$500 a Penguin (Guest Article from Michael Cai)

Club Penguin, the popular virtual world targeting 7-15 year old, is now Disney's Club Penguin. The Walt Disney Company announced that it will acquire Club Penguin for $350 million hard cold cash, with another $350 million in sight if the company meets performance expectations. At 700,000 users, that's $500 a penguin. To put the number in perspective, Murdoch bought Myspace for $28 per user ($580 million divided by 21 million users at the time of acquisition). Of course, the valuation is based on growth potential, or the so-called castle in the cloud. Club Penguin did have a 300% YOY growth according to Hitwise.  Note:  Michael will be speaking at Virtual Worlds Fall Conference in Oct.

Judged from all angles, it's not a bad deal for the three Canadian fathers who set up the site a couple of years ago, not a bad deal at all. When I became a father in 2005, I heard new parents lose 10-20% of their IQ. Apparently the same thing did not happen to those three lucky guys.

Club Penguin did not invent virtual world or avatar-based social network but it was successful at targeting its audience and monetize its users. It combines premium subscription ($6 a month) and microtransaction. Kids can purchase both virutal and real-world merchandise within the game. For instance, they can buy furnitures to decorate their space or T-Shirts to wear to school. Such ideas are nothing new. Cyworld, the South Korean sensation pioneered the concept in 1999. 96% of Korean youth are on Cyworld and it is expected to generate $150-250 million for SK Communications, its parent company. People have doubts whether those cutesy avatars will work in North America. Cyworld did make its U.S. entrance in 2006 but it's unclear whether the company will meet its target of amassing 2 million users by the end of 2007. Apparently Disney believes in the model.

Virtual Worlds have been the media sensation for the past 12 months. There were tons of news articles on everything related to Second Life, including a recent one pronouncing the death of Second Life on Wired Magazine (It does not seem that the article had any impact on the valuation of Club Penguin). However, it's the less known worlds, such as Club Penguin, Habbo Hotel, Runescape, and Webkinz, that are making real money. Virtual World is here to stay, even if Second Life dies. At Connections 2006, I posed the question to the audience, will Virtual Worlds become the new model for social networking? Large corporations might be exiting Second Life, but they are setting up their own branded virtual worlds instead. MTV set up Virtual Laguna Beach and Webkinz, a site owned by Ganz, is making those fluffy toys fly off the shelf. Disney itself has also set up virtual worlds such as Virtual Magic Kingdom. We expect such Branded Virtual Worlds to become even more popular in the coming years and in our recently published report on game advertising, we actually forecasted the growth of advergames and adverworlds. It's funny that Disney said there won't be any advertisements in Club Penguin... It's a giant adverworld afterall.

This deal leaves me wondering, what's next? McDonalds buying Habbo Hotel? Sony buying Runescape?

[This post was originally written by Michael Cai for the Parks Associates blog and appears here with the author's permission.]

Comments

[Daniel James]

Umm, Club Penguin has 700,000 *subscribers* at $5.95 a month. The myspace comparable number is 12M registered users (I've read 'active' registered users and just registered, so it's not clear which). On this registered user metric the price paid is ~$30 plus another $30 in earn-out; absolutely comparable to myspace. That's not to say that the value per subscriber is not significant at $500-1,000, but of course the blend of the two and the growth potential / brand are what Disney is paying for.