Web Masters Episode #41: Lane Merrifield


Club Penguin logo and symbol, meaning, history, PNG

Lane Merrifield:

Most people’s framework for social networking comes from whatever their first experience was, Facebook or Instagram. That is a social network, and anything that doesn’t look like that must not be a social network. There was a lot of folks that did try to launch a social network for kids. They would make it basically a kid, say, version of exactly what Facebook was or exactly what Instagram was. Our whole theory was, first of all, kids don’t act the same way as adults. They don’t want to be entertained the same way as adults. Their whole social structure, they spend all day with them. It’s called school, and that is the way that they interact with their friends.

They’re not going to go home and jump on a Facebook for kids type experience in order to interact with the same kids that they’ve been spending eight hours with. Our theory was what they want to do is play together, and so let’s basically create a giant virtual playground, so they can extend their play, not post pictures of, “Well, I was in math class again today, and so were you, and so were you, and so were you,” because that’s what their life is about, right?

Aaron Dinin:

You just heard a fantastic example of how to properly execute one of the most common but misunderstood entrepreneurial strategies. I’m talking about the x for y strategy. As an entrepreneur is running around trying to build things like Uber for dogs or Amazon for plant lovers, when you take that approach to launching a new venture, you can’t just repackage something that already exists, and try selling it to a different audience. You have to carefully consider how the new audience is fundamentally different, and build your product to fit its unique needs. That’s exactly what our guest on this episode of Web Masters did, and he did it really well.

His name is Lane Merrifield, and he’s one of the co-founders of Club Penguin, the wildly popular children’s social network. Are you ready to hear the story? Let’s get dialed in.

[INTRO]

Aaron Dinin

Hey there, and welcome to another episode of Web Masters. This is the podcast that teaches about entrepreneurship by talking with the Internet’s most impactful early innovators. My name is Aaron Dinin. In a previous life, I was a serial entrepreneur. These days, I spend my time teaching entrepreneurship at Duke University. That’s part of what makes the topic for this episode particularly relevant for my current students, because they all grew up loving Club Penguin. In other words, this episode is really just an attempt to make me and my podcast seem cooler to my students. Pretty sure it’s going to fail, but hey, that’s okay. There’s still plenty to learn for everyone listening, and we’re going to find out what that is after I take a moment to tell you about this podcast’s sponsor.

Web Masters wouldn’t be possible without the generous support of our sponsor, Latona’s. Latona’s is a boutique mergers and acquisitions broker that helps people buy and sell cash flow positive, internet businesses and digital assets. That includes things like content websites, ecommerce stores, Amazon FBAs, domain portfolios, and even subscription-based online games or social networks like we’ll be talking about in this episode. If you have something like that, it’s profitable, but you’re ready to step away and try something else, then give Latona’s a call. Their team of experienced and specialized brokers are ready to help you sell your company for top dollar.

Maybe you’re trying to buy an already profitable internet business. Latona’s can help you with that too. Check out the Latona’s website, where you’ll find tons of listing for profitable internet businesses that you can buy and start operating immediately. That website is latonas.com, L-A-T-O-N-A-S.com. I’m not actually in the right demographic to know much about Club Penguin, but I’m not sure how many of you listeners would know much about it either. After all, it was, depending how you want to look at it, either a social network or a massively multiplayer online game, MMOG, meant for kids that was popular in the mid 2000s. That wasn’t me, and it might not have been a lot of you either.

If I’m being honest, I hadn’t even heard of Club Penguin, at least that I can remember, until I overheard a few of my students joking about it at the start of class one day, and decided to do some research. That took me down quite the rabbit hole of old YouTube videos. Unfortunately, I can’t show those videos here. What I can do, however, is have this episode’s guest, Lane Merrifield, explain what Club Penguin was in his own words.

Lane Merrifield:

On the surface, Club Penguin was about logging in. We use flash at the time, so you didn’t have to download or install anything. It was a web-based game. You could jump into really quickly and easily. The whole idea was you became a penguin. You can choose your color of penguin. You chose your screen name. It wasn’t supposed to be your real name, obviously, for privacy reasons and childhood protection reasons. Every penguin had an igloo, so you could decorate your igloo. You can decorate your penguin with clothing. We were also one of the first games that started doing event. Now, like Fortnite and others. In fact, a lot of our team work at Epic on the Fortnite team, and so they just pulled a lot of the same playbook over, which was great.

My kids love Fortnite, and I think it’s awesome, so doing events, whether they’re based around public holidays or whether they were just our own creation, but there was always this cycle of new content coming out every single week. Yes, become a penguin. You have your igloo, and you play many games throughout this world. The world’s broken up into different rooms, and you’re surrounded by other penguins. You can see up to 50 to 100 different penguins in the room with you at the time, and you can waddle around. You can throw snowballs at each other.

You can chat with each other, and you play these little mini games. You earn coins with the mini games, and then you can spend those coins on decorating your penguin, decorating your igloo. It was the cycle that we built in. Of course, there’s new content coming out for decorating every single week.

Aaron Dinin:

I’ve got to ask, even though I’m sure it’s a question you’ve been asked a million times, why penguins?

Lane Merrifield:

Well, so there’s two reasons. The first one, the more altruistic reason is because we really did love the fact that penguins, as a species, require community to survive, and so they do need to work together. If you’ve ever watched March of the Penguins or something like that, we liked that they were a gender neutral animal. We wanted this to be equal for boys and girls. In fact, the audience was down to a couple of percentage points, almost 50/50, male and female. Penguins are just funny. They waddle. They’re birds that don’t really fly. They swim, and there was a sense of… We really tried to incorporate as much of a sense of humor into it as we could.

In fact, while every other game out there is trying to be the… I always said like the MTV for kids, trying to be really cool and be really with it, and be really… We were the antithesis of that. I think it’s part of why people love it still to this day is that we were the anti-cool game. We were the game for everyone else who didn’t want to have to worry about that stuff when they came home from school, and they just wanted to have fun and goof around. I have photos that friends sent me of their 17-year-old kids, 18-year-old kids logging in and playing Club Penguin every day.

They wouldn’t tell their friends about it, because they were already too cool for it, too old for it, but there’s this charm and the sense of humor, and they just wanted to see what the new event was that came out of the new party. We had these parties every single month, and so that was a big draw as well.

Aaron Dinin:

For what it’s worth, when I first overheard my students talking about Club Penguin, they were joking about how old they were when they finally stopped playing it. Lane isn’t lying when he describes it as being something wildly popular with kids. In fact, at its height, it had over 200 million registered accounts worldwide. Where did this idea come from? More importantly, how the heck did pretending to be a penguin become so popular? To find out, let’s start by hearing a bit more about how Lane first got interested in computers.

Lane Merrifield:

For me, computers were just emerging in school as I was growing up in elementary school and junior high. I found that I would get extra credit because my handwriting was so bad. I’m sure I had ADHD and other things, but my handwriting was so bad that teachers would give me extra credit for typing my homework up instead of handwriting it. I started using computers for that. Then I started upgrading my own computer at home, then I’d start charging other people to upgrade their computers, so just little stuff, upgrading the RAM and modems and things like that. Then at one point, I actually got out of some detentions because I noticed in one of the computer labs that they had had 15 new computers delivered, but they were sitting in the corner of the classroom for about three months waiting for the IT guy from the school district to come around and set them up.

I negotiated with the teacher. I said, “I’ve got about 10 or 12 detentions I need written off.” Typically, I wasn’t being a jerk or anything. I was typically just late or no show to classes, and so I made a deal with her. She said, “Listen, if you set up those computers, I’ll write off a detention for every single one you set up.” I spent two hours one afternoon setting them all up, getting them all dialed, and making sure they’re all working properly for. She was thrilled. I was thrilled because I got 15 hours of detentions written off for a couple of hours of work. Then from there, I ended up selling computers to put myself through university, and tech was always a very normal part of my life.

Aaron Dinin:

When did you first discover the web and think to yourself, “Hey, this web thing is going to be something worth keeping an eye on?”

Lane Merrifield:

I literally remember sitting in front of my computer, and a friend came over, and he was like, “Hey, I want to show you this.” I had already been on BBS at the time, bulletin board system. This is early days of Prodigy, AOL, Apollo. I mean, there was the earliest bulletin, which were basically just networks, but they were centralized networks. They weren’t decentralized like the internet was. I was already downloading games and music and stuff like that from those types of services. Then all of a sudden, a friend came over and said, “Hey, I’m going to log you into this thing called the internet. It’s actually like a bunch of universities, but it’s all interconnected,” and explained it to me.

It took about three or four different pieces of software back then. You needed TCP/IP socket connections, and wind trumpet and all sorts of layers, basically, to get onto the internet, but I still remember going in there, and the speed and the just vastness of what was available, because typically, you’d hop from BBS to BBS to try and find what you’re looking for. You’d hang up on one and dial in to the next one with your modem. This was everything that I could have hoped for in one place. I was hooked, and I never turned back.

Aaron Dinin:

It sounds like you were already a fairly entrepreneurial person at a young age. What do you think made you entrepreneurial and allowed you to recognize the entrepreneurial potential of the web?

Lane Merrifield:

Well, I grew up in a really entrepreneurial home. We were always taught that, “Hey, the rules are guidelines.” Of course, the big rules like don’t hurt people, don’t hurt yourself, those are very, very serious, but the rest of them were always more guidelines. I think as a result, every one of my siblings is entrepreneurial in some form or fashion. We all grew up with this mentality of life is all a little bit of a game. Frankly, I feel spoiled that I grew up when I did, because I grew up when some teachers didn’t know what cut and paste was, so when I would be asked to write something 100 times or type something 100 times, I’d write it once, cut and paste it, play Oregon Trail or something on my computer for a little bit until they finally came around.

Then I print it off, and hand it to them. They’re like, “Wow, you did this so quickly. You did this so easily.” I almost felt like I was always hacking the system a little bit, innocent but certainly ways that favored me. I realized pretty early on that the further ahead I stayed in front of the curve, and then certainly in front of the general population with technology and with computers, the more opportunity that was there. I still remember in university, I was selling computers at a local electronics store, and this older gentleman came in. He had just retired from his job.

He wanted to be fully decked out in technology, but he had no idea how to use it. This is before Geek Squad and stuff like that. He bought one of the biggest orders I’ve ever sold at the time. For a commission sales guy, that was a big deal. Then he also said, “Hey, I’ll pay you $100 an hour to just come and teach me how to use all this stuff.” Literally, I’d spend Saturdays on my day off going and showing him how to use a computer and use a digital camera and use a printer and use the scanner. I realized it was like having a superpower that other people hadn’t discovered yet. They knew it was powerful, but they didn’t quite know how to tap into it, and so natural life encouragements, I guess.

Aaron Dinin:

I like pointing out this pattern when it shows up, which happens a lot on Web Masters. The entrepreneurs we tend to hear from usually come from some entrepreneurial household, and from an early age, they learned that, to borrow Lane’s words, most of the “rules in life” are more like guidelines, or as well-known business motivational guru Tim Ferriss writes in his most popular book, The 4-Hour Workweek, “The common sense rules of the real world are a fragile collection of socially reinforced illusions, and the manifest of the dealmaker is simple. Reality is negotiable. Outside of science and law, all rules can be bent or broken, and it doesn’t require being unethical.”

Now, whether or not those sentiments are entirely true or even healthy, I suppose we could debate, but the fundamental point they’re making is certainly interesting and I’d agree with. Both Lane and Tim Ferriss are reminding us that successful entrepreneurs don’t take things at face value. They love to question what most normal people think of as standard wisdom. It’s that ability to question standard wisdom that opens their eyes to new opportunities. This is exactly what Lane described at the beginning of this episode when you heard him talking about why other people’s attempts to build social networks for kids never worked.

Lane Merrifield:

There was a lot of folks that did try to launch a social network for kids. They would make it basically a kid, say, version of exactly what Facebook was or exactly what Instagram was. Our whole theory was first of all, kids don’t act the same way as adults. They don’t want to be entertained the same way as adults. Their whole social structure, they spend all day with them. It’s called school. That is the way that they interact with their friends. They’re not going to go home and jump on a Facebook for kids type experience in order to interact with the same kids that they’ve been spending eight hours with.

Our theory was what they want to do is play together, and so let’s basically create a giant virtual playground so they can extend their play, not post pictures of, “Well, I was in math class again today.”

Aaron Dinin:

When Lane points out this insight, it seems obvious. Of course, kids already hang out with their entire social networks all day, so why would they go on to a social network and post pictures of their days for those same people to see? In other words, the adult versions of social networks just don’t make sense for kids, but that insight wasn’t obvious. At the time, lots of people were trying to create social networks for kids that were basically Facebook clones, but with better content moderation. You know what? All of those Facebook clones were failing.

By this point, Lane was working for a small marketing firm in Canada, where he found himself discussing the issue of child friendly online content with a colleague named Lance Priebe. I hope I’m pronouncing that correctly. Like Lane, Lance was also about to become a parent.

Lane Merrifield:

One of the guys in the company, he was quirky. He was really unique, the definition of thinking differently, similar entrepreneur. He marched to the beat of his own drum. We couldn’t have been more different from one another, but we would really connect around… We both were having our first kids at the same time together, so we were talking about games we used to play and what games we can’t teach our kids. We were also at the same time watching this transition from MySpace to Facebook. We were playing different online games together. We just had this connection around what is out there for our kids, and what do we want our kids to play.

We saw this big void, and that was internet experiences were getting more and more social, and web was becoming more social at that time, and not just MySpace, Facebook, but also, Warcraft was starting to take over traditional gaming and things like that. We saw that kids were streaming onto these experiences. The going assumption was, “Well, they just want to play these grown-up games. They just want to do these grown up things. That’s just what kids do.” Our thinking was, “Well, some of them do, but also, there isn’t any alternative.” There’s Reader Rabbit single player games for kids of these ages.

Then there’s MySpace or Facebook, so what do you think they’re going to want to do? Lance had already built some of these little mini games. He was planning on assembling them into a giant realtime strategy game. That was a risk type game, and I’m like, “Hey, maybe we should do something different here,” and so we talked about building more of a social experience with them. He was more of the coder. I was more on the leadership side of things. We started brainstorming. Three months later, we went to our boss and said, “Hey, we think we’re going to resign and go do this.” He said, “Well, why don’t you do it here? I’ll funnel in the profits. You guys invest what you can, and let’s go after this.”

Aaron Dinin:

Their boss was a man named Dave Krysko. Together, the three of them, Lane, Lance and Dave co founded Club Penguin. At the time, none of them had visions of building a Silicon Valley venture style, enormous tech company. Heck, none of them had any clue just how much the thing they built was going to grow, but grow it did.

Lane Merrifield:

Lance had a small following of kids that were playing his games, his little mini games prior. We had a couple thousand kids that were on the email list, and they were logging into his website. We put up a couple little banners on his existing games, asking kids to help us test this. They could invite someone, but it was like, “Send your email address, and we’ll send an invite code.” I was literally manually creating the codes and then sending out invites. In the first month, we went from those 2,000 or 3000 kids to almost 15,000 kids just through the invites, and so we knew we had something special. Then we opened it up to the public.

It started growing really quickly, but the real turning point for growth was when we joined up with MiniClip, and we did a rev share deal with them. MiniClip was the largest online game website at the time. I think they had 40 or 50 million uniques a month, which at that point in history was a pretty good size website. Deal with them. They featured us, and they said, “Normally, our traffic will destroy games like yours. We’ll give you three months to get ready, and then we’ll turn it on.” I said, “No, we’ll be ready in one month,” and so we hardened up our servers. We worked, pulled all-nighters and everything we could, got this thing out the door, because I had this sense that the moment people figured out what we’d built, it’s like the hunt will be on.

Like someone firing a gun, and I can hear the dogs and the hunters behind me, and we just got to start running. We had this sense of like, “Keep your head down. Focus on what we got to do,” and let’s just go build this thing as fast as we can.” They ended up opening the traffic. We went down a couple times just as they were slowly turning on the tap and bringing in more and more traffic, but eventually, the server stabilized. We managed the traffic, and it was just a rocket ship from there. We couldn’t add servers fast enough.

This was pre-AWS and virtualized servers, so we were literally ordering crates full of hardware gear to our server company, and they were manually building and putting servers online as fast as they could.

Aaron Dinin:

You were really obsessed with rapid growth. Was that because you were concerned about someone else stealing your idea or market opportunity?

Lane Merrifield:

Yeah. Again, we felt that we wanted to grow and get as big and as large as we could before the big entertainment companies, the Disneys, Nickelodeons of the world figured out who we were and what was going on. We would intentionally lie about our size to the powers that be. We had Businessweek and Forbes, and they would see our Comscore metrics on the internet, and they would see that at one point, we were a top 20 website in the world, and people are like, “Why are you getting all this traffic? What’s going on?” They wanted to do interviews on us. Our mentality was like… In fact, our slogan around the office was, “If it doesn’t matter to an-eight-year-old, it doesn’t matter.”

We said no to conferences. We wouldn’t go to conferences. We wouldn’t do anything that didn’t matter to an eight-year-old, and being on the cover of Businessweek or Forbes didn’t matter to an eight-year-old. We would just lie to them. When we get an email from a reporter saying, “Hey, we want to talk to you about your metrics and what’s going on, and what are you building,” we just say, “Yeah, there’s got to be a glitch with Comscore. We’re not sure how that keeps happening, but we’re trying to get to the bottom of it. Thanks, but I don’t think there’s a story here.” We just pushed them off for probably a year at least.

People started getting wiser and wiser to the fact that, “No, this is not an anomaly.” But even still, we’d turn it down, because it wasn’t about our ego. It was about serving kids, and no kid was going to be served by us running around tooting our own horns. In fact, it just was a big distraction. Back then, it’s like every minute mattered, because it was either I was taking care of three or four million kids around the world, or I wanted to be home and taking care of my own kids and sitting on the phone with a reporter. It just didn’t matter. It wasn’t going to grow our company.

Aaron Dinin:

In retrospect, how much should you have been concerned with people stealing the idea?

Lane Merrifield:

I think it was obviously… I wouldn’t have done it the same way now. I was young and a bit naive to what we are executing and what was the second nature to us, and just the way that we were thinking about it, the way we were tackling the problem felt very natural. It almost seemed like… Well, anyone would think of this. We just thought of it first, and so we got to get out there.

Aaron Dinin:

You said you want to do things the same way now. Does that mean people copying you wasn’t as big of an issue as you thought?

Lane Merrifield:

I’m trying to think. Well, it’s funny, actually. Yahoo was looking for games for Yahoo games, and so we called them up, and they were looking for a company that would do a pool, a billiards game for them. We were on the list of companies that were making flash-based games, and that’s what they were looking for, so they called us up. We said, “Well, we don’t have a billiards game, and we don’t really have time to make one.” At this point in time, I think Penguin was already 10 or 15 million active users or 20 million active users, so we were just focused on that. But we said, “But we’ve got this other game that we just launched, this virtual world that we launched that we’d love to show to you.”

They said, “Sure. We’ll have a meeting.” We showed it to them, and no interest. We got 10 minutes in, and they said, “Listen, this is done. This is… No one’s ever going to play this. We’re not interested, but we know that Disney has been buying some games for their online stable. Maybe you should reach out to them.” I actually reached out to them. At that time, we had already internally decided we would be willing to sell for $4 million, because we’d realized, “Okay, that’s enough that we can take care of the team.” That was in our head. We expected we were going to get an offer, because everyone was going to see how brilliant this was.

We got further through the Disney pitch, but Disney sent a little bit more friendly email afterwards, but basically… I kept the email. I still have it to this day, said, “If we wanted something like this, we would just build it ourselves. Thanks, but no thanks.”

Aaron Dinin:

Remember that thing we discussed earlier in the episode about how entrepreneurs are usually trained from an early age to question what everyone else thinks of as common sense in the established rules of society? The story you just heard is one of the things to watch out for once you do start questioning everything. Eventually, you’ll recognize a seemingly obvious opportunity in the market, and you’re going to worry everyone else sees it too, and that they’re going to try to steal it. That’s not actually the case. You’re forgetting that you see the world differently than everyone else, so what looks obvious to you actually looks ridiculous to most other people.

This is what happened to Lane. Club Penguin was doing great because his users, who were all kids, loved it, but the adults, the people who make business decisions just didn’t get it.

Lane Merrifield:

Funny story about that, the Club Penguin Wikipedia page kept going up because kids were submitting it. Then the Wiki foundation or whatever kept pulling it down. Then they’ve resubmitted. It probably went up and down about seven times, and the foundation kept saying, “Well, this is not culturally relevant,” or something like that. We would have three million kids logging in on a Saturday, and then Wikipedia is sending us an email that says that, “It’s not relevant to society in any way to keep your page up.”

Aaron Dinin:

What were some of your big insights, do you think? What made Club Penguin so successful? Why did kids, your users, love it so much?

Lane Merrifield:

We created the world in a way that it was about celebrating the kids’ creativity. It wasn’t about us. We consider ourselves stewards. In fact, we built this loop intentionally, where we’d spark an idea, put it out to the community and say, “Hey, what should we do with this?” Let their ideas come in. Oftentimes, there’s some themes that would come in with their ideas, and then we make some decisions on which one of those ideas we wanted to pull from. We’d have millions of different ideas and feeds that came in. Then we would turn those ideas into reality, and then give it back out to the community.

It was like a Choose Your Own Adventure experience as the narrative threads ran through the world, as the different events came in. For everyone inside and outside the company, it wasn’t about us. It was about the kids. I think that that was so true to me. I think there’s a big reason for its success. I think that was the reason why the kids felt the way they do, the reason why they still talk about it today when so many other kids experiences and games and everything have come and gone. I think that was really special, because it was about taking their imaginations, and making them real, rather than just being about our imaginations.

Aaron Dinin:

Can you give an example?

Lane Merrifield:

Well, we had a blog that was one of our primary points, and then there was a ton of fan sites that the kids had built, YouTube sites and others. We were constantly watching those. We would put… We had a weekly newspaper that was published, The Penguin Times, which one of our fun stats was that it was more widely read than the New York Times every week. The Penguin Times would release some sort of a story like, “Oh, there was a white fur discovered in the mountains, and scientists are trying to figure out what the white fur was.” Well, then we would see our fan sites and our blog and everyone light up with like, “I know what it is. It’s probably a giant puffle. It’s probably this. It’s probably that. I bet it’s this. I bet it’s that.”

We would just listen, and we’d go, “Oh, that’s a cool idea. We like that one. Let’s do that. Let’s do that.” The only antagonist in the world, Herbert, the giant polar bear, who… Of course, the grown-up humor in it is that polar bears are typically in the Arctic, and penguins are typically in the Antarctic. The idea was… The story that we did is that Herbert was tired of the cold, and so he jumped on a floating iceberg, and was hoping to float down towards the equator. He fell asleep and kept on floating and ended up on Club Penguin Island. He was so angry about it that he’s taking it out on these penguins.

He’s a slightly lovable, but angry polar bear. That story, that narrative came from just dropping a hint about this white fur that was found in the mountains. It was kids themselves that said, “Maybe it’s a polar bear,” and we just took that and ran with it. The artists, of course, had a blast with it, and a new character was born in the world. That happened every single week. We were storytellers. It was basically… In fact, we would send our writers to improv classes because we would use improv as an analogy of what we were doing with the kids. It was a constant yes-and improv experience.

We were writing these stories in real time right alongside them. As a result, they own them. It was their world. It was their stories. It was their experience. They weren’t just partaking in ours.

Aaron Dinin:

Kids loved it, because you were great at incorporating their creativity, but this was a subscription service, right? The kids weren’t paying the monthly bills. Can you talk about your business model and how that worked?

Lane Merrifield:

We wanted it to be safe. Our own kids were playing, and we really valued that and knew that because we weren’t going to put advertising on the site, we had always planned on having a subscription model. The subscription model demanded that we keep parents on the side, and keep parents happy, because they’re ultimately our customers, our paying customers. Safety was paramount. It wasn’t just about building users. It was about obviously growing subscribers at the time, and even that ironically, bit of a tangent, but this was pre Netflix. I kept the articles where we were openly mocked for thinking that a subscription model on the internet would ever be successful by media and by the press, because…

Even early game press were like, “They’re not charging $60 for a cartridge, and everything online is ad driven. They’re publicly saying that they’re not putting ads on their website.” It was basically like, “Well, it’s fun while it lasted. See you later. Subscriptions will never work online.” Fast forward, obviously, to today when there’s a lot of subscriptions. We have way too many of them. We knew we wanted to build something that was more playground like. In fact, we call it a virtual playground, because the term virtual world was still in its infancy back then. That’s just how we would describe it to people.

The goal was give them the tools. The best playgrounds are not the ones that are prescriptive play like, “Okay, here’s station one. Here’s what you have to do. Here’s station two. Here’s what you have to do,” which is what most levels were in games and things like that. Our goal is to say, “The best playgrounds have the biggest jungle gyms or the coolest fort like castles or the best sand or whatever.” Just give them the best tools, and then let their imaginations make about what they will.

That was a lot of what we focused on. In fact, we would study childhood play patterns and imaginative play. We did a lot of research on that. We just incorporated that in for every different age group that we could, make it as enjoyable as possible.

Aaron Dinin:

It’s interesting that you knew you didn’t want advertising from the beginning, because as you mentioned, that’s how everything like this made money online back then. Why were you so opposed to advertising?

Lane Merrifield:

Well, two things. Number one, kids, the age group in the demo that we’re working with, all the research shows how impressionable they are, which is part of why people love to advertise to them. But for a lot of kids, even in those early days, ads were pretty shady and would look like games, so kids wouldn’t even know what they’re clicking on, and so all of a sudden, they’d click on something, and they’d end up jumping from a breakfast cereal company. Then they’d click on another ad, and they’d end up on all these off places of the internet that had nothing to do with kids. There’s a lot of that happening.

We call it ad jumping, because they would just jump from one ad to the next, and then all of a sudden end up in a porn site or something, unfortunately, because Google wasn’t dominating AdWords and all of that yet, so it wasn’t as organized as it is today. Second of all, we just felt like kids are bombarded with ads all the time on TV, on the radio, on whatever, and we wanted a place that was ad free, and we could let it be a more pure creative place as a result. It’s the same reason why a lot of museums don’t put up billboards right next to paintings and stuff like that. It cheapens the experience a bit.

We wanted it to be a really immersive experience. We wanted it to be something that didn’t have distractions, didn’t have a Froot Loops ad running across the top of it or something like that. In hindsight, I think we ended up being more profitable as a result as well. That was the other thing we kept secret was how profitable it was and how much parents clearly did want to pay for a safe, ad free experience for their kids.

Aaron Dinin:

How did you think about keeping kids safe? I mean, that seems like it would have been a huge problem.

Lane Merrifield:

Behind the scenes, our moderators on our team were passionate about giving kids a safe place. The idea was no matter how rough their home life is, no matter how rough their day is at school, no matter how complicated the rest of their world is, this is a safe place where they’re not going to be picked on. They’re not going to be bullied. They’re not going to be expected to do anything or be anything other than just whoever they are, and do whatever they want to do, and create a safe space for that. Even moderation, we were investing $10 to $15 million dollars a year into our moderation engines and our tools for that, and even doing things like passive filtering, the old mantra, “If you can’t say anything nice, don’t say it at all.”

We had a blacklist of words that you weren’t allowed to say, obviously, swear words and things. You get a warning. Then after you’d say it again, you’d get kicked out for 24 hours or 48 hours or whatever. That was to try and curb the blatant swearing, but then there’s words like jerk. Well, some families use jerk every single day at home, and others, it’s a swear word, and so how do we manage things like that because every one parent’s differently? We have this massive gray list that we’re adding to daily of words that were basically just not positive. They weren’t bad words, but they just weren’t positive.

If you and I were to log in and be looking at our penguins, you could say, “Hey, you’re a jerk,” and you would see yourself say it, but no one else in the world would see it. In fact, you’d be just sitting there silent as far as I was concerned. Unless you pulled up both windows side by side, you couldn’t test that filter. What that meant was you could sit there and go, “You’re a jerk. You’re a jerk. I hate you.” You haven’t sworn. You haven’t done anything. You’ve just been not really positive. “Let’s go sledding.” Blink, blink, all of a sudden, that pops up. I see you said something now, and so now I’ll respond, “Yeah, let’s go sledding. Sounds good.”

There was this psychological benefit we saw unfold where kids just felt inherently that Club Penguin was not the place to goof around and be a jerk. Club Penguin is just the place… It’s like Disneyland. You don’t go into Disneyland with a can of spray paint, and start tagging Main Street. No matter how much you might have done that at some point at some other place, it just has this sense of joy and fun, and it created this sense of positivity that I think is why it still has such a soft spot in people’s hearts today.

Aaron Dinin:

That’s certainly one reason people still remember Club Penguin. Another reason is that Lane and his team were able to scale it into a worldwide phenomenon, but they didn’t do it on their own. Remember that conversation with Disney, where Lane was hoping to get $4 million for Club Penguin? Well, it turned out to be lucky for Lane that Disney didn’t want the deal back then, because a couple years later, Disney’s M&A team came calling and ultimately wound up buying Club Penguin for a reported $350 million. Lane and his team decided to sell to Disney specifically because it was the company that seemed most capable of helping them grow, and in a lot of ways, they were right.

Lane Merrifield:

We had this kind of rocket ship that was taking off. As much as that kind of growth is exciting and fantastic, it also can take a bit of a toll as well. We realized that our growth outside of North America was happening just as fast as it was inside North America, and in some countries, faster. We didn’t want to geo block certain countries because we wanted the… The vision was we wanted kids from around the world to play together. The problem was is that our moderation and everything was English only, and our moderation at the time, our safety people were on split eight-hour shifts. We had 16 hours of moderation, but then there was obviously gaps. We didn’t necessarily want to start running 24 hour shifts.

We just knew we needed to open up some other offices around the world, because there’s certain languages and other things we couldn’t all service from North America. We also had a huge demand for toys and consumer products that was growing. They’re selling really well. I think our first year we launched some toys, we made $5 or $6 million just from these little stuffed puffles that we put on the website. But again, we didn’t have any expertise in that. We didn’t want to get distracted with it, and so the three of us sat down, and we had all bootstrapped it. There was no investors. There was no board. It was literally just the three of us founders.

We sat down in a room, and we said, “Okay, what do we want to spend our time doing? Lane, do you want to go run around the world and lease office space and hire teams, or do we want to focus on the experience and focus on what we love to do, which is building parties for kids for a living, and not necessarily running around doing logistics?” That was part of it as well. We were increasingly nervous about, again, just our ability to continue to grow this thing under our own weight, and so we went out on a search. There was six companies at first, and one by one, we’d start kicking them out of the process for one reason or another.

Then we ended up with two or three companies, Disney obviously being one of them. Disney wasn’t even the highest bidder either. I think just culturally and from a values and mission perspective, they most aligned, and they had instant infrastructure. They had teams of people that knew how to make toys and know how to make TV shows, and they had offices all over the world that we could tap into from the very beginning. They sped up our international growth, probably accelerated it by at least a year or two.

Aaron Dinin:

Did you keep working on Club Penguin at Disney, or did you step away at that point?

Lane Merrifield:

I didn’t know what the term exit was. This wasn’t a Bay Area startup. It was three guys who built a company, and we wanted to keep doing it. We just wanted to do the fun parts and not have to do the really complicated international parts that we hadn’t done before. Lance stayed on for about two, three years. Dave, because Dave was always more the investment guy, and so he took his money and bought a castle in Germany, and started a bunch of nonprofits. I mean, he was awesome. He was living the dream, and then he was older than us as well, so he was a little bit more ready for that.

Lance stayed on for two, three years, and then he wanted to go start a different games company, and do some new things. I stayed on the longest. I stayed on for five years until I… It’s just hard to work for a big company from a distance because I was still in Canada raising my kids. Obviously, the headquarter is in Burbank, so there’s some friction there. I’ve met the goals. I wanted Penguin to be a billion-dollar brand, and we’ve done that. I was happy about that, and I wanted to build my own succession, so I hired my successor. I worked with him for 18 months, prepped him, and he was ready, and I was ready, so we made the move.

Aaron Dinin:

Nobody knew it at the time, but if you look back at the history of Club Penguin, Lane leaving in 2012 pretty much marked the beginning of the end. It would continue on for a few more years, but by 2017, Disney had had enough. Club Penguin was still generating millions in revenues, but the operating expenses had grown so much that it wasn’t profitable. On March 30th of that year, Club Penguin was shut down, which begs the question, “What does Lane think about Club Penguin’s ultimate fate?”

Lane Merrifield:

I’m really sad with what Disney ended up doing with the world afterwards. I think when I left, we have all the right pieces in place, and naturally, you have new management, new leadership that comes in, and then it gets passed along and passed along. It just ended up becoming a shell of what it was. I didn’t really have the energy to keep trying to protect it, and keep its purity intact. For Disney, brands are invented in movies, and they’re invented in TV. They’re not invented in the internet. For Disney, the internet was a marketing vehicle, and so when I look at what was going on before Club Penguin, before they shut it down, it was really sad to watch because it was basically a marketing vehicle for their movies

Every party was themed around the frozen Two party and the Iron Man four party. It was just… Literally, they had turned it into a giant marketing vehicle. The kids, they didn’t love it. They weren’t fans of it, and they slowly were walking away from it. The other problem was is even though it was still generating a healthy amount of revenue, they had layered on so many internal costs. It was on now the Disney servers and the Disney cloud, which has its own internal cost structure associated with it. Even though it was… I think at the time that they shut it down, it was still generating $30 or $40 million a year. They had weighted down so much with internal costs that it still wasn’t profitable.

I’m disappointed that it went the way it did.

Aaron Dinin:

Have you ever talked to Disney about starting it back up? I mean, if anyone loves a good reboot, it’s Disney, right?

Lane Merrifield:

Both Lance and I have tried to buy it back. We’ve tried to license it back, and no joy. They would rather keep it shut down. I understand why Disney is not doing it. It’s a no win situation for them. If they let us take on the brand again, and we build something great, then they can make some more bucks, but it shows that they were the reason why it shut down. If we take it on, and we crash and burn, well then it potentially harms a brand that they own and is part of their stable, and that they might want to do something with someday. That part’s disappointing. There’s no one person I’d pin that on. I think it’s just you get enough people in a big enough organization, and groupthink takes over and off you go.

Aaron Dinin:

In a few words, Lane just summed up pretty much how all successful companies eventually wind up closing down. Eventually, they become a victim of their own success. That appears to be what happened to Club Penguin too, but not before having a good 12-year run as one of the most popular places on the internet for kids. It was their social network. Sure, it didn’t look like social networks all the adults were using, but that was also a huge part of what made it so successful. To see that opportunity, it took an entrepreneur who from an early age was taught to question the world around him and recognize that the “rules of the world” are actually more like guidelines.

Hey, speaking of rules, if you enjoyed this episode, which I hope you did, there’s no rule that says you can’t listen to it another 20 times. While you’re at it, please take a moment to leave a five-star review on your favorite podcast app, and share Web Masters with everyone you know. I appreciate any help you give in spreading inspirational stories like Lane’s to as many people as possible. Of course, I want to thank Lane Merrifield for taking the time to share that story. If you’re curious about what he’s up to these days, you can catch him on television. He’s one of the dragons on Dragon’s Den, which was the Canadian show that inspired Shark Tank in the United States.

He’s also on Twitter @LaneMerrifield. Be sure to follow him so you’ll know when he finally does get permission from Disney to launch the next iteration of Club Penguin. As I joked before, if any company is willing to resurface old IP in order to make a quick buck, it’s Disney. Let’s be honest, none of us are complaining. I for one am excited for the Club Penguin TV show that’s surely going to appear on Disney Plus within the next few years. A quick thanks to our sound engineer, Ryan Higgs, for pulling together this episode. Another thanks to our sponsor Latona’s. Don’t forget, if you’re in the market to buy or sell an internet business, be sure to visit latonas.com.

Also, don’t forget to subscribe to Web Masters, so you get the next episode as soon as it’s released in just a few days. Until then, well, I guess it’s time for me to sign off.

[OUTRO]

Aaron Dinin:

I’m sure this is another one of those questions you’ve been asked a million times, but I feel like I still have to ask it. Do your kids think you’re basically the coolest dad ever, or do they not care?

Lane Merrifield:

You know what, it’s funny. At the time, I don’t think they did. I think to them, I was just the nerdy dad who made stupid dad jokes all the time. I think now, they think it’s a little bit cooler. I know my son does. My son’s actually going to university right now for video game design, which is pretty funny, especially when some old school people will be like, “Video game design. Are you nervous? Do you think he’s…” Well, video games are paying for his university right now, so I am not that nervous about it being a future in it. I think to them, I’m just a bit of a nerdy dad. In fact, that was also one of the reasons why I left Disney at the time. I was traveling.

I mean, we had eight offices around the world. I was constantly on the road. I would spend 24 hours in Australia so that I can fly home and spend time with my kids before I’d have to fly off to England. I was asked that exact same question by a reporter once in Australia during one of these 24-hour stints. He said, “Your kids must think you’re a pretty cool dad,” and I realized I hadn’t seen my kids in three and a half weeks. I, in that moment, felt my heart sank, and I felt like a hypocrite. I’m running around the world talking about this thing that I built for my kids, and yet, that very thing is turning me into a shitty dad.

It was certainly for me the beginning of the end of me going, “Okay, I got to be done with this, because I need to reset my priorities a bit.”