As a VC that invests in early stage companies, part of my job is to discover new opportunities and business models. While much of today’s online and social networking growth is being driven by teens and college students, very rarely do I get the opportunity to learn about interesting companies through the eyes of my young children. It started about 6 months ago, when my son came home from school talking about a build-your-own penguin site. He did not know the web address, but said it was a cool place to create your own penguin, play games online, and earn points to further dress up your penguin. He also said that we had to sign up and pay to become a member and kept asking me to visit. After doing some diligence, I found ClubPenguin, created my own penguin, and discovered that it is basically like second life for kids – a virtual world of penguins designed for kids to interact in a safe manner. While the stated target demographic is for 8-14 year olds, I suspect that the user base is much younger. To its credit, it has built in some nice safeguards for privacy with the ability to limit chat to precanned menu items and parental involvement in the signup process. If you log into the site right after school, you can see a number of overloaded servers where penguins are living in a virtual world, earning points to decorate their igloo, playing games with others, and socially interacting. Luckily most of my children’s time is spent doing their own things and less on the social networking aspect of the community.
Within weeks of that discovery, the next big thing in our house became Webkinz. Webkinz is another virtual world for kids but with a twist. You have to buy a stuffed animal and on that pet there is a special code you enter to bring your animal to life on the web. I must say that Webkinz is also brilliant and well done. My kids wake up in the morning asking to log on to feed their pet before they go to school and to also earn some kinzcash to decorate their rooms. Kids can earn kinzcash by answering math and educational questions, playing games, and answering surveys. In addition, you can add friends to your buddy list and invite them to your room to interact. So far Webkinz strikes the happy balance between being a fun and entertaining place for kids without too much marketing. I could envision down the line branded items for sale through the W Shop but for now the site is just selling generic stuff.
Together both of these sites have become the hottest destinations on the web for young kids. As a VC, the big question I have is what is the staying power of sites targeted towards young children as we all know that children are fickle and trend-oriented. In addition, I am paying close attention to the revenue model as it has been notoriously hard to extract dollars from kids. For now, ClubPenguin earns cash through the premium model having free users pay a monthly or annual fee for the special privilege to customize and buy items for their penguins. Webkinz seems to make its money from selling the real stuffed animal which has a virtual equivalent. It also manages its product line and inventory closely by constantly developing new pets so kids can have multiple pets/adoptions. In fact, to further encourage purchasing of new pets with every 10 adoptions kids earn a "priceless" prize for their room. All I know is that based on an informal poll I have taken amongst my children’s friends that the penetration of these services is quite high and most users are paying users. And so far through the eyes of my children I can see that the more time they invest in these services the harder it is to extract them. So from this standpoint there may be some staying power for both services. As a parent, the big question I have is are my kids too young to be on these virtual worlds and what am I socializing them for in the future. Where do they graduate to after they tire of ClubPenguin and Webkinz? Being a technology VC, I would be a complete hypocrite if I did not let my children try these services. While I do question how early is too early, ultimately I have come to recognize that this is the world that my children live in and the best thing I can do is monitor closely, teach them what is real and not, and make sure to constantly educate them in terms of safe web practice. In addition, there are some educational benefits as well pushing my kids to read and do math. I know their world today is much different from mine when they tell me to go to Answers.com (full disclosure-I am a board member) or Google to get more information.
Given these factors, it is pretty clear that there will be more virtual worlds for kids created. From an exit standpoint, I wouldn’t be surprised if one or both of these web properties eventually gets bought by Fox Interactive Media or Disney as a way to reach this young, impressionable demographic, develop brand relationships early in life, and upsell them on various social networking options as they get older. It is also important for us to realize that we are still just in the second inning when it comes to new advertising models. All of the groundwork we are laying to reach today’s teens and young adults is just the beginning and my question is how will the world look 10 years from now when today’s 5 year olds are 15 and todays 10 year olds are 20. What will be the best channel to reach them and with what kind of message and in what medium? I can bet that wireless will definitely be one big component of that. Striking a balance, the parent in me will ask how will we be able to protect our children (to the extent that we need to) from overcommercialization and other security issues (this is a huge topic that can be addressed at a later time)? I don’t have any answers now, but trust me I have a vested interest in monitoring this space carefully for multiple reasons. I would love to hear your thoughts and opinions on this as well.