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From left, Dave Krysko, Lane Merrifield, Lance Priebe and the virtual bird that has made them rich beyond their dreams.
From left, Dave Krysko, Lane Merrifield, Lance Priebe and the virtual bird that has made them rich beyond their dreams.

Report on Small Business Magazine

The $350-million penguin Add to ...

The most surreal moment of Lane Merrifield's career came on Oct. 24, 2008, when the young B.C. entrepreneur found himself standing on a stage in the middle of New York's Times Square, surrounded by hundreds of adoring children and crowds of equally enthused parents. It was three years to the day that he and two partners - Lance Priebe and Dave Krysko - had launched Club Penguin, a virtual world where millions of preteens meet, chat and play games via 2-D penguin proxies. The three men had plenty to celebrate.

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Tens of thousands of young Club Penguin fans, from 23 countries, had joined the high-profile birthday party via a live Web broadcast that was beaming the Club Penguin name around the world. And along with the penguin moniker, one other name appeared, though more subtly and in much smaller print: Disney. The corporate giant had acquired the start-up the previous year, for an astonishing $350-million (U.S.), with the promise of an additional $350-million (U.S.) if Merrifield and his partners met their profit targets for 2008 and 2009. Now, Disney was putting its impressive marketing muscle behind the new acquisition, sending partygoers straight from the Times Square celebration to a Toys "R" Us across the street, where they could purchase a new line of Club Penguin merchandise.

"That day is imprinted on the memory, for sure," says Merrifield, who remains general manager of the operation. "It was one of those moments that we'll definitely look back on."

Yet, Merrifield - a born storyteller, as his Disney associates approvingly note - keeps groping for a meta-narrative other than the easily saleable one: Small-town small business suddenly hits the jackpot, earning its nice-guy founders the interest of huge companies, a set-for-life paycheque, the chance to help others and the adulation of children and parents massed cinematically in Times Square. Even as he describes the scene in New York City, he reflexively steers the point of the story away from the self-administered pat on the back of so many business anecdotes.

"At some point, I'm going to look back and go, 'Okay, what was I measured by?' " Merrifield says. "Everyone always talks about those kind of deathbed experiences and what are you really going to care about. It's not just about, what do the numbers say and what do the metrics say, and how are our stats?"

There's no doubt the numbers are impressive: When Disney acquired Club Penguin in August, 2007 - the first (and, so far, only) time it has publicly disclosed figures - the site had 700,000 paid subscribers out of a total of 12 million registered users (non-paying users can create avatars and participate in basic interactions, such as dancing and chatting and playing games, but can't access activities like exclusive "VIP" parties). According to KZero, a market research firm specializing in virtual worlds, Club Penguin's registered users had leapt to 28 million by last summer - a huge market of curious kids who could potentially be converted into paying subscribers.

But amid all the deal-making and backslapping, Merrifield and his partners say their eyes are focused on more than the money. They're trying to ensure that Club Penguin maintains the integrity and creativity of its snowy virtual playground now that the penguin has been swallowed by a very mighty mouse.

The inspiration for the site, officially known as Disney Club Penguin, came from Priebe, a Web developer who had been working for years on flash games - Internet-based activities that don't require long and memory-clogging software downloads. Priebe had been tinkering with a virtual environment for kids, and after watching an item on Fox News about the lack of safe online communities, he became convinced he was on to something. "It was the whole MySpace thing," he says. "Everybody was paranoid, saying kids shouldn't be online. It basically made me sit down and go, 'Okay, so how do you make it so they can be safe?' "

Priebe's solution was to focus on security protocols, such as filters that screen out inappropriate words and vocabulary that might compromise a player's anonymity, which he incorporated into his virtual world. When he showed the results to Merrifield, his colleague at Kelowna, B.C.-based New Horizon Productions, the young sales and marketing executive was so excited by the game's potential that he and Priebe buttonholed their boss, Krysko, and proposed the creation of a new company in which the three men would be equal partners.

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