537 8.00% 54,209 8.50% 43,456 7.00% 44,052 7.00%
Advertising 43,023 7.40% 45,194 7.00% 52,065 7.50% 47,832 7.50% 43,456 7.00% 44,052 7.00%
Depreciation& amortization 11,629 2.00% 12,913 2.00% 13,884 2.00% 12,755 2.00% 12,416 2.00% 12,586 2.00%
Total operating expenses 180,878 31.12% 206,603 32.00% 229,088 33.00% 213,649 33.50% 192,447 31.00% 195,086 31.00%
Income (loss) from
operations 64,066 11.02% 71,020 11.00% 69,421 10.00% 60,587 9.50% 80,704 13.00% 81,810 13.00%
Earnings before interest and
taxes/operating margin 64,066 11.02% 71,020 11.00% 69,421 10.00% 60,587 9.50% 80,704 13.00% 81,810 13.00%
Other income (expense)
Interest income 241 0.04%
Interest expense (50) -0.01%
Other income (expense), net (2,309) -0.40%
Total other income
(expense), net (2,118) -0.36%
Income (loss) before income
taxes 61,948 10.66%
Provision for (benefit)
income taxes (24,504) -4.22%
Net income (loss) 86,452 14.87%
Table 5 - LeapFrog worst-case scenario pro-forma income statement

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(000's), Years Ending 31-
DEC
2012
% of
Revenue
2013
% of
Revenue
2014
% of
Revenue
2015
% of
Revenue
2016
% of
Revenue
2017
% of
Revenue
Revenue
Net sales 581,288 100.00% 645,634 100.00% 763,447 100.00% 731,132 100.00% 725,988 100.00% 741,910 100.00%
Cost ofsales 336,344 57.86% 361,555 56.00% 419,896 55.00% 394,812 54.00% 384,774 53.00% 385,793 52.00%
Gross profit 244,944 42.14% 284,079 44.00% 343,551 45.00% 336,321 46.00% 341,215 47.00% 356,117 48.00%
Operating expenses
Selling, general&
administrative 89,599 15.41% 96,845 15.00% 118,334 15.50% 113,326 15.50% 108,898 15.00% 111,287 15.00%
Advertising 43,023 7.40% 45,194 7.00% 57,258 7.50% 54,835 7.50% 50,819 7.00% 51,934 7.00%
Income (loss) from
operations 64,066 11.02% 77,476 12.00% 91,614 12.00% 102,359 14.00% 116,158 16.00% 126,125 17.00%
Total other income
(expense), net (2,118) -0.36%
taxes 61,948 10.66%
Provision for (benefit)
income taxes (24,504) -4.22%
Table 6 - LeapFrog most-likely case scenario pro-forma income statement

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(000's), Years Ending 31-DEC 2012
% of
Revenue
2013
% of
Revenue
2014
% of
Revenue
2015
% of
Revenue
2016
% of
Revenue
2017
% of
Revenue
Revenue
Net sales 581,288 100.00% 645,634 100.00% 932,067 100.00% 973,831 100.00% 1,048,981 100.00% 1,161,449 100.00%
Cost ofsales 336,344 57.86% 355,099 55.00% 493,995 53.00% 496,654 51.00% 514,001 49.00% 545,881 47.00%
Gross profit 244,944 42.14% 290,535 45.00% 438,071 47.00% 477,177 49.00% 534,980 51.00% 615,568 53.00%
Operating expenses
Selling, general&
administrative 89,599 15.41% 96,845 15.00% 116,508 12.50% 121,729 12.50% 125,878 12.00% 139,374 12.00%
Advertising 43,023 7.40% 45,194 7.00% 69,905 7.50% 73,037 7.50% 73,429 7.00% 81,301 7.00%
Income (loss) fromoperations 64,066 11.02% 83,932 13.00% 158,451 17.00% 194,766 20.00% 241,266 23.00% 290,362 25.00%
Total other income (expense),
net (2,118) -0.36%
taxes 61,948 10.66%
Provision for (benefit) income
taxes (24,504) -4.22%
Table 7 - LeapFrog best-case scenario pro-forma income statement

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Appendix C: Financial Impact Assumptions
DEFINITIONS OF WORST, MOST LIKLEY AND BEST CASE SCENARIOS (SEE ALSO REVENUE MODEL ASSUMPTIONS)
The following four variable inputs are associated with each scenario:
(1) LeapFrog Landing monthly subscription fee
(2) LeapFrog Landing annual subscriber initial capture rate and subsequent YOY growth rate for migration and net-new
customers
(3) LeapPad revenue growth rates
(4) Project duration
Worst case inputs set to:
(1) 2.99 and 3.99 per month for migration and net-new subscribers respectively,
(2) 8% initial capture rate for existing (migration) LeapPad customers and 8% subsequent YOY growth; 8% of
migration subscribers as the initial capture rate for net-new subscribers and 8% subsequent YOY growth,
(3) 0% or flat LeapPad revenue growth during 2014 and 40% revenue decline per year during 2015-2017.
(4) 30 months starting 01-JUL-2013
Most likely case inputs set to:
(1) 4.99 and 5.99 per month for migration and net-new subscribers respectively
migration subscribers as the initial capture rate for net-new subscribers, and 15% subsequent YOY growth
(3) 10% LeapPad revenue growth during 2014 and 30% revenue decline per year during 2015-2017.
Best case inputs set to:
(1) 6.99 and 7.99 per month for migration and net-new subscribers respectively
migration subscribers as the initial capture rate for net-new subscribers, and 30% subsequent YOY growth (
(3) 20% LeapPad revenue growth during 2014 and 20% revenue decline per year during 2015-2017.
PROJECT COST MODEL ASSUMPTIONS
COGS: LeapFrog Landing hosting costs, including both infrastructure (IaaS, PaaS) and web analytics software (SaaS)
provided by Amazon Web Services; $1M hosting fees per year starting in 2014 in all scenarios.
SGA: Pro-forma LeapFrog Landing operating income includes SGA for employee recruiting and training related to the project,
and for employee incentive compensation associated with the rollout of the new service, approximately 10% of initiative
revenue during both 2014 and 2015.
Project R&D Costs:325 total apps to port over 18 months (most likely and best case scenarios, 30 months worst case
scenario) starting 7/1/13. Estimating 7 FTE per app per month, with each team completing 6 apps over 6 months. With 50
apps to complete in year one = 8.33 teams in year one; $75 per hour developer costs, 140 hrs per month; 20% overhead

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includes project and executive management costs, and R&D incentive compensation costs. In the most likely and best case
scenarios, the migration of remaining apps in the catalog (275) completes in 2014, assuming project team productivity
increases over 2013. In the worst case scenario, due to project overruns, the migration of remaining apps in the catalog
(275) completes in 2015.
Discount rate: 10%
REVENUE MODEL ASSUMPTIONS
Subscriber initial capture and YOY growth: At end of 2013, LeapFrog is expected to have 15.6M connected parents; this is
based on 13M (actual) at end of 2012 plus 20% growth during 2013. Based on the existing assumption that 40% of multi-
media learning platform (MMLP) revenue is attributable to the LeapPad, then at end of 2013, 40% of forecasted 15.6M of
connected customers are LeapPad customers and are target customers to migrate to the LeapFrog Landing subscription
service. For all scenarios - worst case, most likely case, and best case - the initial subscription capture rates for both
migration customers and net-new customers, and the YOY subscription growth rates use Sirius radio (8% initial capture/YOY
growth) (Source: http://tinyurl.com/m8w7fby), Rhapsody (15%) (Source: http://tinyurl.com/mxwvltp), and Hulu (30%)
(Source: http://tinyurl.com/jwlt8ro). For Hulu, the actual growth rate is approximately 50% YOY. Because the target
audience for LeapFrog Landing is a smaller subset (children 3-9 years old) of the general populace versus Hulu (whose target
is a broader subset of the general populace), there are limits above which growth is unreasonable because subscribers
cannot be more than the actual number of children 3-9 years old. As such, the best case initial capture and YOY growth rate
is capped at 30%.
Monthly subscription fees: Amajority of mobile devices (tablets and smartphones) have fewer than 20 apps specifically for
children (Source: http://tinyurl.com/kdswag9). Using approximately 15 apps per customer at an average LeapFrog price per
app as 8.71 as a starting point to price the LeapFrog Landing service you get a value of approximately $131. Assuming
apps have a "life" of one year, then parents would spend $131 per year on LeapFrog apps. The starting point to evaluate a
monthly subscription fee is then nearly $11 per month. However, this does not factor in downward pressure on LeapFrog
app prices based on substitutes that exist on iTunes and Google Play. This also does not factor in substitutes such as
Amazon's Kindle Free Time Unlimited (children's app and video subscription service with parental controls) which is priced at
$4.99 per month for a single child. Based on these factors, the monthly subscription fee for the LeapFrog Landing service is
set at $3.99 (worst case), 5.99 (most likely), and 7.99 (best case) per month for an unlimited number of children. A $1 per
month discount is offered to all existing LeapPad customers to migrate to the LeapFrog Landing service.
LeapPad Revenue: LeapPad specific revenue is not broken out but instead included in multi-media learning platform (MMLP)
revenues (which includes all revenues associated with LeapPad, Leapster, LeapReader, and all associated revenues from
apps, accessories, etc.); in 2010 and 2011, MMLP revenue was 69% of revenue, and in 2012 it was 80%; it is assumed that
LeapPad and associated revenue was 40% in 2012. The remaining revenue (60% of MMLP) includes Leapster, Tag, and
associated apps and accessories. The LeapFrog Landing service is expected to go live 01-JAN-2014 and will materially
cannibalize LeapPad revenue starting 2015; this decline would have happened anyway due to the emerging threat of
substitutes and as such this cost is not included in pro-forma project costs. LeapPad revenue growth is forecasted to be 20%
in 2013. In 2014, because the LeapFrog Landing service is available only in the U.S. LeapPad revenue will grow (flat in worst
case scenario) due to international sales. Then in 2015-2017, LeapPad revenue declines 40%, 30% and 20% YOY in the
worst, most likely, and best case scenarios.
Remaining MMLP Revenue: Remaining MMLP revenue (Leapster, Tag, and associated apps and accessories) grows 10%
annually 2013-2017
Learning Toys Revenue: Learning toys revenue (19% of revenue in 2012) shrinks in revenue 2% annually 2013-2017; other
revenue (1% of revenue in 2012) remains as 1% of revenue 2013-2017.
Other Revenue: Consistent with 2012 actuals, other revenue remains constant as 1% of overall revenue for years 2013-
2017.
INCOME STATEMENT MODEL ASSUMPTIONS
COGS: AsLeapPad revenue declines and as LeapFrog Landing revenue increases and becomes a greater share of revenue,
COGS decreases as a percent of revenue. Starting 2014 when the LeapFrog Landing service starts, COGS includes LeapFrog

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Landing hosting costs. Service hosting is provided by Amazon Web Services and it is estimated that hosting costs will be $1
million per year based on CPU, memory, storage, database, data transfer, monitoring, and disaster recovery (multiple
hosting locations) capabilities.
SGA: Over the period 2010-2012, SGA has been trending down (17.47, 17.13, 15.41 respectively). During 2013, SGA
decreases as a percent of revenue, then increases in 2014 and 2015 to account for increased compensation costs
associated with the new initiative. SGA then decreases again as a percent of revenue in 2016-2017. In the most likely
scenario, SGA decreases as a percent of revenue but increases in absolute terms due to significant growth of the LeapFrog
Landing service revenue.
R&D: Over the period 2010-2012, R&D has been trending down (8.12, 7.42, 6.3 respectively). During 2013 and 2014, R&D
increases as a percent of revenue to account for increased costs associated with the new initiative. R&D then decreases
again as a percent of revenue in 2015-2017. In the worst scenario, R&D increases also in 2015 as a percent of revenue due
to project delays/cost overruns.
Advertising: Over theperiod 2010-2012, advertising has been trending down (11.41, 8.68, 7.4 respectively). During 2013,
SGA decreases as a percent of revenue, then increases in 2014 and 2015 to account for increased advertising associated
with the new initiative. Advertising then decreases again as a percent of revenue in 2016-2017. In the most likely scenario,
advertising decreases as a percent of revenue but increases in absolute terms due to significant growth of the LeapFrog
Landing service revenue.
Depreciation and Amortization: It is assumed that depreciation and amortization costs remain unchanged as a percent of
revenues over the period 2013-2017. Note that the entire project cost is expensed vs capitalized. Per the 2012 10K, the
following content development costs are capitalized "design, artwork, animation, layout, editing, voice, audio". For the
LeapFrog Landing service, these elements of content exist already and the R&D effort consists of an effort to migrate
existing content to another platform.
Operating Income: BothEBIT and net income (including net income per share) are calculated and presented in 2012
(actual), but in all forecasted years (2013-2017), to simplify the forecast only EBIT is presented. This is due to the lack of
stable assumptions upon which to base the calculation of a tax rate and the provision of taxes. LeapFrog in 2012 calculated
its provision for taxes using "the asset and liability method" (see 2012 10K) and as of 31-DEC-2012, the company had
approximately $140 million in net operating losses to carry forward. During 2012, LeapFrog had negligible interest income
and expense, no debt, and all forecasted years assume no interest income and expense.
Table 8 - Financial impact analysis assumptions

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Appendix D: Awards
73
74
73 Source: LeapFrogInvestorPresentation –05/21/2013
74 Source: LeapFrogInvestorPresentation –05/21/2013

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Appendix E: Content Partnerships
75
75 Source: LeapFrog Investor Presentation –05/21/2013

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