Staid Company Finds Consumer Software Distribution a Boon : Technology: A division in Simi Valley is leading growth for established book company Baker & Taylor.

Baker & Taylor Inc. is a venerable book distributor that has quietly gone about its business of selling books to libraries, schools and retailers for about 160 years.

Although the staid book business accounts for most of the Stamford, Conn.-based company’s $900 million in annual revenue, its smallest division, Baker & Taylor Software in Simi Valley, is the one now fueling Baker & Taylor’s growth.

Baker & Taylor Software specializes in distributing computer software for the consumer market, particularly entertainment and educational software. This is a relatively small market compared to the huge market for software used by businesses, but Baker & Taylor is expanding quickly with the advent of computer superstores such as Comp USA and software sales through mass merchants such as Price Club and Target.

Since 1986, Baker & Taylor Software has gone from $25 million in revenue to an expected $130 million this year. The growth will continue, company executives say, because of increasing demand for software from schools and personal computer owners, and as Baker & Taylor finds new ways to exploit its distribution and merchandising expertise.

But Baker & Taylor Software is operating in a market that gets tougher by the minute, and keeping up the growth of its early years won’t be easy. Computer software, like computers themselves, has become more like a commodity as prices continue to fall, slicing distributors’ profits ever thinner.

As a distributor, Baker & Taylor is essentially a middleman. It buys software from more than 300 publishers, including computer games created by Lucasarts Entertainment and educational titles from Broderbund, the Learning Company, Davidson & Associates and others. It then packages and sells the software to retailers such as Egghead Discount Software and Comp USA, mass merchants, electronics stores and buying groups for schools and libraries.

Although Baker & Taylor is privately held and doesn’t make public its financial results, software distribution is generally a business where companies deal in large volume but often make just pennies in profit for every dollar of sales.

At the same time, other software distributors are seeing that the very markets Baker & Taylor specializes in are the ones with the brightest future.

“Everybody in the software distribution business is looking at where’s the big growth going to be,” said Baker & Taylor President and Chief Operating Officer James B. Warburton. The software industry has sold “about as many spreadsheet programs as you’re going to need out there,” he said.

“The real growth in the industry is in entertainment and educational software, and that’s where everybody is looking now. The two areas where we’ve concentrated historically are the two areas where everybody wants to be a player.”

Among possible players are the two software distribution heavyweights, Merisel Inc. in El Segundo and Ingram Industries Inc. in Nashville, Tenn., both of which now primarily sell software for business applications.

With computers increasingly being used in education, “I think the bigger guys are looking at it more and more,” said Taylor Dial, Merisel’s director of software products.

Competition is also coming from Baker & Taylor’s own suppliers, who are selling software directly to retailers, and even from computer makers, who are increasingly bundling software with their computers.

Warburton said Baker & Taylor Software is responding to these threats in a number of ways.

To become more efficient, the company has invested $2 million in its automated Simi Valley plant, which distributes software to customers throughout the United States.

Such moves are considered critical these days. Many believe that only the distributors who can afford such investments will survive.

“Five years ago, when the industry was just exploding all over the place, nobody was sitting down and writing a business plan,” said Alex Papas, executive vice president at Kenfil Inc., a Van Nuys software distributor with nearly $200 million in annual sales.

Baker & Taylor Software is also finding more ways to go beyond merely packing and shipping software. It also provides services for retailers, such as offering access to its database for information on new products, bundling software into categories and providing customers with custom catalogues and marketing support.

“There’s a lot of money to be made in training and support for resellers,” said Heather Clancy, senior editor of the weekly newspaper Computer Reseller News.

But many other software distributors are taking the same steps. So Baker & Taylor is trying to set itself apart through other ventures, including its Affiliated Labels unit, started a couple of years ago to represent software publishers and take their products through the entire distribution, marketing and advertising process.

Among the software titles Affiliated Labels handles are Lucasarts Entertainment’s hit X-Wing game, based on the “Star Wars” movies; Velocity Development’s Jet Fighter flight simulator games, and Channel Resource’s golf instruction software with pro golfer Nick Price.

Baker & Taylor Software is also pursuing contracts to distribute CD-ROMs, an emerging multimedia format similar to audio compact discs but that also holds pictures and text and requires personal computers to be played. Last week, Baker & Taylor Software announced new distribution agreements with several companies that will expand its CD-ROM product line. It is also trying to move into international markets, where Warburton sees big opportunities for the new computer-based format.

“We have felt that this product is really the future for this whole business,” Warburton said. “I think ultimately multimedia is going to be close to 100% of what we now see as the software business.”

Warburton maintained that Baker & Taylor is well positioned for this because it distributes not only to traditional software retailers but also to mass merchants, bookstores and educational resellers--outlets that he believes will be important for CD-ROM sales.

What’s more, Baker & Taylor’s three divisions--the other is videocassettes--long operated independently, are now finding ways to help each other, Warburton said. For instance, he sees the encyclopedias that Baker & Taylor’s book division sells as ideal for the CD-ROM format.

Already the three divisions call on many of the same customers, such as the Virgin Megastore on Sunset Boulevard, and mass merchants, all of which carry a wide range of media products. In the past, the units “didn’t talk much to each other,” Warburton said. But now “we’re going to be a media information and distribution company.”

It’s a bet that had better pay off for Warburton, Baker & Taylor Chairman Gerald Garbacz and other top managers, who acquired the company last year with Washington investment company Carlyle Group. Baker & Taylor was previously owned by chemical concern W.R. Grace & Co., which bought the book division in the 1950s.

In the mid-1980s, Grace decided to expand into the fast-growing media business and started its videocassette distribution arm. In 1986, it followed with an acquisition of a small computer software distributor, then named Softkat, that had about $25 million in annual sales.

The software business grew quickly, but W.R. Grace has a long record of buying into, then selling off, companies in various industries. Garbacz and Warburton, both longtime Grace executives, and other managers with the backing of Carlyle, bought the book, video and software divisions for undisclosed terms and renamed the parent company Baker & Taylor Inc.

Daniel D’Aniello, managing director of the Carlyle Group, said of the Baker & Taylor acquisition, “It’s pretty hard to pass up an industry that is growing as rapidly as software distribution and that’s on the cusp of a technological boom.”

But at some point in the not too distant future, Baker & Taylor faces another challenge: the probability that more information will be delivered electronically to consumers’ homes, over phone or cable lines. That could prove a threat to the retailers Baker & Taylor supplies with boxes of software.

“I don’t really look at electronic distribution as necessarily hurting us,” Warburton said. “There’s a lot of product that has to be out there in front of the consumer, and they have to be able to touch it and feel it” before they actually buy it.