By Marla Backer
OBB:VPIG
Last week, Virtual Piggy (OBB:VPIG) announced that its board had authorized management to evaluate strategic alternatives. The company has engaged an investment bank to help with this process. We believe Virtual Piggy could be an interesting acquisition candidate for a larger technology company or payment provider seeking to expand within the YA market in a regulatory compliant way.
Many online payment services have launched offerings for younger consumers. PayPal introduced a PayPal Student Account and Visa has Visa Buxx or Teen Visa, a prepaid card for teens. However, neither is for the 8-to-14 year old market that Oink targets. In fact, Virtual Piggy management believes that no other payment mechanism offers a solution that is compliant with government regulations concerning 8-to-14 year olds. Other services also do not allow parents to control spending by determining how much buying power they authorize on the card. Management believes that Oink is the only COPPA compliant solution for children under the age of 18.
Payment providers are extending their services to younger consumers, while at the same time, major technology companies increasingly are targeting younger demographics. For example, Google is considering allowing children to sign up for Google accounts, according to trade publications, including a child safe version of YouTube that offers a dashboard allowing parents to monitor their children’s activities. Yahoo allows children to sign up for its services if their parents provide consent. As noted, Facebook, which is currently restricted to users 13 and older, is also interested in expanding to younger people, according to trade publications. These initiatives to target teens and tweens underscore how attractive the YA consumer market is, in our view.
Tweens and tweens represent an attractive market for merchants. With annual income of $2,767 for 12-14 year olds and of $4,923 for 15-17 year olds, teens have access to disposable income of $91.1 billion, according to a Rand youth poll. Moreover, parents spend more than $150 billion on care for their teenage kids, including clothes, food, shelter, entertainment and personal accessories and the child has significant influence directing where this money is spent. According to a 2011 Harris Poll, kids have a greater amount of money to spend than ever before and also have a greater influence on their parents’ purchases, as well. Between what they earn and spend and what their parents spend on them, the domestic teen market is estimated at nearly $259 billion annually. Global teenage purchasing power is estimated at $819 billion, according to TRU Insights research.
This age group is also one of the first generations to grow up with e-commerce, as the launch of the online retail market dates to the mid-1990s and Amazon and eBay. Teens spend a substantial amount of their time online or on mobile devices. Statistics indicate that 74% of teens access the internet via mobile devices versus 55% of adults. Moreover, nearly 80% of teens browse for goods online and 52% of teens under age 18 have shopped online, according to Forrester Research.
As early adopters of technology, teens spend a significant amount of time on mobile devices and are increasingly using their smart devices for e-commerce. To exploit this trend, retailers are enabling mobile commerce opportunities. In fact, launching a mobile strategy has been the most important initiative for retailers in 2014, according to Forrester Research. We believe that as this trend continues, it could be another factor to help drive Oink growth.
Children’s Online Privacy Protection Act
The Children’s Online Privacy Protection Act (COPPA) imposes restrictions on online sites directed to children under the age of 13, including requiring that they obtain verifiable parental consent. COPPA seeks to protect children from companies that store their data. It became effective in 2000 to regulate the online collection of personal information from children under the age of 13. The COPPA rules mandate that online retailers and service providers inform parents and obtain their permission before they collect, use or disclose children’s personal data. The FTC expanded this legislation in December 2012 so that third parties also could not collect personal information from children through plug-ins without parental notice and consent on behalf of apps and websites marketed to children.
COPPA regulates information including full name, home address, email address, telephone number and other personally identifiable information that would allow someone to identify or contact the child. In addition, COPPA also covers other types of information such as geolocation metrics, photos, videos and audio files that contain a child’s image or voice, as well as personal interests or hobbies that are collected through cookies and which can be used to identify the child. With Oink, the merchant never sees the child’s personal information; the merchant only sees a child’s Oink username and password.
Management has a strong track record of building and selling new tech companies. Prior to founding Virtual Piggy, the company’s co-founder and CEO Dr. Jo Webber served as CEO of privately-held InnaPhase Inc., which was sold to Thermo Electron (TMO-not rated) for $71 million in 2004 under her leadership. She then became the CEO of Energy Solutions International, which supplied software for the management of oil and gas pipelines. GFI Energy Ventures, now part of Oaktree Capital Management, acquired Energy Solutions International in 2010.
Given that the company intends to ramp-up its promotional efforts and has also indicated that it expects to do additional financings, Virtual Piggy may believe that a partnership or merger with a larger, better capitalized company will facilitate market penetration of the Oink service. We believe Oink has several benefits that could drive market penetration and consumer adoption, particularly with a larger partner.
We see the benefits to parents, merchants and minors of using Oink as an online and mobile payment mechanism. Virtual Piggy provides what it believes is the only e-commerce payment solution that is regulation compliant for teens and tweens, a market that has surprisingly robust spending power and is increasingly targeted by merchants. The site allows teens and tweens to make online expenditures without a credit card. Parents authorize funds to their child’s account, effectively providing a digital allowance to their children. They can also set limits on how much a child can spend on a daily, weekly or monthly basis or even in a single transaction. The site keeps track of all spending and parents can access the information. Parents can also use the site as a financial teaching tool, allowing their children to budget their own spending.
Gaming: Critical Component of Growth Strategy for Oink
Separately, earlier this week Virtual Piggy announced it had entered into a partnership to integrate its Oink payment solution into Playerize, a network focused on monetization for the social and mobile gaming industry. According to management, the Playerize network has registered more than two billion gaming interactions from gamers in over 200 markets.
Management believes that integrating with a growing number of online gaming sites could be a catalyst to drive active usage of Virtual Piggy’s Oink service. Statistics show that the online gaming industry continues to grow and remains a popular activity for Virtual Piggy’s target demographic. The U.S. contains the highest number of gamers in the 13-34 demographic, with the U.K., France and Germany registering higher percentages of 13-34 year olds who play online. NPD Group's Online Gaming 2013 report found significant year-over-year growth in the number of gamers playing online, as well the number of hours they spent gaming each week. According to the survey of more than 8,800 domestic respondents, 72% played games online, up from 67% noted in the prior year’s survey. Gamers also reported playing for longer periods of time, with the average weekly time spent playing online up 6%. The PC was the most popular device for playing, but almost all devices registered increased online playtime in 2013, according to NPD. Not surprisingly, reflecting growing penetration, mobile devices registered a double digit percentage point increase.
Importantly for Virtual Piggy, in our view, 35% of U.S. online gamers purchased virtual goods in 2011, up 50% from those who made such purchases in 2010. Of this group, 50% of U.S. online males 24 and under and 15% of females 24 and under purchased virtual goods in 2011. According to the Entertainment Software Association, a rising percentage of parents are involved in some capacity in their children’s purchases and game play.
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