Hard-Hit CD-ROM Maker Mindscape to Reorganize

Reflecting continued turmoil in the CD-ROM multimedia business, British publishing giant Pearson said Friday that its California multimedia unit, Mindscape, will lose $69 million this year and undergo a major reorganization.

Pearson said Novato-based Mindscape has had trouble selling its broad line of education and game titles and will cut back significantly on development to focus on narrower markets.

Mindscape (formerly Software Toolworks) was the world’s second-largest CD-ROM developer, with a 16% share of the market, when Pearson acquired it two years ago for $462 million at the height of a multimedia mania.

Pearson Chairman Lord Blakenham announced the news to shareholders at the company’s annual meeting Friday. About $45 million of the losses are one-time charges, including those caused by a change to more conservative accounting.

Industry analysts say Mindscape has suffered from the cutthroat market environment it helped create in 1994 when it began selling CD-ROMs to computer makers for as little as $1 each to package with new computers.

“They were a victim of their own marketing tactics,” said Bruce Ryon, director of multimedia at San Jose-based market researcher Dataquest. Ryon said the practice largely accounted for the drop in the average wholesale price of CD-ROMs to $10 in 1994 from $20 the year before.

Compton’s New Media of Carlsbad, Calif., once the market leader, and Medio Multimedia, an innovative start-up, have also fallen on hard times. Another Seattle multimedia company, Splash, has recently had trouble getting financing, while Sanctuary Woods, a Canadian company, recently announced plans to close down its production operations in Victoria.

Many multimedia companies hung on last year in hopes of being saved by a good Christmas. However, weak sales of PCs, compounded by a low rate of CD-ROM purchases among multimedia computer owners and a flood of new products, instead compounded their troubles. Many analysts say the marketing din could be particularly loud at the Electronic Entertainment Expo, the industry’s trade fair that begins in Los Angeles on May 16, as companies make a last-ditch effort to win attention for their products.

Mindscape’s troubles reflect many of the problems of the industry. Pearson, like many publishers and movie studios, purchased the company with the hope of capitalizing on some of its original content. The company released a multimedia version of the popular children’s tale “Peter Rabbit,” for example.

“Peter Rabbit” had beautiful illustrations but was poorly adapted to the computer. Efforts by many studios and publishers have suffered from the same affliction.

Pearson, with about $2.44 billion in annual revenue, said it will take “substantial” write-offs on products that were developed but now will not be brought to market. Costs of laying off an undisclosed number of workers will also be part of the charge.

While cutting back on its CD- ROM investment, Pearson continues to shift from old line industries into what it considers to be a more promising entertainment sector. Pearson sold its oil company, Camco, and its china manufacturing arm, Royal Doulton, for example, while moving late last year to purchase the telemovie distributor ACI for $40 million. Pearson was also a backer of Phoenix, the film company Mike Medavoy launched in December.