Penguin waddles to Disney

Kids brand passes on AOL's bid

Walt Disney Co. has acquired fast-growing online kids brand Club Penguin, outmaneuvering rival suitors including Time Warner's AOL, which sources revealed mounted an aggressive bid that might have even been pricier than that of Disney.

Disney paid $350 million upfront for Penguin and promised its founders as much as $350 million more over the next few years if the online property reaches certain performance metrics.

During a conference call with analysts to discuss its quarterly earnings, Disney CEO Robert Iger called Club Penguin "a great example of creativity and technology merging."

Sources indicate that Disney won over Penguin despite persistent wooing from AOL, which might have been prepared to pony up as much as $500 million to acquire the brand. But Disney ultimately won on the strength of a late-placed albeit lower bid that emphasized its ability to promote and merchandise throughout every facet of the company.

"Disney came out of nowhere," said the source familiar with the talks who wished to remain anonymous. "AOL was looking to make a play in the kids demographic, but after a certain price point it stopped making sense."

A spokesman for Time Warner declined comment. AOL did not respond to requests for comment.

In addition, sources said that Sony Corp. had made a strong play for Penguin months before AOL did, but negotiations eventually broke down. A spokesman for Sony declined comment.

A mini-MySpace for kids ages 6-14, Club Penguin has been alternately described as a massively multiplayer online game, social network and virtual world. It is a 3-D environment in which users can chat, play games and earn points in the form of avatars, which are animated penguins. True to their habitat, Club Penguin is decked out as a frozen tundra complete with igloos users can decorate.

Key to generating interest in Club Penguin was not only its 12 million-strong user base but also a subscription model that has attracted 700,000 users predominantly in the U.S. and Canada. With paying customers shelling out anywhere from $5.95 per month to $57.95 per year, Penguin is an uncommon revenue generator with a direct-billing operation in place.

Disney will treat Club Penguin much like it has another acquisition beloved to young audiences -- Pixar -- allowing the company to operate at arm's length. The outfit will remain based in Kelowna, British Columbia.

As with Disney's Pixar purchase, Iger said a big consideration was the acquisition of talent. Penguin's management team -- Lane Merrifield, Dave Krysko and Lance Priebe -- will join Disney and continue to run the company; Club Penguin CEO Merrifield also will assume the title of executive vp of Walt Disney Internet Group, reporting to WDIG president Steve Wadsworth.

The short-term focus will be on fueling Club Penguin's growth, with promotional support to come everywhere from Disney's cable channels to theme parks. But the next step, Wadsworth said, is exploiting Club Penguin content across Disney's range of TV, film, publishing and merchandising arms. Soon a Club Penguin character like Rockhopper could get the multiplatform exposure that the conglomerate has put behind everything from Mickey Mouse to "Hannah Montana."

"There are clearly opportunities as appropriate to extend into other media," Wadsworth said. "We will figure those out."

"We get a lot of kids asking to get a plush Penguin, something they could take to school," Merrifield said. "We're not going to try to make 100 million Club Penguin things tomorrow."

The acquisition of Club Penguin also will ratchet up the heated competition between Disney and Viacom's Nickelodeon for elementary school eyeballs. As they battle for viewers via cable channels and theaters, their war has spilled onto a third front -- the Internet. Disney entered the virtual-world market first in 2003 with Toontown Online, which continues to exist. It has since launched Disney Xtreme Digital and plans to follow up with MMOs based on "Pirates of the Caribbean" and "Disney Fairies."

Viacom struck in 2005, snapping up Neopets for $160 million, which seems especially prescient given the price tag attached to Penguin. Disney and Nickelodeon also have developed their own kid-targeted social networks. Nickelodeon this year launched Nicktropolis and Disney countered with Disney Xtreme Digital.

In June, Disney CFO Tom Staggs signaled that the company was prepared to triple its investment to the gaming space. Last month, Viacom countered with a pledge to sink $100 million into the same category.

Neither conglomerate, however, can claim dominance of the kids online community space, which is filled with players commanding sizable audiences. IAC/InterActive Corp's Zwinktopia, Sulake Corp.'s Habbo Hotel and Ganz's Webkinz are among the players who report millions of unique visitors per month. Analysts expect still more conglomerates to try to snatch up remaining market entrants.

Merrill Lynch analyst Jessica Reif Cohen told Iger on Wednesday that Club Penguin was "an amazing acquisition," and Goldman Sachs analyst Anthony Noto said in a note to clients that he views the deal "positively, both strategically and economically."

Disney is a fitting home for Club Penguin considering Merrifield counts Disneyland as his first employer after college and the inspiration for the site.

"Walt's vision of having a place different from carnivals of its time, why he create Disneyland, was the same vision we had when we looked out on the Internet landscape," he said.
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