The Big Squeeze

Producers are feeling the crunch of a retail channel that has not yet adjusted to the glut of new and returning products

By DAVID ENGLISH Illustration by Richard Weiss

Three years ago, the standard joke among multimedia developers was that -- despite all the hype -- multimedia was still a $0 billion industry. Now that multimedia has finally arrived and sales are brisk, there's a new joke: Multimedia is a $2 billion industry; the only problem is that it took $2.1 billion to get there.

The sad reality behind that joke was underscored in a 1994 survey of 912 multimedia producers by Gistics, a Larkspur, Calif., consulting firm; according to the findings, only 4 percent of the producers made a profit. Why aren't more producers making money? Most experts have the same answer: There are too many programs chasing too little retail shelf space. The retail channel simply can't absorb all the software that's thrown at it, and the problem probably will get worse before it gets better.

"It's really tough because a lot of the retail buyers don't even look at the product," says Ileana Seander, vice president of sales at Maxis, which produces the popular SimCity games and acts as a publisher for smaller software developers. "I wish you could see some of the buyers' offices now. They have software submissions up to the ceiling. They just don't have time to look at it."

Seander says the emphasis has shifted from the software itself to what a software developer can bring to the negotiations. "It's the pricing. It's the promotions that you come up with to launch it. And it's their [the buyers'] knowledge of your reputation in terms of working with them on a title." Retailers want to know up front how a producer will promote a title after the initial 90-day sell cycle. "We plan our promotions now in six- to 12-month increments so we can present a comprehensive plan to the retailer," Seander says. She estimates that a retail product launch costs a publisher at least $100,000.

Limited Shelf Space

The glut of software through the channel is especially severe for entertainment programs. PC Data, a research firm, currently is tracking about 3,000 entertainment titles out of a total of 10,000 titles. That's 3,000 games, when most stores are willing to carry only 100 to 200 of the top-selling games. In the first half of this year, the top 30 software game companies accounted for 84 percent of the games sold at retail. To add insult to injury, many of the top-selling CD-ROM games, such as Myst and 7th Guest, have been on the charts for two or three years. Many others are sequels of earlier hits, including Flight Simulator 5.1, MechWarrior 2 and Links 386 CD-ROM.

Like the recording and movie industries, entertainment software is increasingly becoming a "hits" business, where a few titles do very well, but most are unable to find adequate distribution. Some software developers are openly questioning a distribution system that favors large, well-financed publishers over small start-up companies.

"We've been pulling out of retail for the last year and a half," says Klaus Schultheis, a partner at Dongleware, a small game company in Napa, Calif. Dongleware has received excellent reviews in the consumer magazines that cover software, but has experienced a tough time getting paid by retailers. "It's not really consignment, but it turns out that way because they never pay you on time," Schultheis says.

Many producers complain that they have to pay the retailers in order to get their software onto the shelves, and have to take their software back if it doesn't sell. A vice president of sales with a well-known multimedia publisher reports that a major retail chain refused to take his company's latest title until he agreed to take back any previous titles that had not sold.

Sales Momentum

Why do so many producers continue to push their software through the retail channel when the odds are stacked against them? Simple. Everyone wants a piece of the pie; after all, it's a rapidly expanding pie. According to Gary Gablehouse, an industry analyst at Fairfield Research, 1995 will be the first year that computer software games will have outnumbered console games. He expects the cumulative number of software games to reach 291 million, compared to a cumulative 241 million games for the current 16-bit console machines (Sega and Super NES).

Gablehouse doesn't expect the 32-bit and 64-bit game machines (Saturn, Ultra 64 and PlayStation) to knock the PC from its No.1 position. Fairfield's survey of potential consumers found that most do not plan to buy a new-generation console system because they already own a computer. According to Gablehouse, 41 percent of U.S. homes -- roughly 40 million households -- have some kind of home PC, while 32 percent of U.S. homes use a CD-ROM-based home computer for playing games. By comparison, only 34 percent of U.S. homes have a console game system.

Commodity Retailing

The rapid growth in software sales is bringing dramatic changes in the places that people buy their software. Fairfield Research estimates that, of all the CD-ROM software purchases made in 1994, 54 percent took place in computer stores, 23 percent took place in software specialty stores and 23 percent took place in what are often called "alternate channels" -- mass merchants, consumer electronic stores, video stores, music stores, book stores, office superstores and media superstores. By June of this year, Fairfield had found a significant shift in CD-ROM purchases, with the alternate channels surging to 56 percent, computer stores dropping to 35 percent and software specialty stores dropping to 9 percent.

The shift toward mass merchants and superstores, and away from the computer and software specialty stores, brings a different set of challenges for software developers.

"A Kmart or a Wal-Mart may have employees that float in the [software] departments, but there certainly isn't the level of knowledge that you would get at an Egghead [Software] or a CompUSA," says Renee Courington, vice president of the kids' software division at Sanctuary Woods. "It's getting to where we have to fight our battles on the shelf with clever packaging that really talks to the customer and with advertising campaigns that are targeted to kids."

Similarly, the customers at these stores aren't usually looking to buy software; they come to a Wal-Mart or a Target to buy a house plant or underwear, and while they're there, they may decide to browse the software section. "If they see a title that they recognize or a brand name that they recognize or something that relates to a previous thing that they had a great experience with, they'll throw it in the basket," says Sally Narodick, CEO of Edmark, a midsize educational software company. Like other established software publishers, Edmark is building its brand identification in order to attract the kind of shopper that treats software like any other commodity. New publishers with no brand identification, however, are finding it hard to break into the alternate channels. "If I were a new publisher now, I would be sweating it because it's really tough," says Maxis' Seander.

The Perfect Gift

Spurred by strong sales of Windows 95 and a deluge of new games on CD-ROM, 1995 was by far the best year ever for multimedia software sales. A Gallup Poll conducted just before the holiday season found that 92 percent of Americans believe that computers and computer software are good gifts for children 13 and older, while 77 percent believe the same items are good gifts for children 12 and under. More importantly, one-third of those surveyed said they were thinking about purchasing software as gifts for the holiday season.

While Diane Swonk, deputy chief economist at the First National Bank of Chicago, predicts only a moderate 3.2 percent increase in overall retail sales for the final quarter of 1995, she expects home electronics to be the leading category. "Aging baby boomers are simply more interested in putting their money into their homes than into their wardrobes," Swonk says.

Upping the Content Ante

In an effort to grab much-coveted market share, many publishers are throwing all they have into production value. The top-selling computer games for 1995 delivered more 3-D graphics, digital video and digital audio than ever before. Some of the most video-intensive adventure games had production costs that approached the budgets of Hollywood films.

Sierra Online's Phantasmagoria, which ships on seven CD-ROMs, reportedly cost $3 million to produce. The company built its own production studio and brought in Hollywood directors, actors, makeup artists and technicians. Interplay's Stonekeep cost nearly $5 million to produce, plus the company spent another $1.5 million in advertising and promotional support, including a direct mailing to 200,000 game fans.

Interplay also created a big splash early in the year when it spent $1 million to promote the retail version of Descent, which continues to be a hot seller.

Also years in the making (three to be exact) and making heavy use of 3-D graphics, was the much-anticipated Total Distortion from Pop Rocket. It was designed by Joe Sparks, who helped create one of the first 3-D rendered-graphics adventure games, Spaceship Warlock. This offbeat adventure includes games within games and futuristic devices that help the player became rich and famous in the role of a music-video director.

The past year also brought high-resolution 3-D graphics to a bumper crop of arcade games and combat flight simulators. FormGen's Terminal Velocity, Microsoft's Fury3 and Trimark's The Hive pushed the envelope of what a PC can render in real time. The success of Fury3 and The Hive as Windows-based action games speaks volumes about the ability of Windows 95 to write directly to hardware -- at speeds far beyond what was possible with Windows 3.1. Other popular Windows 95 arcade games, including Activision's Pitfall and Sierra Online's Thexder for Windows 95, are helping to establish Windows 95 as the gaming platform of choice.

Another major trend was the continued reliance on proven Hollywood properties to boost sales. Examples include Star Trek: The Next Generation -- The Final Unity from Spectrum-HoloByte, which, though released in the spring, continued to sell well at the end of the year; William Shatner's Tekwar from Capstone, which got a lift from the popular book and television series; and Earthworm Jim from Activision, which borrowed its wiggly hero from a cartridge game and television cartoon series.

But despite all the new state-of-the-art 3-D and video technologies, three of the top-selling games for the holiday season were, once again, Myst, 7th Guest and Rebel Assault. According to Ann Stevens, an analyst at PC Data, many customers are confused about which of the new programs will run correctly on their machines and are opting for the safer choice of a classic CD-ROM game.

Auld Lang Signs

Looking back on 1995, the retail channel sent an ambiguous message to multimedia producers. For those who are new to retail, it's harder than ever to get on the shelves -- the choice seems to be between the equally unpalatable options of buying market share with packaging, advertising, promotions and other expensive means, or developing an alliance with a brand-name publisher that has guaranteed retail presence.

Still, the payoff for successful new titles continues to escalate, making the multimedia title lottery more alluring. All that can be said with certainty at this stage is that, if the consumer demand is there and a profit can be made, the channel, like a mighty river, will cut its course to the sea of plenty. MMP

David English is a Greensboro, N.C.-based freelance writer. He can be reached at davdenglsh@aol.com via E-mail.