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DECEMBER 12, 2001 COMPANY CLOSEUP By Arlene Weintraub Real Profits from an Imaginary World In Neopia, Web surfers nurture their "NeoPets" for hours on end, allowing the site to employ novel ad strategies
Say what? This odd online universe, created by NeoPets.com, is one of the Web's most unlikely success stories. Launched in November, 1999, Glendale (Calif.)-based NeoPets has grown into one of the top three entertainment sites on the Web, according to Jupiter Media Metrix. It attracts 21 million registered users, each of whom spends an average of four hours or more a month there. ADDICTIVE ADOPTION. Think of Neopia as a cross between Pokemon and Tamagotchi. Users adopt their own Skeith, Quiggle, or one of the other 40 cartoon species that inhabit Neopia, then personalize their pets with names and traits that they choose. NeoPet owners must return to the site to feed their creations and entertain them by reading to them or buying them toys. They purchase their pets' goodies with Neopoints, which they earn by playing games or entering contests on the site. "It becomes addictive," says Courtney Lane, director of Mattel unit Girls Online. Mattel promotes its Diva Starz dolls on NeoPets. "It has tremendous stickiness, and that helps us gain the exposure we need," says Lane. Backed by an A-list of advertisers including Coca-Cola, Proctor & Gamble, and Kraft, plus a brand new marketing agreement with Viacom, NeoPets CEO Doug Dohring says his 65-person company has been profitable since last summer. NeoPets is thriving during the worst possible time to be an ad-supported Web site. Slapped by a poor economy and doubts about the effectiveness of banner advertising, online ad revenues are off 8% this year, according to the Internet Advertising Bureau. And scores of ad-supported sites such as Inside.com and the Globe.com have gone under this year. By contrast, Dohring says his company is on track next year to double its sales to more than $15 million, but he declines to disclose earnings. PROVEN RESULTS. From the beginning, NeoPets decided to buck the banner-ad trend and offer a different approach that it calls "immersive advertising." It's a variation of the Hollywood trend toward getting companies to pay for a choice spot for their products in a movie. Only online, the products are actually part of the game. NeoPet owners can feed their pets Kraft's Capri Sun drinks, or play games in which they race Mattel Hot Wheels cars, or interact with the Diva Starz dolls. NeoPets polls users about the products featured on the site, proving to advertisers that the money they spend on the site generates results. NeoPets recently discovered that 42% of its users reported drinking Capri Sun after the product was featured on NeoPets vs. only 35% before. "To get these companies to come back to Internet advertising, we believe we have to be accountable for the effectiveness," says Dohring, 44. The CEO is a longtime marketing executive. He's the founder of market-research outfit Dohring Co. in Glendale, Calif., which since 1986 has conducted studies for companies and government institutions. In December, 1999, right after NeoPets' launch, Dohring was introduced by a mutual friend to the two British college students who created the site. That month, he took one look at NeoPets and instantly decided to buy. Dohring saw NeoPets as a golden opportunity to attract advertisers frustrated with banner ads. In April, 2000, he brought in his first paying customers. UNOBTRUSIVE ADS? Still, Dohring is constantly walking a fine line between harmless advertising and offensive commercialism. Too many products sprinkled throughout the site could spark a backlash from NeoPets fans -- or their parents. Already, Ralph Nader's Commercial Alert, a consumer advocacy group that opposes persuasive selling tactics aimed at children, has criticized NeoPets' approach. Dohring isn't concerned. The advertising isn't overly obtrusive, he says, because the products are featured in ways that don't upstage the pets themselves. In the recently posted game Attack of the Plaque, for example, players use a new Crest battery-powered toothbrush to clean Grarrl the dinosaur's teeth. Brush too slow, and Grarrl's teeth fall out, causing him to react with hysterical grimmaces. "This is better than blatant and ugly banner advertising," says 18-year-old NeoPets fan Ravi Bhikhi, who logs onto NeoPets from his home in the Netherlands and spends about seven hours a month on the site. "I have no problem with it." CONSTANT UPDATES. Neopets faces a bigger challenge: Keeping users around. Since nearly 80% of its users are under 18, that won't be an easy task. NeoPets is vying for attention against other popular kids' sites, such as Disney.com and the teen-oriented portal Alloy, not to mention school, friends, TV, and Harry Potter books. So NeoPets' creative staffers constantly update the site, adding such features as role-playing games, an eBay-like auction site, and even a mock stock exchange called the NeoDaq. NeoPets relies heavily on word-of-mouth, rewarding Neopoints to members who refer their friends to the site. "As a user, you're creating part of the content, and so you feel a personal, emotional connection to it," says Jupiter analyst Stacey Herron. Now, Dohring hopes his online audience will follow the NeoPets into the real world. Next year, Viacom will begin producing NeoPets books and videogames. NeoPets is currently test marketing a line of plush toys based on its characters. Dohring's overall goal is to keep building the company at a profitable rate -- funding it himself without venture capital. It's a novel approach that has led to a novel outcome: a profitable Net business.  Weintraub covers technology for BusinessWeek in Los Angeles Get BusinessWeek directly on your desktop with our RSS feeds.  Add BusinessWeek news to your Web site with our headline feed. Click to buy an e-print or reprint of a BusinessWeek or BusinessWeek Online story or video. 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