Andrew Walmsley on digital: Kids' virtual worlds are maturing nicely

The 3-D environments of online communities such as Second Life and World of Warcraft have made positive headlines in the past year, and marketers have wrestled with the implications for brands and their opportunities in untapped markets.

However, more recent coverage has been sceptical, focusing on the fact that despite the oft-quoted millions of registered users, relatively few are engaged with these communities at any one time. As I write this, Second Life, for instance, has only 40,000 users online.

Advertisers and retailers who had initially rushed in are having second thoughts, and scaling back their operations and closing stores. So, are virtual worlds just a bubble, or are we going to see long-term growth?

To answer that question, we need to look at tomorrow's users. While virtual worlds for adults are still in their infancy, those targeting kids and teens are experiencing phenomenal growth, and fuelling multimillion-dollar acquisitions.

Launched in 2005, Club Penguin was acquired by Disney for £350m in August. Positioned as a gaming and chat forum for 6- to 14-year-olds, the website has more than 12m active users. Plenty of functionality for non-subscribers ensures there are always plenty of kids online, and provides a place for future subscribers to become addicted to the site.

The business model works: there are 700,000 paid subscribers who get to decorate their igloos, dress their penguins and adopt more 'puffles' (the site's digital pets). At $58 for a year's subscription, the site is already generating about $40m from paid-up members - hence Disney's interest.

This is not a trend restricted to the US. One of the biggest kids' sites is Stardoll, founded by a Scandinavian mother who had a lifelong interest in paper dolls. From its homely roots, Stardoll has grown to attract more than 6m users a month, and is backed by Index Ventures, the venture capitalist that invested in Skype, Joost and Betfair.

There is no subscription fee for Stardoll, but its young members buy - and their parents are encouraged to give - 'stardollars', a currency that can be spent on virtual clothes for the dolls and personalising your profile.

This is a business model based on South Korean community Cyworld - the forerunner of MySpace - which since 1999 has been charging users to decorate their 'minihomes' and obtain accessories for their 'minime' avatars.

At first glance, all this activity takes place online, but some sites are starting to move into the offline space, creating multifaceted businesses in entertainment and merchandising.

Neopets is a pioneer in this space. It is a virtual pet site where owners can play games and customise their adopted creatures, buying 'Neocash' credits, either in stores or online, to do so. The website, which has attracted more than 10m users, was bought by MTV last year for $160m, propelling Neopets into the global entertainment arena. It recently signed a deal with Warner Bros to create animated films based on characters from the online world, as well as a book deal with HarperCollins.

Moving in the other direction, toy-maker Ganz has created Webkinz, which are sold with a code allowing users to give their pet an online identity. The toy then becomes a kind of virtual Tamagotchi in the Webkinz community, where kids can interact with each other in a carefully governed way. The site was attracting 4m visitors a month earlier this year - that's a lot of soft (and virtual) toys.

While adult online worlds are still a niche market, those catering for kids are a mass-market phenomenon, with several of these communities attracting millions of active users. If we want a sign of how significant virtual worlds will be in the future for adults, it is there right now, in kids' online behaviour.

- Andrew Walmsley is co-founder of i-level

30 SECONDS ON ... WEBKINZ

- Online community Webkinz, created by toy manufacturer Ganz, allows owners of the company's 'loveable plush pets' to create virtual profiles for the creatures by entering a 'Secret Code'.

- According to the website, 'Webkinz Frogs are hopping with joy all throughout Webkinz World' at the news that its 'Pet of the Month program is under way'. October's pet of the month is ... frogs.

- Children are encouraged to keep their virtual companion satisfied by monitoring its 'Happy', 'Health' and 'Hunger' meters. 'Kinzcash' can be purchased to decorate the critters' home and buy them food and clothes.

- Parents are warned that if their child's pet gets sick - 'if it has a green snout and an ice pack on its head' - they should immediately contact the virtual clinic, where medicine can be bought. Mercifully, Webkinz pets cannot die.

- Retailing at about £5 a throw, the Ganz toys give children a year's access to Webkinz's features.

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