July 5, 2011

Oh Mickey You’re So Fine, You’re So Fine You Blow My Mind- Hey Mickey

Oh Mickey You’re So Fine, You’re So Fine You Blow My Mind - Hey Mickey
Don Shifrin, MD, FAAP

When Disney announced in 2010 that it was buying Playdom, an online social gaming company, for $532 million, it was lauded as part of a long-term strategy to have a more formidable presence in the video game industry. This followed their purchase of Club Penguin in 2007 for $350 million. Seems like Mickey may have had his eye on a lot more than just webpages.

In May Playdom/Disney paid to settle federal charges that it illegally collected and disclosed personal information from hundreds of thousands of children under 13 without parental consent. Talk about success! The Federal Trade Commission (FTC) noted that the ‘settlement’ was the largest civil penalty ever for a violation of the Children’s Online Privacy Protection Act (COPPA). Just to make sure, let me reiterate. Ever.

Does Mouse central consider this a setback, akin to when the FTC investigated whether their Baby Einstein series was marketed falsely as “educational”? Although the complaint was dismissed in 2007, Disney responded in 2009 to the continuing bad publicity by offering a refund to parents who might have purchased DVDs with visions of Harvard on their children’s horizon. Actually, I am not sure what would embarrass Mickey these days. But I digress.

According to the FTC, Playdom operated 20 websites that collected children’s ages and email addresses and allowed children to post names, email addresses, and locations on personal pages and in online forums. Prior to Disney’s purchase in July of 2010, about 400,000 children registered with Playdom sites. An additional 800,000 registered with its Pony Stars site as well. (Pony Stars was purchased by Playdom when they bought Acclaim Games two months before the Disney deal swallowing them both). A July, 2010 Disney release announcing the purchase stated, “By acquiring Playdom, Disney will strengthen its already robust digital gaming portfolio, acquire a first-rate management team and provide consumers new ways to interact with the company on popular social networks like Facebook and MySpace.”

Well, not exactly what Mickey’s shareholders had in mind; last fiscal quarter Disney’s interactive unit lost $155 million -- $100 million more than the previous year. The culprit? Well Playdom came on board for $500+ million. True, most of the blame for the FTC’s ire is on Acclaim. But when you pay over half a billion (plus maybe another $200+ million in incentives), one assumes that due diligence should be a given.

Let’s get back to the FTC. No question that Disney/Playdom/Acclaim violated the COPPA law, which became active April 2000. As of last week, Representative Edward Markey of Massachusetts proposed new COPAA legislation to “extend, enhance, and revise the ability of companies to collect, use, and disperse personal information from minors.”

So after we have a clear FTC violation, what was Disney’s response? Not so coincidentally, the same response has been in the playbook for years by children’s food companies investigated by the FTC for deceptive marketing practices; admit no wrongdoing even though you have been found to be unscrupulous by the FTC. Then declare happily that the infraction is all behind you.

Predictably, Disney’s release reads, “This matter involved a FTC investigation of the practices of Acclaim Games, a company that was acquired by Playdom prior to Disney’s acquisition of Playdom in 2010,” textbook boilerplate language acknowledging no wrongdoing on Disney’s part. Then the happy ending, “Disney is pleased that Playdom and the FTC have now resolved this problem amicably.”

The amicable resolution of the “problem” was a mandate for the largest civil penalty ever. Did I mention ever? Wait for it -- 3 million dollars. For a company whose recent quarterly profit was $942 million, that amount could be found on the mailroom floor. That represents less than 1% of their purchase price for Playdom.

If and when a new COPPA law is instituted, do we really think that companies targeting children will be afraid to play chicken with the FTC? Not at those prices.