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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 ...

To Merrifield and Krysko, two things stood out about the Club Penguin prototype - the fact that multiple users could be simultaneously represented on the screen (the term "virtual world" may be commonplace now, but five years ago, most Web environments were single-user experiences) and the safety measures that Priebe was building into it. "I was blown away with the thoughtfulness he'd put toward that," says Merrifield.

The partnership worked from the start, not only because the three men had a clear business vision but because they shared strong religious beliefs. Merrifield had attended a Christian college in Edmonton before moving to California to pursue a career in marketing. One of the reasons he'd joined New Horizon was his deep connection with Krysko, who, in accordance with his Christian beliefs, steadfastly committed 10 per cent of the company's profits to charity each year. Priebe also came from a Christian family and wholeheartedly supported his employer's charitable policy. The trio wanted their values to be integrated into their new business. So, when they established their roles in the partnership - Krysko would cover expenses and work on the business plan with Merrifield, while Priebe would develop the product - they also agreed to donate 10 per cent of their profits to charity. (Collectively, the partners have largely supported projects that help needy kids and families in Canada and abroad.)

Priebe spent nine months developing the nascent Club Penguin; Merrifield and Krysko perfected the business model. There would be no advertising, and no charge to access the basic site, but users who wanted to buy extras like clothes for their penguin avatars or accessories for their igloos would pay a monthly fee of $5.95, or $57.95 a year. Merrifield acknowledges their monetization scheme was inherently risky: Few companies have been able to persuade consumers to pay for online content (statistics are hard to come by, but one industry observer suggests that, typically, fewer than 5 per cent of consumers are willing to pay extra for "premium" services). But Merrifield says advertising wasn't an option they wanted to pursue. "As a parent, I'll pay five bucks for a cup of coffee. Five bucks for a month's safe environment for my kid online isn't that excessive."

Beta-testing began in September, 2005, with about 5,000 kids who frequented Priebe's flash games site. The number of users swelled to 25,000 within the month. "That was when we knew we had something," Krysko says. With the site's official launch on Oct. 24, 2005, they "started to run," he says, "and once it launched, we didn't stop running."

Soon, the momentum of the growth took over, Merrifield says, "and it wasn't, 'How are we going to make this happen?' it was, 'How are we going to keep this running? How are we going to deal with the traffic?' "

Despite relying entirely on word of mouth for its marketing, and on users' ability to arm-twist their parents for its sales, Club Penguin hit profitability within three months. The site cost "far less than a million" to build, says Merrifield - and enough parents opted to pay the yearly subscription to cover the partners' costs. As traffic grew, Merrifield handled the phone support himself, and wrote a blog apprising users of new additions to the site, most of which were directly based on participants' feedback. Priebe, meanwhile, struggled to keep the servers up.

None of the partners were workaholics by nature. But, says Merrifield, they knew they had a site with unique features, and they were determined to see how big it could become. If they could quickly establish their Club Penguin as the No. 1 choice for kids, they'd beat out competing ventures by mega-companies like Disney and Nickelodeon (both of which were expected to launch imminently). They'd also prove to themselves that it was possible to score big in business while creating a sustainable company that could "take care of its employees, take care of its customers."

By March, 2006, after Club Penguin was featured on the wildly popular British-based flash gaming site Miniclip, the total number of users had reached nearly 1.4 million, according to comScore, an Internet research company. Six months later, more than 2.6 million children were logging on to the site in Canada and the U.S. alone, and, at almost $60 per subscriber, the company was seeing rapid revenue growth - enough to bootstrap the fast-growing operation, add staff (especially moderators and customer service personnel who could respond to the growing volume of e-mails) and upgrade equipment.

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