Thursday, August 2, 2007

Interview: Steve Wadsworth, President, WDIG; Lane Merrifield, CEO, Club Penguin

All too often when a seller says it’s not about the money, it’s
about the money, so it was almost a shock to to get the end of a call
with Lane Merrifield, one of the three founders of Club Penguin, and
realize he means it. Almost—because as much as he means it, Club Penguin’s deal with Disney
still comes back to money in one way or another. Money and
infrastructure to expand, money for the owners’ foundation, a sale to
Disney because they didn’t want certain kinds of money. I had the
chance to speak with Merrifield and Steve Wadsworth, president of the
Walt Disney Internet Group late Wednesday afternoon after the
announcement that Disney was paying $350 million in cash for Club
Penguin, with the possibility of a matching earnout by the end of
2009. Some highlights:

10 percent to charity: Merrifield and co-founders Dave Krysko
and Lance Priebe each stand to receive about $115 million for the
two-year-old self-funded virtual world. 10 percent of CP’s net profits
already go to charity, primarily through a foundation started by the
three. Merrifield confirmed that 10 percent of the amount each makes
from the sale will go to the foundation—more than $30 million from the
cash payout. He said it feels “a little weird” to talk about it: “It’s
something we’ve done all along. We never wanted it to be seen as a
marketing gimmick. ... It’s part of our DNA.”

Decision to sell:
From the start, the three were determined to avoid investments from VC
and private equity. As Merrifield explains, “For us, it wasn’t about
liquidating or exit strategy.” They self funded the startup based in
Kelowna, British Columbia and kept it running that way as it went into
profitability. But about six months ago they realized they had to make
some tough decisions: “do what we were doing and not expand out and
risk having our own success hurt us ... or we build up the
infrastructure ourselves and risk becoming distracted ... or we find a
company that already has the infrastructure in place.” Merrifield
compared it to sending a kid to college—at the end of the day, do you
hold on or lock them in the basement? They started talking to
companies, keeping “conversations at a minimum” and focusing on the
companies that from the outside had the potential. “All along Disney
held true.”

Why Club Penguin? Wadsworth said Disney had been watching CP as
a product and knew as soon as they met the team it would be a good fit:
“A Iot of it already lines up the things we want to do.” Wadsworth
echoed some CEO Bob Iger’s earlier comments about the move being
complementary to a home-grown strategy for virtual worlds that they
think is already working. Disney has been cautious about M&A.
Wadsworth said the company has looked at opportunities along the way
but generally speaking things are not either not the right fit or the
“value expectations are not in alignment.”

The price: Merrifield said the company “had other opportunities
that were on par” with Disney. He didn’t want to talk specifics but
insisted, “At the end of the day, the dollars were not really a
priority and never have been.”

Rebranding: The switch to “Disney’s Club Penguin” won’t be
instant. The two said they will sort it out over time. But that’s the
only obvious change planned for the virtual world. Wadsworth said
Disney has “absolutely no intent to do anything that would change or
get in the way.” Disney is already promoting the new addition with an
animated video on the front page of, which has been
transformed into a Club Penguin world.

Building out: Wadsworth, asked about global expansion (currently
CP is largely U.S. and Canada): “Certainly something that really
excites us about this.” Disney has the international presence already
and experience translating the Disney experience to various cultures
and languages. That’s one place where CP felt stuck. Merrifield talked
of having kids in Brazil struggling because they don’t know English; he
wants a CP for Brazil.

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