Virtual-world makers aim to hook kids

By Stefanie Olsen
Staff Writer, CNET News.com
Published: October 15, 2007 4:00 a.m. PDT
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SAN JOSE, Calif.--There's about to be a boomlet in kids' virtual worlds.

Parents and children can expect a raft of new 3D environments for play and socializing in the coming year, thanks to projects from established players like Disney and Neopets, as well as upstarts aiming to unseat them. Of course, momentum has been building in this market all year, punctuated by Disney's $350 million acquisition of kids' phenomenon Club Penguin this summer. But more companies believe that they can outdo the current crop and capitalize on kids' love of virtual playgrounds.

One venture capitalist summed up why the market is so hot by saying that kids' virtual worlds are the only ones that are successful so far. Club Penguin, for example, expected $35 million in earnings before interest and tax this year from subscriptions, according to Sharon Wienbar, managing director of venture capitalist Scale Venture Partners. While that's only an accounting figure and not necessarily a real indication of profitability, it's certainly indicative of potential.

"In the children's market, that's where virtual worlds are really mainstream," Wienbar said at an industry conference last week. She was referring to sites like Webkinz and Club Penguin, which have millions of active members, as opposed to adult worlds like There.com and Second Life, which have anywhere between tens of thousands and hundreds of thousands of active users.

Another reason the industry is booming is because more kids are flocking to imaginative, character-driven environments. An expected 53 percent of children on the Web will belong to a virtual world within four years, more than doubling the current population of 8.2 million members, according to a recent report from eMarketer.

"This is the way people will interact in the future," said Scott Raney, a venture capitalist from Redpoint Ventures, which backs the virtual world Gaia Online. Raney also was at the Virtual Worlds conference, held here last week.

The market is still relatively young, too, giving upstarts a chance to rival brands like Disney and Nickelodeon. Companies like Webkinz have proven that it's possible. In 2005, the company started selling plush toys in stores that let kids adopt a virtual character in its online world. In May this year, it had 4.1 million visitors, up 1,300 percent from the previous year.

For that reason, more newbies are piling in. Fashion doll-makers Barbie and Bratz both opened new virtual worlds for girls in recent months, in an attempt to catch up with market-unknown Stardoll.com, a Sweden-based virtual paper-doll site. In less than three years, Stardoll has attracted 6.4 million worldwide members, according to the company. Aardman Animations, creator of the cartoon Wallace and Gromit, also recently opened a kids game site.

Showing that more relative unknowns will be here soon, at least a dozen people raised their hands when asked if they were developing a new online world for teens or kids during a panel at the Virtual Worlds conference.

Executives from well-established players like Nickelodeon, Neopets and Stardoll on the panel also were bullish about their expansion plans to cater to children aged 6 and older. For example, MTV Networks-owned Neopets, a community of 45 million people worldwide who own fantasy pets, plans to launch another virtual world for kids by the end of 2008.

Disney also plans to open up a new virtual world game site based on its popular theme of "Pirates of the Caribbean" by the end of the year.

"It's a little scary to see all these people coming," said Mattias Miksche, CEO of Stardoll.com. "It's a pretty cluttered market already. You have to make a really kick-ass product."

Venture capitalists said that they like kids' virtual worlds for their diverse revenue sources--advertising, subscriptions and sales of virtual goods like pets or accessories.

"We're looking for zero friction and virtual worlds (that simplify) customer adoption," Raney said, referring to companies that his venture capital firm is most likely to invest in. He said that they're looking for new companies that focus less on superior graphics, and more on making it easy for kids to use.

Because of all the interest, major brands also are experimenting with extending what they're doing.

Neopets is the one of the oldest virtual worlds on the Net, with about 11 million average monthly visitors. Acquired by MTV two years ago, Neopets plans to extend its characters to books, in partnership with HarperCollins, and to toys and TV broadcasts through its parent company.

Neopets and Stardoll also separately plan to start selling prepaid cards at retail store Target next week. Those prepaid cards will allow kids to buy virtual goods like digital pets and furnishings on the sites.

Nickelodeon's virtual world Nicktropolis launched in January, and now the virtual world has about 5.5 million registered users who on average spend 55 minutes on the site per visit, according to Jason Root, senior vice president of digital at Nick.com. Building on its business, the company soon plans to introduce advertising into the virtual world for kids, Root said.

Many executives in the packed audience were eager for pearls of wisdom from the well-established players on the panel. "To anyone developing in the space, it's not as simple (as you might think). It comes down to the unique combination of gaming and personal expression," Root said.

"You can't underestimate the need to keep it fresh for kids and (get) that playground chatter," Root said. "We can't get complacent--we can't go a week without launching something new."

Send insights or tips on this topic to stefanie.olsen@cnet.com.