Smart toys will represent a US$18 billion hardware and software market by 2023, up from an estimated $6 billion this year.

According to a new report from Juniper Research, this increase will primarily be driven by the growing popularity of smartphone-connected toys and related in-app purchases, which are projected to grow by 69 per cent annually over the next five years.

The new report, Smart Toys: Hardware, Technology & Leading Vendors 2018-2023, found that in-app purchases will become the main driver for growth, with content revenues reaching 25 per cent of the total industry by 2023.

One example, Merge’s Augmented Reality Cube toy, pictured above, highlights the potential of the smartphone working alongside an established platform for successful content distribution and monetisation.

Juniper says this growth coincides with the stagnation of the console based ‘Toys to Life’ sector. The report recommended that vendors incorporate smartphones into their proposition to drive new innovative games.

Privacy and security issues

Privacy issues continue to hamper overall growth, according to Juniper. It cites the recent prosecution for VTech’s breach of data security as a watershed moment, and a warning to all vendors of the Federal Trade Commission’s increasing focus on data protection violation.

In addition, the new GDPR (General Data Protection Regulation) rules from Europe will increase the risk of fines for vendors.

However, Juniper cites the increased focus on security as an opportunity. A ‘safe’ reputation is a unique selling point for a vendor, in an industry blighted with security issues.

Meanwhile, the research found that as connected toys become more affordable, educational toys will find a place in the school curriculum in developed markets. Osmo, for example, has been a leader in this area, with more than 25,000 schools embracing its learning kits. Juniper forecasts the educational toys market will be worth more than US$1.5 billion by 2023.