Battle for Learning Co. Is a Big Deal in PC Industry : News analysis: SoftKey victory will force every company to reexamine its assumptions.


By the standards of corporate America, where multibillion-dollar mergers and takeover battles have become routine, the fight for educational software maker Learning Co. is a small-time affair.

Broderbund Software Inc. of Novato, Calif., is currently offering $530 million in cash and stock for the company in a friendly offer, while hostile rival SoftKey International Inc. has bid $606 million in cash. It's chump change compared with Disney's $19-billion merger with Capital Cities/ABC Inc., for example, or Viacom Inc.'s $10-billion acquisition of Paramount Inc.

Yet the comparatively modest sums involved in the Learning Co. struggle mask just how significant it is. For Broderbund and SoftKey represent diametrically opposed viewpoints on how consumer PC software should be created and sold. And a SoftKey victory, which looks increasingly likely, will force every company in the business to reexamine its assumptions.

The battle is likely to be resolved Monday when Learning Co. shareholders meet at the company's Fremont, Calif., headquarters for a vote on Broderbund's offer. Learning Co. management has steadfastly supported the lower Broderbund bid, though on Wednesday it finally agreed to at least discuss a merger with SoftKey.

It isn't hard to see why Learning Co., developer of the popular Reader Rabbit software products, would prefer to merge with Broderbund. The two companies share a commitment to sophisticated, high-quality consumer software, and Broderbund promises to leave Learning Co. largely intact--and, not incidentally, leave the current management in place.

SoftKey has an entirely different agenda. The company has grown rapidly by buying small software companies, slashing costs to the bone, drastically cutting prices and then selling the products through retail outlets where SoftKey actually owns its own shelves. Founded 12 years ago by two Canadians, Michael Perik and Kevin O'Leary, neither of whom was ever involved with software before, the company last week gained a big vote of confidence with a $150-million pledge of support from the Tribune Co.

Thus the battle is really about the very nature of software. Is it art, destined to better the world, as many in the software industry have always believed? Or is it like any other consumer commodity that should be created and sold as cheaply as possible?

"It's hard to explain, but we're much less of an assembly line," said Eric Winkler, manager of worldwide marketing programs for Broderbund.

"Like the Learning Co., Broderbund is made up of former educators, musicians, animators, screenwriters.

"These products typically take two years and more than $1 million to design," Winkler explained. "You have to have people who are really committed, people who are motivated beyond a paycheck I mean; there is a person at Broderbund who is Carmen Sandiego," the main character on Broderbund's popular software package for children.

As such, Broderbund, like many software companies, believes its products should command a premium.

A package like "Where in the World Is Carmen Sandiego?" carries a price tag of around $50, hefty when you consider that children can quickly become bored and abandon a piece of software after weeks, even days.

SoftKey has been on the receiving end of a lot of mud, from the suggestion that it's the "schlockmeister of software" to gibes that "software is not Fig Newtons"--a reference to O'Leary's former employer, Nabisco of Canada. But SoftKey contends that Learning Co. executives, in favoring Broderbund, are looking out for their own interests rather than those of their shareholders.

And O'Leary is frustrated that an important message is being lost: "We want software to be available for everybody in every economic and social strata. Why should educational software be available only for the children of the affluent? We will sell these kinds of products for $12.95 so that anyone can buy them.

"It's inevitable that software will sell for far less, but that software publishers will be rewarded by much higher volumes," he continued.

"When I first started in this business, one of the big companies was Software Publishing. Where are they now? Microsoft started dropping prices and these companies couldn't compete."

No matter how this battle turns out, indeed it seems clear that many successful small software firms like Broderbund and Learning Co. will have to change their ways.

The price wars that have ravaged the office software business and devastated companies such as Borland International and WordPerfect are fast becoming a fact of life in the fast-growing consumer segment too. Broderbund's share price has plummeted in recently on such fears.

The SoftKeys of the world may be sneered at by the industry today, but they're shaping the software business of tomorrow.

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