March of the Penguin

Disney's $350 million bird is spreading its wings

SAN DIEGO -- Every kid in Brazil will have an igloo to live in if Disney has its way.

The entertainment giant isn't trying to bring a new Ice Age to South America. Rather, the igloo is a digital fixture of Club Penguin, a virtual world for which Disney paid

$350 million 18 months ago -- a deal that could cost another $350 million if the property hits performance targets. Its first non-English-language version, operating out of Sao Paolo, launched in November.

It's just one of the signs that Disney is in expansion mode on the franchise, aimed squarely at kids 6-14. Once restricted to English-speaking countries the U.S, the U.K. and Australia, the Portuguese edition will be followed by virtual worlds for France and Latin America. Disney's first Penguin merchandise and video game extensions rolled out in October.

With the Penguin brand starting to feel the power of Disney's infrastructure, now is the time for the company to make good on its investment. But that will mean competing for kiddie mindshare all over the globe and putting the same weight behind the brand that Disney usually devotes to homegrown properties.

Does that mean a Pixar movie devoted to the site is coming? Maybe a Disney World ride? Disney isn't saying, but in November, CFO Tom Staggs acknowledged that the conglomerate is happy with the acquisition. "Club Penguin actually is doing quite well for us," he said during an earnings call.

Launched in late 2005 by three Canadian entrepreneurs under the banner New Horizon Interactive, Penguin allows kids to create and customize penguin avatars and enter a snow-covered virtual world where they can chat, play mini-games or just explore.

It wasn't just kids who found Penguin appealing: Parents who control online access in most households also liked the site's efforts to provide a safe environment for children.

Within two years of launch, Penguin claimed more than 12 million registered users, of which about 900,000 were premium subscribers typically paying $5.95-$6.95 a month for access to additional features and virtual collectibles.

"The premium service option has been wildly effective in driving revenue," said Joey Seiler, editor of Virtual World News. "From what I can tell, Club Penguin has been profitable almost since its inception."

Lane Merrifield, one of the co-founders of Penguin who joined Disney after the acquisition, suggested that one of the reasons they opted to link up was to drive expansion of the Penguin brand, including internationally.

"We're in a unique position where a lot of international growth has already happened, completely unintentionally," he said. "More than 30% of the Club Penguin audience is outside of North America -- we have kids who are playing English-only games and buying memberships in U.S. dollars from around the world."

During the past year, Disney has been busy taking some of its most popular licenses, including "Pirates of the Caribbean," "Cars" and Tinker Bell, and creating virtual worlds around them.

But with Penguin, that strategy has been reversed somewhat, giving the property the chance to leverage Disney's retail muscle. The recent launch of a toy line includes plush versions of popular characters, a set of figurines and an Igloo Playset. The brand also was extended into the lucrative game field with the introduction of "Club Penguin: Elite Penguin Force" for the Nintendo DS.

"Internet toys are the hottest trend in the toy industry," said Chris Heatherly, vp technology and innovation at Disney Consumer Products. "Kids want to play with their toys online as well as in the real world."

Of course, merchandizing is not new in virtual worlds and already has proved far more than a branding play. Toronto-based Ganz is estimated to be earning more than $100 million annually from collectible plush toys and accessories kids buy that allow them to unlock virtual goods online at Webkinz World.



Teemu Huuhtanen, president North America at teen-centric global virtual world Habbo Hotel, said virtual worlds essentially have a choice: Go with an advertising-based model or figure out a way for consumers to foot the bill.

But with more than 150 virtual worlds for the 18-and-under set already up and running globally, according to a recent study by Virtual Worlds Management, companies are becoming increasingly sophisticated in figuring out ways to make it all pay.

Penguin likely won't alter the formula of subscriptions and merchandise, even as it expands into new markets. Portuguese might not be the most obvious choice for the first non-English site, but Seiler said that with such markets as North America and Korea already crowded, South America is emerging as the next big growth opportunity.

"We're seeing a lot of global brands getting into markets like Brazil," he said. "There's not a lot of activity for virtual worlds yet, but it's a hugely connected country with plenty of interest in online social communities."

Added Huuhtanen: "South America is one of major growth markets right now. With the current financial situation, I don't think there will be that many companies capable of building global virtual world brands."

Seiler said that if anyone can do it, it's likely a U.S. entertainment giant.

"Companies like Disney, or a Viacom through MTV and/or Nickelodeon, are able to push internationally because they have well-known brands that can be rolled up into their virtual worlds," he said.

Merrifield, recently named executive vp of Disney Interactive Media Group, said the inclusion of multiple languages within Penguin will have benefits in the domestic market as well.

"As language-learning is such an important thing right now, we have parents that say, 'If you launch in Spanish, I would love to tell my child that they can play for a half-hour in English but then have to play for a half-hour in Spanish,' " he said.

Merrifield is aware that the current Penguin audience will age out of the virtual world but suggested many could graduate into other Disney-branded worlds.

"When we first set out, we very obviously built Club Penguin for the youngest users," he said. "But we already have Pirates in that next older stage, and we have others in development that we haven't announced yet."

Merrifield suggested that many of these in-house virtual worlds will end up reinforcing the Disney philosophy of creating content that appeals primarily to kids but also has something entertaining for parents.

"We have a lot of parents and grandparents who play with their kids in our virtual worlds," he said. "One of the things that I challenge our studios to do is make sure there are elements for parents and grandparents, much like what Pixar's done in 3-D animation with its scripts."
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