HBS-NeoPets-(9-802-100)

DoNotCopy9-802-100REV:MARCH19,2003_______________________________________________________________________________________LizKindpreparedthiscaseattheHBSCaliforniaResearchCenterunderthesupervisionofProfessorThomasR.Eisenmann.HBScasesaredevelopedsolelyasthebasisforclassdiscussion.Casesarenotintendedtoserveasendorsements,sourcesofprimarydata,orillustrationsofeffectiveorineffectivemanagement.Copyright©2002PresidentandFellowsofHarvardCollege.Toordercopiesorrequestpermissiontoreproducematerials,call1-800-545-7685,writeHarvardBusinessSchoolPublishing,Boston,MA02163,orgoto—electronic,mechanical,photocopying,recording,orotherwise—withoutthepermissionofHarvardBusinessSchool.THOMASR.EISENMANNLIZKINDNeoPets,Inc.STOP!YouabsolutelyhavetostopmakingNeoPetssomuchfun.Ican’tstandit.Therearetoomanythingstodonomatterwhatyourtastesare.Icheckonmypetseveryday.Iworryaboutwhetherthereisenoughstockinmyshop.IamlearningtodobasicWebpagedesign.Iamactuallyhavingconversationswithmychildren!!Don’tdothisanymore.MakeNeoPetsboring.Makeithardtounderstand.Makeallthegamesthesame.Please!Ineedtogetareallife!!—AdultNeoPetsOwnerDougDohring,chairmanandCEOofNeoPets,Inc.(NeoPets),chuckledashewalkedbacktohisoffice.Oneofthecompany’sartistshadjustcompletedanewrenderingoftheNeoPets!charactersforthefirm’sreceptionarea.1Dohringhadenjoyeddecoratingthecompany’sGlendale,CaliforniaofficeswithimagesfromtheNeoPetswebsite;thiswasjustoneofthemanyaspectsofhisjobthatheloved.NeoPetswasaninteractive“virtualpet”website(seeExhibit1forexamplesofthecompany’sWebpages).NeoPetstargetedusers,ages20andunder,whocreatedvirtualpetsfrommorethan40fancifulanimatedpetspecies.Viewerspersonalizedtheirpetsbyname,color,gender,andpersonalityattributesandcaredfortheminthemythicallandofNeopia#.Thesitealsoofferedawealthofmulti-layeredgames,contests,andactivities.SinceitslaunchinNovember1999,NeoPetshadbecomeoneofthemostpopularsitesontheInternetforyoungpeople.ByJuly2001,NeoPetshad65employeesandwasprojectedtoreach$12to$15millioninrevenueforthecalendaryear.TheNeoPetswebsitehad14millionmembersand,accordingtoNielsen/NetRatingsdataforApril2001,wasrankedfourthamongallU.S.websitesfor“stickiness”—theamountoftimeviewersspentonthesite—behindAOL,Yahoo!andeBay.DuringthemonthofJune2001,NeoPetsmembersspentanaverageofmorethan7hoursonthewebsite.2Inaddition,NeoPetsmembersgeneratedatotalofmorethan5.3billionpageviews,rankingitinthetop10amongallwebsites,aconsiderableaccomplishmentconsideringitsyoungaudienceandthefactthatthewebsitehadbeenliveforlessthan2years.NeoPetshadbeenprofitablesinceitsfourthmonthofoperations.Thecompanydidnotchargeafeetoitsusers,butratherearnedrevenueprimarilyfrom“ImmersiveAdvertising#.”Thisonline1Neopia,NeoPoints,NeopianTimes,andImmersiveAdvertisingaretrademarksofNeoPets,Inc.,andNeoPetsandNeoMailareregisteredtrademarks.Trademarksignageonlyappearswiththefirstmentionofeachterminthiscase.2NetScore,June2001.DoNotCopy802-100NeoPets,Inc.2marketingconcept,pioneeredbyNeoPets,wassimilartotraditionalproductplacementinmoviesandtelevision.Sponsors’productsormessageswereintegratedintotheactivitiesandcontentoftheNeoPetssite.Thecompany’sadvertisersincludedCoca-Cola’sOlympicGamescampaign,TurnerBroadcasting’sCartoonNetwork,WaltDisneyCompany’sHollywoodRecordsandMiramaxFilms,WarnerBros.HomeVideo,Nintendo,EncyclopediaBritannica,andKraftFoods.Backinhisoffice,DohringsatdowntothinkaboutthefutureofNeoPets.Hewasexhilaratedbythecompany’srapidsuccess,butconcernedaboutmanagingitsgrowthandensuringitslong-termviability.Inearly2001,GreenDotCapitalPteLtd(GreenDot),asubsidiaryofSingaporeTechnologies,hadapproachedNeoPetsaboutinvestinginthecompany.InApril2001,NeoPetsandGreenDotsignedamemorandumofunderstanding(MOU)toworktogethertoexpandNeoPetsinAsia.Inthemonthsfollowingtheannouncedagreement,Dohringhadbeenapproachedrepeatedlyregardingotherlicensingagreementsandinternationalexpansionopportunities.Dohringrealizedthatthatheneededastrategyforthecompany’sgrowth,bothdomesticandoverseas.Herecognizedtheneedtogrowquicklyandtakeadvantageofthecompany’sstrongmomentum,butatthesametime,hewantedtopreservethequalityoftheNeoPetsbrand.Further,hewantedtoinsurethatNeoPetswaspositionedforlong-termsurvival,ratherthanbeingjust“thelatesttrend.”HetookhisphoneoffthehookandclosedthedoorsothathecouldthinkaboutNeoPets’strategywithoutinterruption.CompanyHistoryIn1986,DohringfoundedTheDohringCompany,amarketresearchfirmfocusedprimarilyontheautomotiveindustry.Withinitsfirstfiveyears,thecompanybecameoneofthetop100U.S.researchfirms.In1995,Dohringsteppedasidefromtheday-to-dayoperationsofTheDohringCompanytobecomepresidentandadirectorofDigitalLightwave,Inc.,atelecommunicationsequipmentstartup.In1997,DigitalLightwavecompletedaninitialpublicofferingatavaluationof$300million.Shortlythereafter,in1998,DohringreturnedtoTheDohringCompanytolaunchitsonlinemarketresearcheffort.Throughouthiscareer,Dohringhadinvestedhisownmoneyinentrepre