THE CUTTING EDGE: COMPUTING / TECHNOLOGY / INNOVATION : More Outlets for Technology : Sales of CD-ROMs Shift to Book, Discount Stores
To Elizabeth Berglund, it makes perfect sense. If you’re looking to buy an encyclopedia, you go to a bookstore--even if that encyclopedia is Encarta, Microsoft’s multimedia edition that combines text, pictures, sound and video on CD-ROM.
As an executive of the Computing Technology Industry Assn. in Lombard, Ill., Berglund has seen CD-ROMs make their way not only into bookstores, but also into music retail outlets, video rental shops, warehouse clubs and mass-merchandise stores such as Target and Best Buy.
Creators, publishers and distributors of new-media products are realizing that because their titles are meant to appeal to regular people who own computers--not just to computer enthusiasts--they have to sell their titles where regular people shop.
“Retail channels are changing,” said Eric Winkler, a spokesman for Broderbund Software, the Novato, Calif., company responsible for the best-selling CD-ROM games “Myst” and “Where in the World Is Carmen Sandiego?”
“We’ve gone from an industry that primarily sold through software boutique shops to an industry that is selling through huge retailers such as Wal-Mart and Price Club and Costco and Toys R Us,” Winkler said. “This is the biggest transition the industry’s ever seen.”
But that transition hasn’t been swift or worry-free. There is no consensus among mainstream retailers about how best to incorporate CD-ROMs into their merchandise mix. For example, while the Borders Books & Music chain has opened new-media sections in a dozen of its outlets, rival bookseller Barnes & Noble has decided to allow the specialty chain Software Etc. to hang a shingle under its roof.
“I think the mass market hasn’t figured it out yet, and I believe it’s because there truly isn’t a commitment at the upper management level to make the category work,” said Kim Motika, vice president of sales for Interplay Productions in Irvine, the firm behind musician Peter Gabriel’s interactive disc.
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Three years ago, when the CD-ROM format was introduced to consumers, the silvery discs were available exclusively in technology-oriented stores ranging from computer superstores to smaller software boutiques. Retailers believed it was essential to have a sales staff that understood the ins and outs of various computer systems and their compatibility with a variety of software programs.
But as CD-ROM publishers make their products more user-friendly, the importance of a computer-savvy sales staff has diminished. In most cases, little technical expertise is necessary to figure out how to play a sophisticated game or use a reference disc.
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That has helped the market for CD-ROM titles grow to $1 billion a year from only about a fifth of that two years ago, according to the Interactive Multimedia Assn. The Software Publishers Assn. said 22.8 million software CDs were sold in 1994. Bruce Ryon, a multimedia analyst with research firm Dataquest, estimates the number of PCs equipped to run multimedia CD-ROMs will hit 35.3 million by the end of this year, up nearly 70% from 1994.
A lot of those PC owners aren’t inclined to seek out computer stores to make the occasional software purchase. So retailers are bringing the software to them.
“You want to have your product where people spend their time shopping so it’s in front of the consumer,” said Mandy Braun Strum, manager of the Software Publisher’s Assn.’s consumer section. “It’s like disposable cameras. You used to only be able to get cameras in a camera store. Now you can go to the supermarket, the drugstore, the newsstand or the travel store.”
Sales of new-media titles through alternative channels have doubled every year since CD-ROMs hit the market about three years ago, said Donna Grothjan, marketing director for Santa Ana software distributor Ingram Micro.
Multimedia publisher Electronic Arts now records 35% of its CD-ROM sales through consumer electronics superstores, wholesale clubs, toy stores, office supply stores, music and book stores and the QVC home shopping channel. Rival Broderbund’s sales in those channels combine for a 40% share of total sales, and that percentage is expected to top 50% in the next year.
“Rather than looking at this as taking share away from computer specialty stores, we see this as really expanding the overall market,” said Electronic Arts spokeswoman Pat Becker. “The pie is getting bigger.”
Her prediction is based on experience. In 1991, before toy stores and mass merchants began selling 16-bit video games, the market was 10 million units a year. In 1992, when retail channels expanded, unit sales tripled, Becker said.
Interest in expanding channels comes from both CD-ROM publishers and mainstream retailers, Grothjan said. Publishers are also facilitating the shift by making their products easier to use and marketing them as anything but software, Winkler said.
“We’ve gone from wanting to be an IBM to wanting to be a Frito Lay,” he said. “The packaging is much more splashy. It looks much more fun and easy to use rather than having a more generic label that says, ‘This will only work if you have a 486, three-megabyte blah, blah blah.’ ”
But some say that hasn’t been enough.
“It’s still a more technical sell,” said Thomas Carley, a research analyst with Jenson Securities in Portland, Ore. “You have to have a staff that understands hardware. If a customer comes in and says, ‘I’ve got a 486 computer with X amount of memory,’ the salespeople had better know whether this thing’s going to work or not. It’s not as if they’re selling Hardy Boys books.”
But that dynamic may be helping traditional software retailers such as Software City in Lake Forest. General Manager Ross Jaibaji says 5% to 7% of his customers are “disgruntled” patrons of stores such as Price Club and Circuit City that don’t have the expertise to help them use their new-media purchases. However, Jaibaji says those stores have helped raise the profile of CD-ROM products, and that has increased sales in all kinds of stores, including his.
Some analysts doubt whether such a trend can hold out forever. Stores such as Best Buy, Circuit City and CompUSA have already proven to be steep competition for specialty software outlets, forcing the Egghead Software chain to cut its prices, Carley said.
But it’s not just price that makes the newcomers feel they have a competitive advantage. CD-ROM publishers are sorely in need of more space on retail shelves, and the new retail channels are offering it.
“Distribution is playing catch-up to development right now,” said Ken Christie, vice president of marketing for the Interactive Multimedia Assn. in Annapolis, Md. Only half of the 3,500 mainstream titles produced last year got sufficient distribution, proving that current distribution channels cannot handle the current output, he said.
Thus the interest from stores that don’t consider software their forte, especially since book, video and music stores outnumber software stores, said Joey Tamer, president of SOS Inc., a Los Angeles consulting firm that specializes in the distribution of multimedia products. Some stores are staying out of the market because the process of getting software onto shelves is different than for other kinds of merchandise. But others have jumped in with both feet, deciding that the extra effort for CD-ROM distribution will pay off at the checkout counter.
According to the American Booksellers Assn., 24% of bookstores sell new-media titles--floppy disks as well as CD-ROMs--and that proportion is expected to grow to at least 43% in the next three years.
Dan Conetta, vice president for marketing for the Ann Arbor, Mich.-based Borders Books & Music chain, said books and software are a natural mix.
“It was pretty clear it was a growth area for us because of the nature of what our customers look for from us: a combination of information and entertainment,” he said. “Whether it be traditional printed material or audio material or computer CD-ROM, these are all just different ways of delivering the end result: information and entertainment.”
A few stores in the Barnes & Noble bookstore chain experimented with selling new-media titles, but now the New York-based company has decided that it would be more efficient to open up Software Etc. mini-stores inside their bookstores, spokeswoman Lisa Herling said. That decision was based on many factors, including distribution considerations and staff expertise, she said.
“We’re bookstores and our main focus is selling books,” Herling said. “These products obviously complement our book title selection, so it made sense to partner with Software Etc.”
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Blockbuster Video stores are carrying new-media titles for sale or rent in selected stores as part of a 3-month-old test, spokesman Mike Caruso said. Eventually, CD-ROMs will be available in all the chain’s video outlets.
New-media publishers “recognize the fact that we’re a distribution channel that can easily reach the customers that they’re trying to reach,” Caruso said. “Lots of these titles these companies put out are educational or oriented toward children, and a big part of our customer base is families.”
Ultimately, experts predict, multimedia software will outgrow the CD-ROM format and be distributed directly into homes via on-line computer services, interactive television sets and the Internet.
“I can easily envision five years down the road that there’ll be a Broderbund Channel where you receive our software over your television and it goes right into your home system,” Winkler said.
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Growing Fast
The market for CD-ROMs and other multimedia software is exploding, with unit sales up nearly 200% between 1993 and 1994. The number of computers equipped for these new products is expected to reach more than 35 million by the end of this year--then grow another 37% by the end of next year. Producers and retailers say the growth is pushing products into new venues, ranging from bookstores and video rental outlets to mass merchandisers and membership warehouse clubs.
COMPUTERS WITH CD-ROMs
Number of personal computers in United States equipped to run multimedia CD-ROMs, at year’s end:
1994: 20.9 million
1995: 35.3 million
1996: 48.5 million
Source: Dataquest
CD SOFTWARE SALES
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1994 Sales 1994 Revenues (in millions) Growth ‘93-94 (in millions) Home Education 6.24 258% $106.6 Reference 6.28 143 156.0 Games/other home 7.55 222 169.2 Language & tools 0.49 182 102.6 Other products 2.23 191 113.1 Total 22.8 199 647.5
Growth ‘93-94 Home Education 229% Reference 109 Games/other home 275 Language & tools 434 Other products 348 Total 229
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Source: Software Publishers Assn.
