Have CD-ROMances Run Their Course?

When DreamWorks SKG joined with Microsoft 2 1/2 years ago to form a multimedia company, it looked like an unbeatable combination: the creative force of Steven Spielberg powered by the technical savvy and financial resources of Microsoft Chairman Bill Gates.

Instead, DreamWorks Interactive today is just one more CD-ROM company losing money as it desperately searches for a hit.

Of the four products the company has released to date, the strongest seller was the one based on the popular “Goosebumps” book series. It sold 130,000 copies in its first eight months on the market, according to market researcher PC Data.

But with 100 employees and high licensing costs, analysts believe even a modest success like that does not make much money.


“This market doesn’t support expensive production unless you have a big hit,” said Gary Gabelhouse, head of Fairfield Research, a Lincoln, Neb., market research company. “They don’t have a Myst. They don’t even have a Barbie.”

Myst, after four years on the market, still managed to sell 750,000 copies last year, while Barbie Fashion Designer sold 400,000.

Meanwhile, the Neverhood, a much-hyped and heavily promoted adult game released last fall, has been a bust. The game, produced under a three-year, multimillion-dollar contract with Doug TenNapel, the celebrated creator of the popular game Earthworm Jim, won rave reviews but has sold only 37,000 copies since it was introduced in November, according to PC Data.

DreamWorks Interactive head Glenn Entis thinks the company’s luck is about to change. Trespasser, a game based on Spielberg’s “Lost World” that has had good reviews and will appear in stores by the end of the month, “feels like a hit,” Entis said.


Dataquest’s Dan Levin believes the company can be a modest success by taking advantage of the Hollywood connections and deal-making capabilities of Spielberg and his partner Jeff Katzenberg to get important licenses from popular movies.

But that’s a far cry from the early vision of the founders.

When Spielberg and Gates sat on a stage at Microsoft’s Redmond, Wash., headquarters to announce the deal, Spielberg said the company “wouldn’t stand on the shoulders of giants,” but instead would “do things that haven’t been done before.” The founders confidently predicted a “few hundred million dollars” in sales in two to three years with a “couple dozen products” being released annually.

It was partly bad luck. The CD-ROM market, which seemed so promising in 1995, has all but collapsed. Dataquest estimates only 4% of the companies in the CD-ROM business made money last year. With the market in a funk, many of the big-budget projects Spielberg wanted to produce no longer made economic sense.

And although Entis says Spielberg still spends time at the game company, observers say the DreamWorks honchos are too wrapped up in their fledgling movie studio to focus much on the games subsidiary.

Microsoft has also been distracted as a result of its recent push into the Internet. “When the Internet took off, Microsoft was less interested in CD-ROMs,” said Bruce Jacobsen, a former top executive at DreamWorks Interactive. “Microsoft wanted the venture to develop products for the Net, but DreamWorks wasn’t interested in the Net.”

Analysts say Microsoft also hasn’t put the manpower into the joint venture it initially promised. Some employees sent to DreamWorks to help the company get started chose to return to Microsoft rather than make their careers at DreamWorks because they didn’t want to forgo lucrative stock options.