Lego's Q3 2025 earnings announcement, October 2025
So Lego just posted another monster quarter and everyone's doing the usual "timeless appeal of analog play in the digital age" garbage and like, no, the actual story is that Lego is a privately-held Danish family company that spent the 2000s nearly going bankrupt and came out of it having figured something out that almost nobody in consumer products has figured out, which is that your core IP is the manufacturing tolerance.
Here's what I mean. A Lego brick made in 1958 still clicks perfectly onto a Lego brick made last week. That is not a marketing claim, it's a manufacturing fact, and it's enforced by tolerances measured in like two thousandths of a millimeter â the stud diameter variance on a standard 2x4 brick is famously smaller than most medical device manufacturers hit on parts going inside human bodies. Which sounds like trivia until you realize it's the entire business model: every brick ever made is compatible with every brick that will ever be made, which means the installed base isn't a depreciating asset, it's an appreciating one, because every new set expands what you can do with the bricks already in your kid's bin (and your bin, and your dad's bin in the attic).
Now compare this to basically every other toy category. Hot Wheels from 1972 don't interface with Hot Wheels from 2024 in any meaningful way â they're both little cars, sure, but the track systems have changed, the scales have drifted, the accessories are incompatible. Barbie has gone through probably a dozen body molds. American Girl dolls from the 90s have different proportions than the current ones. The entire video game industry is structured around planned incompatibility â your Switch games don't work on Switch 2, your Xbox 360 discs mostly don't work on Series X. Incompatibility is the business model, it's how you get people to rebuy.
Lego said no. Lego said the brick from 1958 will fit the brick from 2058. And this is insane, if you think about it, because it means they have voluntarily foreclosed on the single most powerful lever in consumer products, which is forcing obsolescence. Every company that sells a durable good spends enormous amounts of R&D figuring out how to make this year's product not work with last year's product without pissing the customer off too much. Apple is a master at this, Microsoft is slightly worse at it, car companies have built entire industries on it (proprietary charging connectors, OBD-II access, right-to-repair fights). Lego just... doesn't do it.
What they get in return â and this is the thing the "timeless analog charm" people miss â is that the brick becomes infrastructure. A Lego brick is not really a toy. It's a piece of durable manufacturing infrastructure that gets distributed into hundreds of millions of homes worldwide, and every new set is basically an expansion pack for an operating system that already has universal install. Which means the network effects are doing most of the work. When a grandparent buys a Lego set for a kid, they're not buying "a toy" in the sense that a Mattel product is a toy â they're depositing compatible substrate into an accumulating household stockpile, and every deposit raises the marginal utility of the next deposit.
This is also why the IP licensing deals (Star Wars, Harry Potter, the recent Nintendo stuff) work for them in a way they work for basically nobody else. When Hasbro does a Star Wars license, they're making Star Wars figures that sit on a shelf. When Lego does a Star Wars license, they're making bricks in Star Wars configurations, which means even if the kid loses interest in Star Wars in six months, the bricks get absorbed into the general pool and keep producing value. The license is temporary, the substrate is permanent, and the substrate was already the valuable part.
The near-death experience in the early 2000s is the instructive piece here, because Lego almost lost this. They went on a diversification binge â theme parks, video games, clothing, Galidor (look it up, it's hilarious) â and they started loosening the tolerances on the actual bricks because the bricks were seen as a commodity and the "brand" was seen as the valuable part. Which is exactly backwards. Jørgen Vig Knudstorp comes in in 2004, basically says the bricks are the company, tightens tolerances back up, narrows the product line, and the company starts printing money again. The takeaway the business press drew was "focus on your core competency" which is such a domesticated reading of what actually happened â the actual lesson is "the boring manufacturing discipline IS the moat, and when you think the brand is the moat, you are about to destroy the company."
Which is interesting because right now there's a huge knockoff market â Mega Bloks, Chinese brands like Lepin (which got sued into oblivion), various others â and they make bricks that are almost compatible with Lego. Almost. And it turns out almost-compatible is actually worse than incompatible, because when a kid tries to fit a knockoff into a real Lego build and the stud is 0.03mm off, the whole structure gets wobbly, and the kid learns not to mix them. The tolerance is a credential. You can counterfeit the shape but you can't counterfeit sub-thousandth precision at scale without becoming, essentially, Lego.
Anyway, the Q3 number is like 13% up year-over-year in a consumer products environment where basically nothing is growing, and the analyst takes are all about "emotional connection" and "intergenerational brand equity" which â sure, fine, those are downstream effects. The upstream cause is that a Danish family spent fifty years obsessing over whether their plastic rectangles were within two thousandths of a millimeter of spec, and it turned out that was the whole game.
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