Canadian kids-and-family portals hitting their stride

Of all the niches for interactive content on the Internet, the business of creating spaces for kids online seems to be gathering momentum with two Canadian firms making major announcements recently. Toronto’s Kaboose is one of those rare firms that managed to ride out the tech-stock meltdown to come back a winner. Starting with $250,000 in seed capital in the fall of 1999, co-founders Jason DeZwirek and Eric Yuzpe were well on their way to building a successful online family portal when the market crash of March 2002 hit. Fortunately, DeZwirek and Yuzpe found they could put their background in interactive family entertainment to work for corporate clients ranging from mutual fund company AIM Investments to Teletoon to the National Basketball Association. "That enabled us to break even or make a little money each month, but more importantly it gave us the ability to stick it out, and sometimes when you’re in a position to stick it out, you also put yourself in a position to seize upon opportunities," DeZwirek says. After the double-whammy of September 11 a year and a half after the dot-com crash got underway, those opportunities began rolling in. "All of a sudden, companies that I greatly admired, companies that were able to build a critical mass of users in the online kids and family space, but who’d also been able to raise tens of millions of dollars, ran into trouble," DeZwirek remembers. Within a six-month period, Kaboose had acquired three key properties: Funschool, a San Francisco-based market leader in the three-to-11-year-old demographic; Zeeks, which caters to nine-to-14-year-olds from its Portland headquarters; and New York’s KidsDomain, an online resource aimed mostly at parents. Between the three companies, Kaboose added more than $60 million in financing and 1.2 million registered users to its operations; more recently, the firm recently secured an additional $10 million in financing and underwent a conversion to a TSX Venture Exchange-listed company. Shortly after the acquisitions, Kaboose tried to capitalize on its newly acquired mass of users by converting to a paid subscription-based service, but the idea wasn’t well-received and few users made the jump to paying customers. However, DeZwirek says, companies such as Kellogg Co. and Nintendo Co. Ltd. began showing an interest in marketing to Kaboose’s viewership, and he and new Kaboose president Jonathan Graff decided to move to an advertising-driven model. "Since July 2003, that’s what we have been, and we have grown our audience from 1.2 million to over seven million, and our revenue has grown twelvefold as well," DeZwirek says. Kaboose is now the sixth-largest provider of kids-and-family content in the world, DeZwirek says, behind such giants as The Walt Disney Co., Mattel and Viacom International Inc.’s Nickelodeon. Its Funschool site alone boasts more than 350 games – all developed in-house. The firm is applying that expertise in game creation not just in distribution partnerships such as the one with Yahooligans, the kids portal owned by Yahoo Inc. of Sunnyvale CA, where a quarter of the games featured were developed by Kaboose, but also in custom-building games with a marketing focus for advertising clients. As the only independent content provider in the top 10 destinations for sub-teenage kids, Kaboose accomplishes a feat that none of the others can manage: it draws advertising revenue from other top firms in the content space. "Disney doesn’t like to advertise on Nickelodeon, Nickelodeon doesn’t like to advertise on Disney, but they can all advertise on Kaboose," he says. "We are brand-agnostic…and we’re now the only independent company left. It’s a really great position for us to be in." While Kaboose may seem at first glance to be in direct competition with the online franchises of broadcast-driven firms such as Disney and Nickelodeon, both those American firms provide content to Kaboose in a bid to capture new viewers. "People that go to Disney.com or Nickelodeon.com are the same people that are watching the Disney TV channel or the Nickelodeon TV channel," DeZwirek says. "In order for them to reach outside of that audience, they need to position their brand and their content in other places." Unlike Kaboose, Kelowna BC’s New Horizon Interactive didn’t start out offering kids-and-family content. While company spokesman Lane Merrifield says the firm has been in the web development business "for some time", the foray into family and children’s entertainment is less than a month old – the firm’s Club Penguin community launched on November 25. New Horizon’s roots lie in building websites for corporate customers, Merrifield says. "We’ve got some large Fortune 500-level clients as well as some smaller clients, and we’ve done various elements from tools to design and other web work, kind of as the Internet has evolved itself." Club Penguin was born when an employee – who had a side business making Flash-based games – convinced the firm to broaden its scope. "We acquired the rights to all of his intellectual property and…essentially shifted his job to working on that stuff full-time," Merrifield says. "A little over a year ago, launched into a whole new division that was built on games and Flash-based entertainment." The offering, which targets eight-to-14-year-olds, features games and competitions, as well as a proprietary version of a technology that’s become near-ubiquitous in youngsters’ lives: online interaction in the form of chat and message boards. Users also choose a penguin in one of a dozen colours to represent them online; with a full membership costing US$5.99 a month (with discounts on six-month and yearly subscriptions), players are also given the option to buy clothes and other accessories for their penguins. It’s a concept that’s proved its worth with the success of Habbo Hotel, an online community created by Finnish firm Sulake Corp. Merrifield says he and the other creators of Club Penguin were well aware that kids, like their parents, have varying levels of disposable income. Hence, the majority of content and functionality on the site is free; users earn virtual coins toward making purchases for their penguins simply by playing games and interacting with others online. Other similar sites, he adds, offer kids a time-limited trial, after which time they have to purchase a membership, or provides them with a fraction of the full functionality paying customers get. "We weren’t interested in that," he says. Likewise, the firm made a conscious decision not to adopt an advertising-driven model. Because of that business model, New Horizon still retains its corporate clientele – Club Penguin is more a labour of love at the moment. Nevertheless, the site has managed to gather more than 22,000 users in just over a month since its official launch, simply by word of mouth. With users as young as preschool-age, it perhaps goes without saying that security is paramount at both firms. "I know enough, from working in this industry as long as I have, to know that there’s a lot of unsafe stuff out there," Merrifield says. "Everyone who’s involved in Club Penguin, at least from a leadership perspective, are all parents of young kids. Both myself and my partner have three-year-olds, so we’re starting to think about this stuff more and more every day." Consequently, both firms boast security systems and content filtering that would be the envy of many spy agencies. (See related story on page 4 dealing with kids’ Internet usage). Club Penguin offers parents a choice of two different chat modes for their kids: Standard, which is an "open" interaction system monitored by both software filters and adult moderators; and Ultimate, which limits kids to a menu of approximately 150 preselected greetings, queries and other pieces of conversation. The portal’s chat technology has its roots in an earlier product, Penguin Chat, which Merrifield says was created for sale to third-party sites. The experience proved invaluable in eventually launching Club Penguin. "You start to figure out patterns of ways that people are bypassing filters, and so what we were able to do was basically learn from those patterns, stay one step ahead of it, and build in filtering systems that can catch those patterns," he says. The system monitoring Club Penguin’s user interaction is so sophisticated, Merrifield says, it can sniff out codes such as capitalizing certain words in a post to spell out a message, or adding spaces around specific characters to make them stand out. "If we’re going to be building it around safety, it needs to be safe," he says. "We spent the majority of our R&D time on the safety aspect of it." The human moderators also view every message submitted for posting, and can reject messages without the poster even knowing: while a post will show up on the poster’s screen, it won’t be visible to other users, fostering the impression that the poster is being shunned by the community for posting inappropriate content. Adult interlopers intent on misrepresenting themselves to kids will find the multiple layers of filtering a major deterrent, Merrifield adds, comparing it to the steering wheel locks widely used by motorists. "The point is to make it as difficult and as frustrating as possible for anyone to try and prey on young kids," he says. "The reality is there are thousands of other websites that are far less filtered and far less moderated that they can get to more readily." Kaboose, on the other hand, relies on a team of contracted adult employees who work nearly around-the-clock to examine each submitted post for inappropriate content. "Every single message that a child posts is seen by a human being prior to it being posted," DeZwirek says. "It’s one of the few places where kids can actually communicate with one another in a fully moderated environment." Most of the advertising content on Kaboose is also reviewed before posting. As well, both sites comply with the various pieces of legislation and industry standards aimed at protecting childrens’ privacy online. Kaboose follows the US Children’s Online Privacy and Protection Act and the Better Business Bureau’s Children’s Advertising Review Unit standards, while Club Penguin adheres to the US Department of Commerce’s Safe Harbor Principles and the Canadian Code of Practice for Consumer Protection, the latter of which contains principles for protecting kids online. With solid foundations for content development and a secure environment in place, both Merrifield and DeZwirek say their firms are well-positioned for future growth. Kaboose has already far exceeded the industry average of 25% to 30% growth annually, with three-digit growth rates in the past four years; this year, the company is predicting 180% growth. Kaboose president Jonathan Graff says the two parent-centric properties, Kaboose and Kidsdomain, are in the process of being amalgamated and will relaunch under a new Kaboose banner in mid-January, as will Funschool, the destination for the three-to-11-year-old demographic. Zeeks, the property aimed at older kids, will get a facelift sometime in the first quarter of 2006. "Within those relaunches will be new channels and new content offerings for both the demographics, but right now we’re really focused on getting new products out the door," Graff says. Club Penguin, meanwhile, faces the challenge of convincing more of its 22,000 members to become paying customers; Merrifield admits that paid-up subscribers are in a minority at the moment. Part of the solution to that might be in targeting new markets, he says, and the firm is looking at creating an offering to woo older kids. "We understand that there’s a life cycle to everything, and we hope to have something in its place at some point in its life cycle to replace it or add onto it for an older demographic soon."

Canadian kids-and-family portals hitting their stride

Broadcast | December 9, 2005

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