Umair Haque / Bubblegeneration
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Thursday, August 02, 2007

Deal Note: Disney + Club Penguin


A nice exit for the founders, and the street is positive on the deal, with both Jessica Cohen and Anthony Noto excited - if not gushing - about it.

I'm less sure.

First, from a purely financial point of view, if the rumoured numbers are true, this isn't too rich an acquisition by any means (10x earnings, 5x revenues).

Secondly, this deal validates, to an extent, the virtual goods revenue model, and puts it squarely in the spotlight.

But the point of this note is that it's the strategic aspect of this deal that I question.

What Disney needs more than anything else is fresh DNA. Disney's trapped by a mouse - its decaying resources and capabilities have it pinned like a butterfly.

The problem is that Disney isn't acquiring Club Penguin for fresh DNA.

Rather, there are two basic rationales for this acquisition.

The first is the explosive growth of virtual worlds, kids, etc. But chasing shifts in demand is no substitute for real strategy.

The second is the clear complementarity in value propositions. An explicit rationale for the acquisition is, for example, Club Penguin's similar focus on a "safe" environment for kids.

In other words, like Disney, Club Penguin is clean, inoffensive - and bland.

But neither is the complementarity of value propositions a substitute for real strategy.

Disney needs fresh DNA because, fundamentally, it must discover fresh sources of advantage. Yesterday's reach, brands, and IP aren't just in deep decay - they have placed Disney squarely in the jaws of a deep and durable strategic trap.

But it's dubious that Disney sees this in the acquisition - if anything, it's a way to chase demand and so buy short-term reinforcement for yesterday's sources of advantage.

And so I have a suspicion that Disney will resist the radical management innovations that Club Penguin might bring it.

Flickr, for example, was a great company - but not such a great acquisition - because Yahoo resisted all the fresh new DNA the Flickr kru brought with them.

Years later, Flickr is a shell of it's former self - and Yahoo is an also-ran.

I think much the same will happen with Disney and Club Penguin. Disney won't (can't) do much with it - unless it sees Club Penguin as more than just another way to chase demand - apart from put it in a corporate trophy case.

In the long run, I think, Disney would be better off not making acquisitions - at least until it has a better understanding why, in the edgeconomy, such a deep reliance on IP and traditional marketing lead almost irrevocably to strategy decay.

-- umair // 10:10 PM // 3 comments


Comments:

Umair, I believe you are totally correct in mentioning that Disney is helping validate virtual goods. There has been quite a bit of momentum in the virtual goods marketplace in the past few months and Disney is a company who has the resource to make this specific industry happen.

I've posted quite a bit about it at:
http://www.darrenherman.com/2007/08/03/disney-club-penguin/

Thanks Umair, keep up the amazing posting!
// Blogger dherman76 // 2:22 AM
 

As a former 2nd grade teacher who is now getting into strategic planning for youth brands, I think it is incorrect to call Club Penguin "bland." Kids love it so much that I had to ban all discussion of Club Penguin from the classroom last year. My students would pass notes that read, "meet me at my igloo at 7:30?"; they would talk about all the parties they were going to throw in Club Penguin. Yes, perhaps bland for adults but for kids, it is a world where they are free to express themselves and have fun.

Disney is not chasing demand for mere interactive products; rather, Disney is chasing a distinctive and compelling interactive product--a product Disney couldn't create on its own becuase of its stale product development strategy. (Also, consider that Neopets amd Nicktropolis aren't nearly as compelling as Club Penguin.) In this sense, it is a sound strategic choice. Just as CPG companies and pharma are not relying as heavily on thier in-house R&D, Disney needs to create an acquisitions strategy that scoops up the best-in-class, complementary innovators.

Of course, you're correct that this is an incomplete, short-term strategy but it is not necessarily totally misguided. It just needs to be balanced with vigorous effort to reawaken (perhaps reinvent) its past advantage with the "fresh DNA" you mentioned.

I'm excited to see what happens. Will the kids still be chatting about Club Penguin next year? Or will it get lost in Disney?
// Blogger Ben // 4:21 PM
 

As a former 2nd grade teacher who is now getting into strategic planning for youth brands, I think it is incorrect to call Club Penguin "bland." Kids love it so much that I had to ban all discussion of Club Penguin from the classroom last year. My students would pass notes that read, "meet me at my igloo at 7:30?"; they would talk about all the parties they were going to throw in Club Penguin. Yes, perhaps bland for adults but for kids, it is a world where they are free to express themselves and have fun.

Disney is not chasing demand for mere interactive products; rather, Disney is chasing a distinctive and compelling interactive product--a product Disney couldn't create on its own becuase of its stale product development strategy. (Also, consider that Neopets amd Nicktropolis aren't nearly as compelling as Club Penguin.) In this sense, it is a sound strategic choice. Just as CPG companies and pharma are not relying as heavily on thier in-house R&D, Disney needs to create an acquisitions strategy that scoops up the best-in-class, complementary innovators.

Of course, you're correct that this is an incomplete, short-term strategy but it is not necessarily totally misguided. It just needs to be balanced with vigorous effort to reawaken (perhaps reinvent) its past advantage with the "fresh DNA" you mentioned.

I'm excited to see what happens. Will the kids still be chatting about Club Penguin next year? Or will it get lost in Disney?
// Anonymous Anonymous // 4:22 PM
 
 

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