I know the reason that there isn't G1 characters in FiM (save for Tirek and Applejack, debatably) because Hasbro, for whatever reason doesn't own rights to the G1 characters besides Tirek somehow.
Can someone explain to me how the hay does Hasbro own MLP, but not G1 characters?

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The names are separate trademarks/copyrights from the main series. They lost those right during the gap between G1 and G3. Same thing happened with Transformers.

I think now they have the rights back.

This was a misunderstanding by Lauren Faust of Hasbro's reasoning.

Hasbro didn't lose the rights to their characters. It's impossible to lose the rights your characters. Copyrights are practically immortal, especially when it comes to a corporation. The only way you "lose" your copyrights is if you sell them which didn't happen since no one would buy characters without the brand they're tied to.

What Hasbro lost was their trademarks. Trademarks last for 10 years and can be renewed indefinitely making them essentially immortal too, but require upkeep. While a copyright states your exclusive rights to use intellectual property, protect your specific use of terms, names, images, etc. Hasbro trademarks the name of the ponies so their use of those names is protected. If they name a pony (or any other toy) with a certain word, their use of that word as the name or part of the name of that toy is protected from litigation by other entities that use that word for other purposes.

Because Hasbro was not using the names of the G1 ponies except Applejack and Spike, their trademarks lapsed and ceased to be. That took it from a renewal process to starting from scratch which is a more costly process.

Also, the toy side of Hasbro (which has final say) wanted to maintain as many of the Core 7 from the end of G3 as possible. That's why we have Pinkie Pie and Rainbow Dash as main characters as well as Cheerilee, Sweetie Belle, and Scootaloo as secondary characters.

Business illiteracy on the part of Faust, a wish to continue G3 on the part of Hasbro; that how this whole issue came up.

4680294 Well... That about covers it. Thanks. I still don't get how they can still use Applejack and Tirek, no less.

4680337 There was a G3 Applejack (who actually look more like Big Macintosh) and a G3 Spike. Tirek/Tirac was never trademarks as they never used him to merchandising purposes.

4680337

"don't get how they can still use Applejack"

http://mylittlewiki.org/wiki/G3_Applejack

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Oh, okay. I looked at a list of G3 ponies before after I got one as a gift and wanted to see the name. Jesus Christ, they had a lot! It'd be like if every background character now (and I mean EVERY background character) had a toy.

4680464 That was how Hasbro operated up until this generation (and actually late G3) where they've collapsed the brand down to only a few characters.

It would have been nice if at least if The Hub (later on known as Discovery Family) aired G1 alongside G4 for nostalgia and to give the viewers the idea of how MLP originally started just like they did with Transformers and GI Joe, but didn't for some reason. I never understood why that was never the case. Maybe because fans would be pressuring Lauren Faust to have a revamped version of Megan Williams in the what was then the newer series and that she was against doing that. However, that could have been brought back after she left, but that still wasn't done making any claim that she was going to appear in it just a rumor done by bronies. My guess is that if Megan was to appear in MLP: FiM, the writers would have found a way to fit her in a long time ago, but couldn't due to the way the series was formatted. Let's not forget that when she was in MLP 'n Friends, that series was completely dedicated to adventure where in FiM, that wasn't always the case, so it might have been hard to adapt her to such a format, though I still think that it was a missed opportunity to not have her in that series. The closest she got to a G4 adaptation was a claimed character of her in the Equestria Girls special, Rollercoaster of Friendship, but I didn't think it was really her, but probably more of an Easter Egg not to mention that the girl shown didn't even have any lines despite making a few cameos in that said special. However, it is surprising to see find a lot of fanart where she is with G4 characters when doing a Google Image search despite not being part of the show itself. Nonetheless, she will appear in the upcoming comic series, so that sort of makes up for not being in the show itself.