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Forget Second Life. It turns out that kids, not adults, are the ones whose virtual worlds translate into real bucks. On Wednesday, Disney bought New Horizon Interactive's Club Penguin, a website where kids pretend to be penguins and decorate digital igloos. The price tag for putting mouse ears on the penguins? $350 million, and Disney's willing to double that if Club Penguin hits earnings goals in 2008 and 2009. Unlike the wasted budgets of corporate marketers setting up empty shops in Second Life, Disney's money seems well spent. Here's why.


Club Penguin eschews advertising; instead, it's supported by a base of 700,000 subscribers who pay $5.95 a month for the right to decorate an "igloo" — a penguin character's virtual home. (Anyone can play for free if they can pass up an igloo — but what parent would deny their child a toy everyone else has?) Traffic to the virtual world has increased 329 percent since June 2006. Linden Lab, the creator of Second Life, claimes to make money by issuing virtual currency and collecting property taxes on digital real estate, wins praise from economists enamored with the abstraction of its virtual economy. But Club Penguin, which plays on feelings of parental love, guilt, and competitiveness, ought to be a more worthy subject of study.

Club Penguin's founders explain that selling out will help fuel the site's global expansion, a Disney specialty. But it's also an acknowledgement of increasing competition.

Disney have to contend with Viacom, a familiar media competitor which owns Neopets as well as the growing Nickelodeon online empire. But there are also a growing contingent of free communities, like the kid-centric Whirled, soon to be launched by San Francisco online-game designer Three Rings. Whirled forgoes subscription fees, instead making money through virtual item purchases, a business model that has worked well for Korea's Cyworld. Club Penguin is collecting its six-buck allowance from parents for now. But what happens when the kids start begging for a new toy?