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Reports that Sony or News Corp. could snap up Club Penguin highlight the growing allure of such sites to potential acquirers
Kids who immerse themselves in Club Penguin, the online virtual world for youngsters from 8 to 14, can chat with friends' penguin avatars in icicle-covered cafes and earn coins for accessories like sombreros—a must-have in Antarctica. For Club Penguin's owner, New Horizon Interactive, all that virtual commerce could soon translate into a wad of real loot.
Sony (SNE) and News Corp. (NWS) are said to be interested in paying as much as $400 million for the site, based on reports from blogs paidContent.org and GigaOm. Neither Club Penguin nor the would-be suitors would comment. But the reports underscore the growing attractiveness of immersive online worlds as takeover targets and are fueling speculation that a wave of purchases may be on the horizon. Some of tech's titans—including Google (GOOG), Yahoo! (YHOO), Microsoft (MSFT), and Time Warner's (TWX) AOL—have cause to engage in a round of purchases reminiscent of the social network land grab touched off when News Corp. bought MySpace.com for $580 million in 2005.
"The Next Big Thing"
Like social networks, virtual worlds have become big business. Online advertising is booming, and a growing number of companies—from Coca-Cola (KO) to IBM (IBM)—are promoting their brands in virtual worlds such as Second Life, owned by Linden Lab. Subscription sales from online virtual worlds rose to $526 million in North America in 2006, according to media consultancy Screen Digest. And consultancy Gartner (IT) predicts that 80% of active Internet users will join a virtual world by the end of 2011.
In the coming years, surfing the Web may more closely resemble the immersive experience of virtual worlds (see BusinessWeek.com, 4/16/07, "The Coming Virtual Web"). Potential acquirers "are thinking virtual worlds are the next big thing, and they want to get in early," says Joe Laszlo, an analyst with consultancy JupiterResearch. Considering it can take two years or longer to build a flourishing virtual world, acquisition may be the fastest way in.
And while Second Life has come to typify the rise in popularity of virtual worlds, it may not be among the most attractive target, some analysts say. In April, Second Life didn't even break into the top 10 most popular virtual worlds, as measured by percentage of traffic, or market share of visits, according to consultancy Hitwise.
Real World Acquisition Candidates
Which worlds, then, might wow buyers more? Try Webkinz.com, a site where children care for virtual pets and play online games. Webkinz had seen its share of Web traffic rise by 1462% in the past year, according to Hitwise. The virtual world, owned by closely held toy and accessories manufacturer Ganz, now commands a greater share of Web traffic than Second Life and the World of Warcraft online community combined. Ditto for Club Penguin, whose traffic share jumped by more than sevenfold in the past 12 months. Its share is also higher than Second Life's and World of Warcraft's combined.
Using Hitwise's figures, an even more popular site is RuneScape.com, where users can explore haunted mansions and join other knights in battles. RuneScape commands 0.17% of all Web traffic, outstripping Second Life's 0.00091%. The site's share of Web visits rose by 32% year over year in April, according to Hitwise.
Virtual worlds that are profitable are also likely to draw attention. This group includes Habbo.com, a popular destination for teens owned by Finland-based Sulake. A slew of smaller sites, like There.com, expect to swing into the black this year as well. "Those companies that really stand out will get high valuations," says mergers-and-acquisitions expert Tom Taulli.
What many sites have in common is their appeal to kids and teens, a demographic that advertisers covet. In 2003, 47% of 9- to 17-year-olds surveyed by Mediamark Research were asked by their parents to research products and services online, up from 37% in 2001. Teens spend about $112 billion a year of their own funds, according to Mediamark.
Cool Features Are a Draw
Some faster-growing sites are also easier to learn and use than Second Life or Linden's version of Second Life for teens, analysts say. "The whole experience of Second Life is less user-friendly," says Piers Harding-Rolls, an analyst with Screen Digest. "It's an undertaking to download the game, and there's no tutorial. It's not as mainstream as Club Penguin. The potential user base is not as big."
Rich patent portfolios and tech knowhow could prove an inducement for potential buyers as well. In a new version, due to be released in June, virtual world Playdo.com will offer users new cool features, such as the ability to control a game using movements registered on a Webcam. Worlds.com, which has built virtual worlds for musicians such as David Bowie, holds a patent, issued in 2001, on some 3-D technology, and is currently in the process of assessing whether rivals are infringing on it, says Thom Kidrin, the company's CEO. "I am constantly getting phone calls from people interested in where we are going," he says. "We are not interested in a sale right now, but everything has the right price."
Media giants may be willing to pay just that. To gain a toehold in this emerging market, giant Viacom (VIA) acquired Neopets, a virtual world for kids, for $150 million in 2005. Several months ago, Viacom's music network MTV launched Virtual MTV, which lets users outfit and race virtual cars, watch celebrity interviews, and hang out with other fans. Virtual MTV's traffic has already jumped more than threefold since January, according to Hitwise. And Disney's (DIS) Virtual Magic Kingdom for kids is already a top 10 virtual world in traffic, according to Hitwise. Both companies' efforts drive viewers to the companies' TV shows and increase advertising revenues online and off.
For its part, Sony is building PlayStation Home, a virtual world for people using PlayStation 3 gaming consoles that's expected to debut later this year. PlayStation Home users will be able to play online games, shop, and create their own spaces, and it's expected to be filled with an array of advertising.
Expanding the User Experience
These and other companies could supplement their virtual world efforts with new purchases. A telco or a cable company might wish to acquire a virtual world to encourage more subscribers to watch TV programs online or to bolster a show's following. Peter Levinsohn, the new chief of News Corp.'s Fox Interactive division, has publicly stated that he'll look for acquisitions that improve user experience on sites like MySpace.com. A 3-D virtual world could be incorporated into MySpace, allowing users to create avatars and virtual houses instead of standard profiles.
Google may look to combine a virtual world with properties such as Google Earth, building a virtual world around a real one, as startup Weblo has done, analysts speculate. Weblo opened in December and has 27,000 users, with its membership doubling every month. The site lets users buy their own house, street, city, state, or country in its virtual world. California went for $53,000. The buyers act as mayors and governors, for instance, collecting taxes from other users. "We had an offer already which we didn't take," says Rocky Mirza, CEO of Weblo, funded by powerful venture capital firm Oak Investment. He didn't elaborate.
Other potential acquirers, analysts say, include Yahoo and Microsoft, which have been expanding through acquisitions (see BusinessWeek.com, 5/18/07, "Microsoft's Big Online Ad Buy"). Representatives of Microsoft, Yahoo, and Google declined to comment.
As one might expect, many virtual world owners are coy on the idea of takeovers. Says Michael Wilson, founder of Makena Technologies, the owner of There.com: "My goal is to build a great product." And as any tech watcher well knows, the money often chases great products.