Disney vs. Residents of The Virtual Magic Kingdom

Only a few days after Disney Online announced the imminent closure of the online Virtual Magic Kingdom (VMK) there are a number of petitions circulating to try and keep the worlds running. While the effort is commendable and indicative of how powerful virtual worlds have become, it is not going to happen. However, Disney is not entirely off the hook. The manner in which Disney is closing VMK will unravel much of the good will and support it gained from the current user base. Not to mention their parents.

Disney cannot be expected to run the Virtual Magic Kingdom forever. It was a celebratory, gracious, and deep offering to commemorate the 50th anniversary of the Disneyland Theme Park. It was originally intended to run alongside the 18th month celebration from January 2005 to July 2006. VMK made it almost two years past its sell-by date. However, to expect Disney to maintain and support a service that was never built with a sustainable business model is unreasonable and uninformed. VMK was never built to be a long-term virtual world and to turn it into one would require an entirely new world, built to different standards, and constructed outside the existing VMK. Disney is surely contemplating just such a virtual world and with the wealth of Disney IP available to fill a virtual world: even if done poorly, it would surely be a success.

However, Disney must have been losing a lot of money on VMK or the world was taking too much time and effort away from getting a new virtual world off the ground. How else can you explain dropping tens of thousands of users off the deep end? Virtual Magic Kingdom built a lot of good will for Disney. It helped establish the company in the virtual world space and gained a large following in the process. There are a lot of upset children, tweens, and parents glaring at Disney and asking why their world is being taken away from them. Disney’s remaining virtual world offerings in the youth-oriented space are popular and profitable, but do not capitalize on Disney’s IP lineup. Toontown Online and Club Penguin both serve a younger demographic than the typical VMK resident and do not utilize the Disney IP library to engage users.

We realize the technology that VMK was built upon was licensed from Sulake. We realize Sulake’s own Habbo Hotel virtual world has increasing relevance in the North American market and this could have sped up the VMK closure. We realize there are behind-the-scenes details unknown to all but Disney. Regardless, Disney needed an exit strategy; a plan to move these VMK residents into a new virtual world. A virtual world with an economy and a way to pay Disney for all the IP related digital content, social networking features and ways to interact with some of the world’s most recognized characters. Instead the company is looking back at angry residents searching for a new virtual world to inhabit. Hopefully Disney will come back soon with a new neighborhood for its fans to inhabit.

$500 a Penguin

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). If we consider activated user account instead, it's a little over $29 per account based on 12 million accounts (many users have multiple accounts). 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. 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?