CD-ROM turf war is heating up

Now that retail sales of CD-ROM titles have begun to take off, publishers, distributors and retailers are intensifying their turf war for an increasingly lucrative — and crowded — new market.

Last year’s explosive fourth quarter was a watershed for the embryonic CD-ROM industry. Sales of CD-ROM drives for personal computers soared as prices dropped , doubling an installed base that some industry analysts estimate is as high as 6 million, though others say the figure is closer to 2 million. (Analysts and executives do agree that hardware sales are likely to nearly double again this year.)

Retail software sales skyrocketed accordingly. Dataquest, Inc., the San Jose market research firm, said approximately 2.7 million CD-ROM titles were sold last year — up an eye-popping 450% from 1992’s 700,000 units sold.

Although 75% of those sales came from “bundled” CD-ROM titles — those sold in discount multiples with hardware — retailers are rapidly claiming a bigger and bigger piece of the pie.

“CD-ROM became a business in Christmas 1993,” says Chuck Witaker, divisional merchandise manager for Software Etc., the 331-store computer software retail chain. “We’re getting to critical mass,” adds market consultant Joanna Tamer, head of Marina del Ray-based S.O.S. Inc.

The biggest winners at retail were CD-ROM game player platforms, led by Sega, and the desk-top PC platform using MPC and Macintosh formats.

Best-selling titles included “Rebel Assault” from LucasArts; “The 7th Guest” from Virgin Games; “Return to Zork” from Activision; “Encarta 1994” from Microsoft; and “Compton’s Interactive Encyclopedia” from Compton’s New Media.

But hardware and software sales for both the Philips Compact Disc-Interactive and 3DO set-top box platforms for TV sets proved disappointing, according to retailers and distributors.

Many industry executives are skeptical that Philips’ CD-I player and its proprietary software will ever catch on. And 3DO is widely viewed as having stumbled badly in its debut selling season.

“They made some wrong assumptions,” says Thomas McGrew, vice president for Compton’s New Media. “Their player was priced too high at $ 700 and they thought they wouldn’t have any competiton, but players like Atari’s Jaguar were surprisingly popular.”

3DO, with deep pockets and backing from corporate heavyweights such as MCA, AT&T and Time Warner, is hardly being counted out, but the company’s slow start is particularly painful, says Tamer, because “it’s a lost opportunity to take dominant market share for set-top players without significant competition.”

Rumblings abound

One prime indication of just how competitive the market is becoming was last month’s announced $ 400 million stock-swap acquisition of Broderbund Software, the highly respected education-oriented publisher and distributor by the entertainment and games-oriented computer software powerhouse Electronic Arts.

The newly minted EA-Broderbund combination is staking out territory in a distribution landscape already crowded with heavyweights such as wholesale distributors Ingram, Baker & Taylor and Marasal; and powerful publishers with strong affiliated label programs, most notably Microsoft and Compton’s New Media.

In addition, major media players such as Philips, Paramount and Time Warner that already have established distribution channels in book, music and video outlets are itching to leverage their existing operations and become forces in CD-ROM.

Tamer believes they have a chance because she’s convinced once CD-ROM becomes a true mass market, a “film industrymodel” for new releases, featuring intense promotion and marketing (and requiring massive spending), will emerge. “I don’t know if the software guys can figure it out,” she says.

Sales of CD-ROM hardware and software have also performed surprisingly well in two of the country’s big discount wholesale club chains, Price Costco and Sam’s Club, a division of WalMart, which has also had success with CD-ROM disks in its mass merchandise stores.

The real retail prize, say many CD-ROM executives, will be the nation’s 10, 000-plus video stores, although visions of a sales bonanza are tempered by video’s predominant rental culture, and the copyright questions it raises.

Bookstores are also expected to join the CD-ROM bandwagon. While Walden Books and Barnes and Noble (parent of Software Etc.), the country’s two largest chains , say it’s too early to announce plans, publishing sources say the big chains will have CD-ROM sections in some stores by fall.

One of the most intriguing and closely watched retail developments has been the emergence of a hybrid “multimedia” store selling prerecorded music, videos, video games, books and computer software.

Pioneers in this category have been the two huge Virgin Megastores in Los Angeles and Costa Mesa; the Musicland Stores Corporation’s new Media Play stores concept and Tower Records new multimedia stores.

Approximately 30 well-stocked Media Play stores averaging 45,000 square feet will open this year, the chain says. A typical store carries 80,000 book titles, 40,000 compact disc and cassette tape stock-keeping units, 12,000 movie videos, 1,000 computer software and CD-ROM titles, 1,000 magazine titles and 200 comic books.

The stores feature “interactive stations” where consumers can hear music, see video tapes and sample computer software and CD-ROM programs, as well as a 5,000 square-foot area designed for children to play and adults to eat and drink.

Tower Records, the music and video chain, expects to open 10 to 15 “multimedia” stores within the next 12 to 18 months, says founder and president Russ Solomon. Two 30,000 square foot stores will open in the Chicago area this year, he says, and in 1996 the chain’s Lincoln Center store will expand to 45, 000 square feet.

No matter what the outlet for CD-ROM sales, there is near unanimous agreement that marketing has become vital to in-store sales.

“There are so many new titles now,” says consultant Tamer, “that it’s critical to get above the noise level. Publishers must have an aggressive marketing and promotion plan to buy shelf space and pull the product through.”

“Being good isn’t enough anymore,” says one major distribution executive. “If you can’t pull the product through, it doesn’t matter if you have the greatest CD-ROM title in the world. You’re dead.”

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