Club Penguin: Should Disney Waddle into Social Networking?

Club Penguin: Should Disney Waddle into Social
Networking?
INTRODUCTION
In the summer of 2007, the Walt Disney Company (WD) had to decide whether to
purchase Club Penguin (CP), one of the largest and fastest growing online virtual
worlds for kids, to add into its online division, the Walt Disney Internet Group (WDIG).
This was part of a plan to make several purchases to improve its position in key longterm growth fields, including online entertainment and international markets (Disney
Annual Report, 2007). The deal would require Disney to acquire all of the outstanding
shares of New Horizon Interactive Inc., the Canadian company that operates CP. The
purchase price was $350 million up front, and an additional $350 million to be paid out if
Club Penguin were to meet earnings targets for 2008 and 2009 (Disney Annual Report,
2008). If the deal were finalized, the acquisition of CP would be the largest acquisition
in 2007 for The Walt Disney Company.
WD was very interested in finalizing the deal, as evidenced by the enthusiasm of Bob
Iger, Disney’s president and chief executive, who claimed that "the founders have
woven together new technologies and creativity to build an incredibly compelling,
immersive entertainment experience for kids and families," (Jesdanun, A., 2007). Still,
some in upper management grappled with the idea of the acquisition, wondering
whether it was the right choice, the right price, and what true risks and benefits the
move could bring to the Disney family. (1)
COMPANY BACKGROUNDS
The Walt Disney Company
On October 16, 1923, Disney brothers, Walt and Roy, founded the Disney Brothers
Cartoon Studio. In 1929, Disney Brothers Cartoon Studio was reincorporated as Walt
Disney Productions (Wikipedia, 2010). After becoming the leader in the American
animation industry, the company expanded its divisions in different fields: film
production, television, and travel, theatre, radio, publishing, and online media. It further
expanded to include the Disney Channel, ESPN, the ABC network and 11 theme parks.
The mission of the WD family was to produce the best entertainment experiences based
on storytelling (Disney, 2010).
New Horizon Interactive Inc.
Club Penguin was launched in 2005 by New Horizons Interactive (NHI), a graphics
software company based out of Kelowna, British Columbia, Canada, which produced
massively multiplayer online role-playing games (MMORPG) (Wikipedia, 2010). It was
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developed by two Canadians, Lane Merrifield and Lance Priebe, out of the need to
create a social network that was safe for children. “We wanted to build a fun, online
playground guided by such a strong commitment to safety we'd feel comfortable letting
our own children and grandchildren visit” (Club Penguin, 2010). Its chat program was
eventually integrated into what would become Club Penguin. Experimental Penguins
was offline a year later due to costs, but the company re-launched as Penguin Chat and
continued to test and improve the program. The idea of a kid-friendly social network
continued to develop until Club Penguin was launched in 2005.
Club Penguin started with 15,000 users and within a year that jumped to 2.6 million
(McKenna, Barrie, 2006). In March 2006 Miniclip, the world’s largest online game site,
offered to display CP on its site, and soon CP was ranked as the site’s number one
game. Miniclip helped CP to experience a rapid growth (Miniclip News, 2007) (see
Exhibit 1). Clearly CP was gaining massive popularity, and the numbers showed this: in
2006, NHI’s revenue from CP was about $60 million and profits were about $30 million
(Kramer S. D., 2007). The expected profits for 2007 were $35 million (Arrington M.,
2007). By 2007, Club Penguin had 12 million accounts, 700,000 of which were paid
memberships. At this point, NHI wanted to expand the program but knew they would
have to collaborate with a larger company in order to do so.
Exhibit 1
MARKET AND COMPETITION
The gaming world has changed significantly over the past decade with the introduction
of social networking. Companies like Playstation and Nintendo are no longer just in
competition with each other, but now with social gaming (Lynley, M, 2010). Social
networks such as Facebook with games like FarmVille and now specifically Club
Penguin have introduced new trends in gaming. By 2007, both children and adults had
their choice of many virtual worlds to ‘hang out’ in, such as Second Life, Barbie Girls,
Gaia and Whyville. All offered the service of an experience that one could personalize
(e.g.: via an avatar), as well as social and gaming attributes. Some companies' main
revenue sources were selling advertising spaces, some incorporated virtual worlds as a
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part of their business plans, and they all competed for a bigger share of the virtual world
market.
Specifically, CP's two main competitors were Webkinz and Neopets. These companies
had different business plans than CP. By August of 2007, CP had 2.5m unique visitors
and was in third place after Neopets by 3.5m (second place) and Webkinz by 4.5m (first
place) (Traylor S., 2009). (See Exhibit 2)
Exhibit 2
Ganz Company launched its first collection of Webkinz in 2005, which were small
stuffed toys. The toys were similar to other stuffed animals; however, Webkinz came
with tags that had printed secret Code. By entering the code, kids could open account
and play at the "Webkinz World" website, where kids could own virtual versions of their
pets for one year. The regular price for Webkinz was around $10. In 2006 Webkinz had
one million online accounts, and they made $100 million (www.webkiz.com; Wikipedia,
2010).
Launched on November 1999, Neopets was a virtual pet website with its own virtual
world, Neopia. Joining Neopia was free, and each account holder could have up to 4
virtual pets. The pet owners could play and interact inside the virtual world. The virtual
world had two different currencies, Neopoints and Neocash. Neopoints were earned
through playing games, while Neocash had to be purchased with US dollars. In addition,
Neopets had a pay-to-play version, Neopets Premium. This version provided additional
benefits for users for a monthly fee of US$7.99. Neopets, Inc. produced a wide variety
of Neopets merchandise, such as notebooks, video and card games
(www.neopets.com; Wikipedia, 2010).
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MARKETING STRATEGY
CP’s target market is children between the ages of 6 to 14, catering to the increasingly
relevant demand for "social networking for kids" (Richards, 2008). Its purpose is to
allow each user to individualize their experience, to practice and develop (online) social
skills, and to promote cooperation via games and other activities. Some educational
elements include: practicing reading, typing, conversational skills, participation in
events, recipes, arts and crafts and outdoor activities. There is even a weekly
newspaper that kids translate into other languages (Canadian Business, 2008). Thus
the game promotes a certain level of ownership, freedom of choice, and
multiculturalism. Other activities inside CP are areas like The Town, The Coffee Shop,
Hockey stadium and the shop (see Exhibit 3). Kids play different games and earn coins
which are used for purchasing different virtual products, but to get these coins a paid
subscription is required (Club Penguin, 2005).
The site also profits via the promotion of charity work, which not only teaches children
the value of giving, but also benefits various aid agencies. CP’s Global Citizenship
program began as an annual charitable event known as "Coins for Change" where Club
Penguin users were able to donate their time and in-game earned coins to help various
charitable organisations. Now the Global Citizenship program ensures that a portion of
the revenue earned by Club Penguin memberships is donated to charitable
organisations. In turn, the users of Club Penguin become "kids helping kids" and are
encouraged to help others as well as increasing awareness of social issues around the
world (Disney Online Studios Canada Inc., 2010).
Unlike traditional online social networking services such as Second Life or Facebook,
Club Penguin does not use in-game advertising for revenue, but advertisers do earn
money by selling things within the game: players collect coins and are able to purchase
goods such as clothes, furniture and pets (Wikipedia, Club Penguin, 2010). Instead
Club Penguin relies on segmentation between non-paying and paying user
memberships to maintain and upgrade their services (table 1). The most recent reports
indicate that there are over 12 million casual user accounts as well as over 700,000
subscribed members to Club Penguin's services (Kaplan, 2010).
Table 1
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The first safety measure is activated upon initial set up of user names: any revealing or
inappropriate names are not approved. Once users are registered, CP offers two
heavily monitored chat options. The first is the "Ultimate Safe Chat" mode, where users
can only communicate with predefined greetings, questions, statements, emoticons,
actions and greeting cards. The second is "Standard Safe Chat" and allows users to
write their own messages that are filtered before other users can read the message.
The constantly updated filtering in the Standard Safe Chat blocks any forms of personal
information, such as phone numbers, email addresses, the user's age, profanities and
key words that could possibly mislead users such as "mother" and "home". (Disney
Online Studios Canada Inc., 2010). In addition to the in-game safety measures, another
preventative safety measure are the actual staff that monitor user activities 24 hours a
day. The site goes further and created an Elite Penguin Force Agent status for those
who report inappropriate behaviour. Parents can also monitor their children's usage
time with Club Penguin through a Parent Account.
The more subtle educational experience being promoted by CP is that it offers a chance
for kids to be introduced to online worlds such as those that they will likely be using later
on as teens and adults. CP is a safe environment for them to essentially practice ways
of socializing that have become a regular part of life, and this means also practicing
safety in regards to general computer usage.
Criticism
Despite its best efforts to maintain the image of CP as a safe and educational place,
there remained plenty of criticism concerning the use of these types of games by
children, specifically because they were still relatively new products; many brands had
yet to establish a true feeling of ‘trust’ that would allow parents to feel safe letting their
kids use them.
Critics have suggested that CP can lead to the discovery of off-site forums where
‘anything goes’, establishing potentially unsafe or unhealthy relationships between
users. In addition there have been noted cases of ‘cyber bullying.’ This could occur for
different reasons: perhaps it is as simple as one player not wanting to ‘chat’ with
another, or perhaps more complex, for instance due to inequalities between those with
a membership and those without. Failing to monitor this kind of cyber-bulling could
damage CP's reputation as a safe site for children (Estroff S. D., 2010).
OUTLOOK
Disney had to find a way to assess the profitability of the acquisition in light of the
controversy surrounding social networking and MMORPGs for kids; after all, online
worlds were still so new that there had been little chance for thorough research to be
conducted on how they can affect children negatively. Would Disney really want its
name attached to a product that is not generally perceived as wholesome, trusted or
safe?
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Exhibit 3
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