Virtual Worlds for Kids: Game Over or a Never-Ending Story?

shdioni2Rapid growth in the casual gaming market has prompted a proliferation of online virtual worlds for kids which incorporate casual gaming elements. While the segment at large has achieved mass-market levels of adoption – as demonstrated by the success of Club Penguin, Neopets and others – future success in this increasingly crowded market will only be achieved through bold efforts of competitive differentiation. This piece profiles Virtual Tweens and Shidonni, two Israeli startups which have developed virtual worlds for kids, and provides commentary on the challenges and opportunities facing the segment going forward.

Shidoni- a virtual world for 4-10 year olds

Shidoni- a virtual world for 4-10 year olds

Have Fun While Learning About Social and Environmental Responsibility

Virtual Tweens is the company behind Ekoloko, a virtual world for 7-12 year olds which launched in October 2008. The purpose of Ekoloko is to teach kids how to be environmentally and socially aware while having fun. The virtual world provides a framework for users to interact within the context of an overriding story of good versus evil (screenshots below). Users progress by completing adventures which deal with a range of issues, including biodiversity and the importance of respecting differences in people, and are intended to make users more environmentally and socially aware.

Ekoloko - a virtual world for 7-12 year olds

Ekoloko - a virtual world for 7-12 year olds

Virtual Tweens generates revenue through paid monthly subscriptions which provide users with ‘pioneer’ status and unlock a set of premium features. Its distribution strategy is based on word-of-mouth advertising in addition to the retail distribution of ‘eko-cards’, physical cards which contain codes to unlock pre-paid subscriptions, through Steimatzki outlets across Israel. The company also has plans to introduce a line of Ekoloko-branded merchandise.

ekoloko2

eko-cards contain codes to unlock pre-paid subscriptions

CEO Guy Spira indicated that since launch, Ekoloko has attracted 400,000 registered users and currently has 120,000 active users per month. Active users, several thousand of which are paid subscribers, spend an average of 4.5 hours on Ekoloko each week. Interestingly, the company has focused on achieving critical mass in Israel before focusing on foreign markets – not such a common approach for Israeli consumer web companies – with about 90 percent of its users located in Israel. To date, the US has not been a major focus for the company, given the low perceived return on marketing dollars in a crowded market. But a French version of the service will be launched in December 2009, where it is expecting to be the number 3 or number 4 player in the French market.

Virtual Tweens raised a US$1 million seed round in July 2008 from a group of Israeli and US-based investors – including tech luminaries David Rosenblatt, former CEO of DoubleClick, and Gigi Levy, CEO of 888 Holdings – and recently raised a Series A round, also of US$1 million, with Gemini Israel Funds.

Draw Your Favorite Animal and Include Him/Her in Game Play
Shidonni, a virtual world for 4-10 year olds which officially launched in January of this year, differentiates itself with proprietary technology that brings user-generated animal drawings to life. After drawing an animal and background, users are able to automatically embed their creations into a range of activities within the Shidonni ‘galaxy’ (screenshots below). Activities include single and multiplayer games, which are based on market-proven concepts, as well as animal caretaking tasks such as feeding and bathing.

The company has tackled the distribution challenge by securing a series of partnerships with gaming portals and related contents sites across the US and Europe. Key US partnerships include PrimaryGames and WildTangent, and in Europe the company recently secured agreements with Jedessine and Xilam. While the service supports a total of 8 languages, and the company is determined to address markets globally, approximately 50 percent of users are located in the US.

ekoloko3

ekoloko's world for tweens

Like Virtual Tweens, Shidonni relies on premium subscriptions as a major source of revenue, where Shidonni Pro members are provided access to a set of more elaborate tools and special effects to assist in their creations, as well as access to a more advanced animal care clinic. The company also offers users – or, more likely, their parents – the option to purchase merchandise which features the user creations. Available merchandise includes mouse pads, baseball caps and t-shirts. Given the management team’s background – CEO and co-founder Ido Mazursky was formerly CEO of Toys R Us Israel – it will be interesting to see whether the company is able to leverage its toy industry experience and contacts going forward. The company has raised a total of US$1.5 million from London-based private investors.

Proven Demand, Compelling Economics
Shidonni and Virtual Tweens are catering to the entertainment needs of the youngest web users. For parents, these services represent an attractive, active alternative to the passive experience of television, and provide children with educational, interactive entertainment. But in addition to fulfilling a real need, this segment has demonstrated that it holds impressive monetization potential through premium subscriptions.

While Shidonni and Virtual Tweens have both pursued the premium subscription route, virtual goods could represent an attractive alternative path to monetization. Such an approach could allow the companies to more fully leverage their existing intellectual property (by making all features which are currently limited to premium users available to all) and could facilitate the creation of a transaction-based virtual economy over which they could exercise control. In the absence of the subscription services, there would be less of a rigid distinction between the ‘haves’ and the ‘have-nots’, and scarce assets would be distributed along more of a continuum, where even unpaid users could access premium products over time with enough effort – for example, by acquiring virtual currency through completing adventures or achieving a high game score.

The key to monetizing this market lies in creating an impression of scarcity for select items and making the purchase of such items a possibility for all users. Building a pay wall around a bundled set of features, as both Shidonni and Ekoloko have done, risks leaving the impression that the virtual worlds are not merit-based. It also risks leaving some revenue on the table by failing to cater to demands of users that are willing to spontaneously pay for virtual goods, without being willing to pay the recurring monthly fee required to be a premium member. Nonetheless, both subscriptions and virtual goods offer virtual worlds the opportunity to generate high gross margins, at least among those that are able to garner sufficient traction.

Welcome to Hollywood
Virtual worlds for kids are the present day equivalent of cartoon shows, but have the remarkable web-enabled properties of network effects, virality and interactivity. But entrepreneurs and investors should be mindful of the challenging nature of building a hit product in what is, at its core, part of the entertainment industry. Substantial upfront investment is required before any meaningful market feedback can be achieved – it is not possible to launch a virtual world without a high standard of game play, illustration, graphics and an accompanying story – and iterating in response to market feedback is more difficult here than in most other market segments. Perhaps this is why some venture investors do not invest in startups that are developing gaming applications.

That having been said, Ekoloko and Shidonni provide an innovative solutions to a real problem – keeping children occupied, safe and engaged in a way that unleashes creativity and encourages learning – and represent an active alternative to passive entertainment options like television. As they pursue different distribution strategies and target different geographies, it will be interesting to see where they continue to diverge and where they continue to remain similar. While the market is intensely competitive, and subject to the whims of a fickle, rapidly maturing target demographic, both companies are building considerable momentum and demonstrating the out-of-the-box thinking that Israeli entrepreneurs do best. There are challenges going forward, but strong management teams and impressive track records of delivering quality products with limited resources suggest that both startups are ones to watch.

* GFDOGlobal From Day One is a weekly column which focuses on Israeli startups with global ambitions.

Geoffrey MuglistonGeoffrey Mugliston (mer-gliss-ton) is a London-based Australia-born entrepreneur, strategist and blogger. See the About Page for his full bio and follow him at @gmugliston

gmugliston

Geoffrey Mugliston (mer-gliss-ton) is a London-based Australia-born entrepreneur, strategist and blogger. He began writing for VC Cafe in 2009 with the objective of showcasing promising Israeli startups to the global startup and investment community. He is co-founder of a consumer internet company with its development team based in Haifa (currently in stealth-mode). He also serves as adviser to a pan-European startup which develops software for print service providers. Prior to his current projects, Geoffrey worked in management consulting with a focus on the infrastructure sectors. When not working (though sometimes while working) he enjoys coffee, running and engaging in intense debate. He holds an undergraduate degree in finance from the University of Sydney.

gmugliston

Geoffrey Mugliston (mer-gliss-ton) is a London-based Australia-born entrepreneur, strategist and blogger. He began writing for VC Cafe in 2009 with the objective of showcasing promising Israeli startups to the global startup and investment community. He is co-founder of a consumer internet company with its development team based in Haifa (currently in stealth-mode). He also serves as adviser to a pan-European startup which develops software for print service providers. Prior to his current projects, Geoffrey worked in management consulting with a focus on the infrastructure sectors. When not working (though sometimes while working) he enjoys coffee, running and engaging in intense debate. He holds an undergraduate degree in finance from the University of Sydney.

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