Michael Acton Smith doesn’t like to act his age—at least in front of his customers. During a recent East London event for Moshi Monsters, his online game for kids, the 38-year-old turned up in a purple blazer, gripping a matching electric guitar with a bite mark on one side. Little girls in tutus and mermaid costumes lined up to sample treats from a milkshake bar and cupcake tower.
Like their creator, the misshapen, furry monsters that obsess kids in Britain and the U.S. are getting on in years. At five, Moshi Monsters are nearly as old as their 6-to-12 target audience. And the history of children’s media is littered with once-ubiquitous brands, such as Blue’s Clues and Teletubbies, that burn out as young fans age.
That has Smith and the 200 staffers at his London-based company, Mind Candy, scrambling for deals to keep the characters from losing their charm. “Most kids’ properties don’t last anywhere near five years, and we’ve already made it,” says Smith as children at the Moshi party dive into a ball pit. “We want to ensure that it becomes sort of a Lego or a Hot Wheels or a Barbie.”
Moshi Monsters is an online game in which players adopt a monster, feed it, dress it, and customize its home. While there is no cost for signing up to play, users (or their parents) are prodded to upgrade to a premium account, which costs £4.95 a month, so their monsters can enjoy special privileges such as partying at MonstroCity’s underground disco or having their art work displayed at the Googenheim, a virtual museum. Revenue almost quadrupled in 2011 to £28.9 million ($45 million), and profit jumped fivefold to £7.4 million as the game caught on. Although Mind Candy hasn’t released 2012 results, it says registered users have grown from 32 million in 2010 to 55 million in 2011 and more than 80 million today.
To wring more money out of his stable of critters, Smith has gone beyond the usual brand extension formula of plush toys, backpacks, and puzzles. He’s teamed up with Sony (SNE) on an album of children’s songs and with Activision Blizzard (ATVI) on a Nintendo (7974:JP) DS game. About a year ago, Mind Candy acquired Origami Blue, a U.K. game developer, to bulk up its in-house talent pool. Last month the company inked a deal with Pearson’s (PSON:LN) Penguin book publishing unit.
An initial public offering is a possibility, Smith says, though he declined to give a target date. Mind Candy could also attract offers from a big media company. A few game startups, such as Rovio Entertainment, the Finnish creator of Angry Birds, “just break out,” says Victor Basta, managing director of Magister Advisors, a London firm that counsels tech startups. “But you can count them on one hand. For everyone else, it’s perfectly logical that they get acquired.” In 2011, Electronic Arts (EA) paid $750 million for PopCap Games, the creator of the popular Plants vs. Zombies.
A big challenge ahead for Smith is navigating the transition from computers to mobile devices. Zynga (ZNGA) has seen its shares lose approximately half their value in the past year as it struggles to make that jump. The Moshi Monsters game still isn’t compatible with touchscreens, though there are some mobile apps that feature the characters. A tablet version of the game is in the works.
The ultimate goal for children’s games is to have characters with staying power. Sanrio’s (8136:JP) Hello Kitty is a good model, says Patrik Kärrberg, a researcher at the London School of Economics. “It’s about establishing these characters and getting people to identify with them,” he says, along with prolific efforts to license them for different products.
Mind Candy nearly went bankrupt in 2008, four years after it was founded. Its first game, Perplex City, was a “bizarre, very creative global treasure hunt” that was too complicated, Smith recalls. The game wasn’t making money, and Mind Candy used its remaining funds to get Moshi Monsters off the ground. Around mid-2009, “things just took off like a rocket,” he says. “We’ve been hanging on for dear life ever since.”