Kids Flock to Social Nets, but Few Advertisers Dare to Follow

Sites Like Togetherville and Moshi Monsters Are Hot, but Mostly Ad Free; Here's Why

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Kid's social networks are a boom business -- in every way but advertising.

Online playgrounds with colorful names such as Everloop and Togetherville aren't only popular with small fry, but also investors. Everloop just raised $3.1 million and Togetherville was acquired by Walt Disney Co. earlier this year for an undisclosed sum. Moshi Monsters, a 3-year-old kids' social-gaming network, has already raked in $100 million this year, but not one dime of it was from advertisers.

"Believe me, we get asked to incorporate branding and advertising all the time," said Rebecca Newton, chief community and safety officer at Moshi Monsters, which expects to have 70 to 80 million members in 200 countries by the end of this year. "But it's complicated. When kids tell their friends they just had a mocha latte at Starbucks, they don't understand that now Starbucks has their name and knows that they went to a Starbucks in Des Moines on Third Street on Thursday and had a mocha latte and they start getting coupons for 20 mocha lattes."

It's not just kids' understanding of advertising that 's a lightning rod of controversy for social networks, which mainly rely on virtual and real goods and subscription business models. It's the public perception of how advertising affects kids. Besides law enforcement and the government watching over anyone working with kids online, pediatricians are getting in on the act. A March report by the American Academy of Pediatrics suggests doctors ask kids how much time they spend online and warn parents and children about social media including kids' obsession with popularity and status, sleep deprivation, social anxiety, depression, bullying -- and interactions with advertising.

Companies such as Togetherville are also aware of the difficulties Facebook has been having despite the fact that its rules specify no one under 13 can sign up. At least four lawsuits have been filed nationwide -- all hoping to go class action -- against Facebook's use of kids' images in their social ads. A big part of Facebook's advertising strategy is to turn user "likes" into ads that show the user's name and image. A recent Consumer Reports survey found that as many as 7.5 million Facebook users in the U.S. are under 13, despite its user policies. An additional 14.4 million are between the ages of 13 and 17, younger than the age of legal consent in most states. And Facebook has no controls in place to prevent a child under 13 from lying about his age to join the site.

Cognizant of the mess exposing kids to advertising can create, 50-million-member strong Moshi Monsters avoids it altogether. Ms. Newton, who is very passionate on the topic, said exposing kids to sophisticated advertising techniques isn't fair. "It's exploitative on a high level -- getting information from a kid who doesn't know what they're doing."

Instead of working with brands, Moshi decided to become a brand in its own right. The company just announced an exclusive line of plush toys and figurines with Toys 'R Us. In fact, most of Moshi Monsters' $200 million-plus revenue comes from the offline sale of toys, cards and magazines, with every piece of merchandise driving kids back to the site with a code embedded on the item. Moshi Monsters also makes money when members upgrade to the paid membership, earning $8 a month per member. Additional revenue comes from virtual currency called "Rox." Games are "short-play optimized," meaning that after 15 minutes, the rate at which players earn Rox diminishes, encouraging children to do homework or play with friends instead.

Rather than avoid brands and advertising completely, Everloop maintains it's creating a place where kids can learn how to behave around advertising. Everloop has sponsored "loops" -- the network's version of pages. "Our philosophy is to socialize kids to brands and not commercialize them," said Everloop CEO and co-founder Hilary DeCesare. "Kids will face ads their whole life online, but our goal is to let them find brands they are interested in." So while Simon & Schuster is sponsoring a loop built around a book, the kids don't know the name of the publisher, but they definitely know the name of the book -- "Dork Diaries: Tales from a Not-So-Fabulous Life," a popular series of children's books by Rachel Renee Russell.

The publisher sees Everloop as an essential part of its marketing strategy. "We have found Facebook and other online outlets to be a successful tool when marketing to teens but to reach the tween market there are not as many vehicles," said Lucille Rettino, director-marketing for the children's publishing group at Simon & Schuster. "Everloop, with its community set-up, is a perfect place to have kids talk about books. Our goal is to create a book club where tweens are reading and discussing our books and talking about them to their friends."

Besides the millions of dollars in funding, the company recently announced that former senior VP of Disney marketing Sandy Barger is the company's new CMO.

Togetherville does not accept advertising or subscriptions. The business model is based on the "allowance" -- parents pay for T-bills (Togetherville currency) that they give to kids to spend on goods, games, and gifts. On Togetherville, before a kid makes a new online friend, she needs the approval of her parents. Even though Disney has owned Togetherville since February, CEO Bob Iger is approaching the space with caution. Early this month, he spoke at the AllThingsD conference and when asked if Disney can address demands from preteens for a social network, Mr. Iger said, "We have to be very very careful with our brand. Until we are certain that we can live up to our brand attributes within that space, we're not going to do anything there."

Disney has the numbers to create a huge stir -- ComScore puts Disney Entertainment at top in the kids' category, with 17.1 million unique visitors in May. But when it comes to a Disney social network: "We might do that , but not anytime soon," Mr. Iger said.

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