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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 ...

Their first office, designed for 10 people, was rapidly pressed to accommodate 35, and as soon as they moved to a new location, they outgrew it. The partners began feeling the strain. "It was terrifying," says Merrifield, "because at the end of the day, we had people who were now depending on us every day to be up, to be online, and they're kids, and they're kids like our kids - neighbours' kids, friends of our kids. The level of responsibility we all felt at that point was daunting, to say the least."

What they needed, they realized, was expertise: advice and resources that could help them meet the surging demand for Club Penguin. On the technical side, they needed programming staff and data centre expertise; on the business side, they needed insight into issues such as customer service expansion and merchandising, and help with the "overwhelming" task of finding and hiring new employees. By 2007 - when projections showed Club Penguin was about to hit annual revenues of $65-million (and profit of $35-million) - the trio began contemplating something they'd never considered before: seeking another partner. Possibly a big one.

"Finding a company that had an international infrastructure in place was a huge thing," says Merrifield. "We already had over 40 per cent of our audience coming from outside of North America. So it wasn't an issue of, 'Okay, how do we expand out,' it was way more of, 'How do we just serve the audience that's there? How do we provide the same kind of phone support in Australia that we're able to provide for kids here?' "Do we go out and start looking at real estate in all these countries to set up offices? We could've - we did, we had to. But it's not what we were passionate about doing. So for us, it was as much about finding a home where we could slot in what we were great at, and then be able to pool the resources that [the partner] had, to be able to take the next big step a lot faster."

The founders won't name the potential partners they talked to, but, in addition to Disney, most industry insiders mention AOL, Sony and NewsCorp. The head of AOL's Kids and Teens division, Malcolm Bird, appeared to corroborate the rumours of his company's interest, telling a reporter in early 2007, "Yes, we're looking at a virtual world. We've got something up our sleeves [but]there's no use going and building another Club Penguin." Any discussions were cut short, however, when AOL decimated the budget for its kids' division and a frustrated Bird left in March. Then, there was Sony, which allegedly bid $450-million to $500-million (U.S.) for Club Penguin in a series of exclusive negotiations. It had much else to offer besides money: Through its PlayStation Portable brand, Sony made video games that connected users to the Internet via WiFi, and the Club Penguin partners were keen on producing spinoff video games that could interface with the site.

Merrifield won't talk about their discussions, but does say that Disney's acceptance of Club Penguin's "non-negotiable" conditions were key to reaching an agreement: The business would be headquartered in Kelowna, where the three men had settled with their families (including school-aged children); the co-founders would maintain operating control of the company; and 10 per cent of profits would continue to go to charity.

The tithing raised eyebrows among some suitors, who "looked at us a little cross-eyed when we'd start talking about that," Merrifield says. "Ten per cent is a significant amount, especially for a company that was doing as well as we were. There were only a few of them, frankly, who encouraged it."

The question of who would run the company was never in doubt, according to Paul Yanover, the Canadian-born executive vice-president of Disney Online. He says Disney wanted the team's expertise in building virtual worlds as much as it wanted their virtual world itself. The entertainment giant was about to launch a Pirates of the Caribbean game, and was developing a fairy-filled environment built around Disney's Tinker Bell character. Club Penguin's chief attributes "make us feel really confident about associating it as a Disney-branded experience: safe, family-friendly, great story, just steeped in imagination," Yanover says.

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