In today's harsh economy, the notion of developing a new business with strong growth, high-profit margins, and a central focus on philanthropy may sound like a fantasy from the world of elves and fairies.

Instead, it's a reality for Atlanta online video game company Good Egg Studios.

Oh, and yes, there is a bit of fantasy involved, complete with elves.

Good Egg founders Craig and Liz Kronenberger say young online gamers are eagerly signing up to help the environment and their fellow human beings, on Elf Island, the company's online virtual world, now out of beta testing and accepting paid subscriptions for membership. 
 

"We really as individuals wanted to do something good," says Craig Kronenberger. "We felt that the idea of helping kids and empowering them with social responsibility was that route."

Via its trademarked "Gaming for Good," Elf Island invites users onto "Good Quests," where the gameplay involves protecting endangered species, planting trees, or helping needy communities, the twist being that success on these virtual quests translates into support for such missions in the real world.

In Elf Island's just completed polar bear project, online players worked to rescue virtual polar bears struggling with shrinking ice floes due to global warming. Each success in the game meant a contribution from Good Egg to the nonprofit Polar Bears International to buy collars to track and better understand polar bears.



Not that this is just a matter of starry-eyed idealism. The Kronenbergers are already veterans of their own dot com startup Spunky Productions, which they successfully sold in 2000. Today Craig points out that virtual worlds like Elf Island have already proven remarkably resistant to the stormy seas of even a crushing recession.
  
"When you're looking at investments," he points out, "you want something that can grind out this bad economy and be healthy. And even in this economy, the virtual worlds, whether its Webkinz or Habbo Hotel in the European market, they are still doing well.  World of Warcraft just reported an enormous amount of revenue."

And not just revenue; impressive profits too. "If you look at Club Penguin for example," he continues, "you're talking about 45 or 50 percent margins on how much they're making. The subscription membership model does very well once it hits a certain point.  It makes really good money."

The Kronenbergers initially launched Elf Island in 2007, put it online in beta testing late last year and are now fully operational. As the parents of two boys, Craig says they wanted their gaming world to be about more than blowing things up. "We have friends whose kids play in these virtual worlds. We've been watching them and we kept thinking to ourselves 'these kids are highly engaged and they're spending hours a week playing at these products. And they're not getting anything out of it. I think it was a big factor."

No guns, he insists. "There is this premise that killing and causing harm to things is why kids play games. The reality is it's much more about status, competition that it is about anything else."

Originally, Elf Island was targeted at kids between eight and 12 years old, but Kronenberger says its audience has expanded. "The majority of our viewers are eight to 15. That is much broader than what you typically find. There's a lot of chat involved. We have the elves and the fantasy world which can skew a broader group, but most importantly I think it's the doing good. Kids come to do the Good Quests. That's cool regardless of what age you are."

Bringing technology to Georgia

The idea, and the Kronenbergers, certainly impressed Gordon Rogers, member of angel investment group Atlanta Technology Angels. "They seemed very sincere and passionate people," he recalls. Trained as an economist himself, Rogers was an enthusiastic advocate as ATA helped Elf Island set sail with an initial investment of $1.5 million. "I have been interested in nonprofits for a number of years. I've worked with several, but I like to see companies that make money. This was an interesting intersection of those two objectives."  

ATA is now putting together a second round of funding for the company, even as investment capital remains scarce virtually everywhere else in the economy. 

But the elves of Elf Island are also packing some powerful pixie dust courtesy of a bigger partner still, the state of Georgia. Under the 2008 Georgia Entertainment Industry Investment Act, in-state spending by the video game industry is eligible for a hefty 30 percent tax credit, the most generous incentive of its kind in the country.  Once Good Egg studios qualified to receive it, the credit delivered $430,000 to the virtual shores of Elf Island, paying 25 percent of the company's operating expenses for the entire year. 

It was that largesse, Kronenberger says, that prompted him to set up shop in Atlanta after previously doing business from San Francisco, and bring all of Good Egg's creative work here too, after previously offshoring some of it in the Philippines. Today, Good Egg has 12 employees in its King Plow  studios, 16 working statewide.

"They're a great partner for us," says Asante Bradford, Digital Entertainment Liaison with the Georgia Department of Economic Development. "From the success of Elf Island, the local investment community is looking at other startups in the video game sector. They're a great role model for the video game industry in Georgia."

While it's still in its relative infancy, Bradford says Elf Island is bringing new attention to Georgia in the gaming world and that growing numbers of companies are applying to exploit the warm welcome the state offers to video game makers.

Already, the industry has sharply increased its economic impact on the state. Since 2005, the Department of Economic Development report the gaming industry's annual production spend in Georgia has risen from $13 million to $71 million and its impact on the state's economy has jumped from $24 million to almost $127 million.

Beyond the money, Kronenberger also enthuses over the brain power he finds readily accessible in metro Atlanta. "Georgia has a phenomenal infrastructure for gaming," he exclaims, specifically citing the Art Institute of Atlanta and the Savannah College of Art and Design.  In fact, 14 Georgia colleges offer undergraduate or graduate degrees in the gaming industry including the University of Georgia, Georgia State, Georgia Tech and Southern Polytechnic.

Opportunities

The frontiers of Elf island involve multiple potential revenue sources, including merchandising, carefully selected sponsor partnerships (no big flashing "Acme Cola" billboards among the windmills and villages of Elf Island), micro transactions whereby users can buy virtual accessories for their virtual characters, and as-yet unannounced retail products meant to enhance the gameplaying experience for the island's denizens.

But the central model remains that of many virtual worlds, paid subscription.

With nonpaying (or not-yet-paying) players that he says number over 100,000, Kronenberger now sees Elf Island becoming cash flow positive by this summer ... if enough of those free players can be persuaded to convert to paying members. "We are probably at about an 8 percent conversion rate. Our goal is to be at about 10 percent within the next five months. Depending on how you build your model, somewhere between 20,000 users and 40,000 users most virtual world products can get to cash flow positive."

How do they plan on making that happen?

Kronenberger says that's where Elf Island's doing-good Good Quests become pivotal.  Only paying members can participate in the quests and more compelling causes await aid from the gameplaying skills of the island's growing virtual population. Its new project is one in which players try to bring together healthy virtual trees and roots online and, by their efforts, help plant real world trees to save real world African communities hold back the encroaching Sahara Desert. Future quests will help finance gardens in developing countries, buy computers for children in hospitals and help preserve populations of endangered pandas.

Just to make sure the quests are compelling enough to attract and hold young audiences, Elf Island has another grand project on the horizon:  Democracy.

In time, promises Kronenberger, young users will have the option of voting on what future quests will be. "They will compete against each other but they will also have the opportunity to vote on certain issues. Your tribe of a chief and your chief will be able to vote on certain issues like what kind of good quests will go on next. We're trying to allow them to have a vote on critical decisions on how the site grows and where we go next. We are not the target. The kids are the target."