Educational Software Finds Itself at Back of Class for Kids’ Attention
A 7-year-old would rather:
(a) blast aliens
(b) rocket through space
(c) learn multiplication
Hint: The answer ain’t (c).
Though sales for the video game industry have hit record levels in recent years, the market for children’s educational software has imploded.
Once totaling half a billion dollars, children’s educational software sales in the United States shrank to $325 million last year. This year, things have slowed even more. The volume of software sold from January through October fell 28% compared with the same period in 2001, according to market research firm NPD Techworld.
Contributing to the decline have been the spread of video games and the rise of the Internet, both of which can offer more engrossing experiences than most children’s software can muster.
A vicious price war has driven many companies out of business and left survivors bleeding. Those that remained -- Knowledge Adventure, Learning Co. and Broderbund -- have been purchased and pared back.
“There’s been a giant forest fire that swept through the educational software market,” said Warren Buckleitner, editor of the bimonthly Children’s Software & New Media Revue. “It’s left some opportunities, but it’s also destroyed a number of brands. It’s been a very tough time.”
Not all is bleak. Industry watchers say the business is reinventing itself by turning to other products that boast more computing power than early PCs. For example, educational toys such as Emeryville, Calif.-based LeapFrog Enterprises Inc.’s LeapPad are hot sellers as holiday gifts this year. Veterans of the business also are sneaking their wares onto the Internet and into game consoles.
The upshot: Although packaged software as parents know it is fading, the sector may again thrive in other, less obvious ways.
The industry began in 1980, when educational psychologist Ann Piestrup founded Learning Co. in a Portola Valley apartment using grants from the National Institute of Education, the National Science Foundation and the Apple Education Foundation. The result was “Reader Rabbit,” a series introduced in 1984 that ultimately sold more than 25 million copies.
Around the same time in a Palos Verdes schoolhouse, Jan Davidson introduced her students to “Math Blaster,” a software program that she and a programmer created to run on the Apple II computer. It was so successful that parents clamored to buy copies.
So, in 1984 she founded Davidson & Associates Inc. to publish and sell her software.
“In those days, publishing meant putting floppies into sandwich bags with labels on them,” Davidson said.
Little did she know that her company would help define the children’s educational software market and become an industry powerhouse. In 1989, she recruited her husband, Bob, then a senior executive of a major construction company. The two of them took the company public in 1991.
“Back then, there was a lot of optimism,” said Sarina Simon, who worked with various publishers, including Burbank-based Walt Disney Co.’s Disney Interactive. “Just about everyone you met was starting a new business and developing new titles. People who got into the industry were Peace Corps types who believed they could make educational products that would be brought alive by technology.”
In 1996, CUC International Inc., which later merged with HFS Inc. to form Cendant Corp., acquired Davidson & Associates for $1.15 billion as part of a consolidation wave that swept the industry. Also in 1996, CUC gobbled up Bellevue, Wash.-based Sierra On-Line Inc. and Knowledge Adventure, an educational software company founded by entrepreneur Bill Gross in La Crescenta.
Softkey International had bought Learning Co. a year earlier. And in 1998, it acquired Mindscape and Broderbund.
A price war, which had been bubbling up during the consolidation phase, broke out in full force in 1998 and 1999. Software titles that had been sold in specialized computer shops for $50 started to be sold for $20 or less in warehouse stores where customers demanded rock-bottom prices.
“In 1999, demand was exceedingly high because the rebates were so high,” said Rosemary Yates, who then worked at Mindscape and is senior vice president of Riverdeep, a Dublin, Ireland-based educational publisher. “Someone would buy a $99 product but get $90 off.”
The bruising price competition weeded out small publishers and left big ones bleeding.
Learning Co., for example, was sold to El Segundo-based Mattel Inc. in 1999 for $3.5 billion. Soon after, the company started to hemorrhage $1 million a day and its failure ranked high among the reasons that Mattel CEO Jill Barad was forced from the company in 2000.
Mattel sold the unit to turnaround specialist Gores Technology Group of Los Angeles, which eventually paid $27.3 million for the company. After focusing on core brands, trimming costs and putting in rigorous procedures for funding new projects, Gores sold the company to Riverdeep in August for $60 million in debt and stock.
The war had other casualties. Many of the innovators who had helped shape the industry left.
“The price points were absolutely brutal,” said Ariella Lehrer, chief executive of Hollywood-based Legacy Interactive, which published its last educational title in 1999 and moved on to games. “At $20, you couldn’t afford to put the same amount of money into development. The economics were just not feasible.”
At the same time, video games began selling in bigger volume and commanding ever higher prices. That meant game developers could afford to spend millions on titles while educational developers had to make do with tens, or at best hundreds, of thousands of dollars. As a result, educational software often paled in comparison with games.
Kids flocked to games, particularly those for the PlayStation introduced in 1995.
“There used to be a lot more innovation in software,” said Mark Schlichting, who developed “Living Books,” a series published by Broderbund that sold more than 3 million copies. “Now budgets are down, and the quality is often not strong.”
Down too are the number of titles being published. Buckleitner, whose publication tracks and reviews kids’ software, estimates that 350 educational titles will be introduced this year, down 40% from last year. By comparison, more than 1,200 games were published for PCs and consoles this year.
Many of those educational titles land in so-called software junkyards, where they sell for as little as $4.99, he said.
“The industry is at an all-time low right now,” Buckleitner said.
Still, there are signs that kids’ educational software may be staging a modest comeback.
Many of those who left the industry in the late 1990s founded companies that try to marry technology and learning. Former Davidson executives John Sosoko and Brooke Abercrombie left in 1996 to launch Neurosmith in Long Beach. They introduced their first product, Music Blocks, in 1999. Designed to teach kids about music, the $69 toy has more computational power than the $3,000 Apple II computer that Davidson first used in 1983.
“With cheaper chips, you’re seeing software people do what they’ve always wanted to do -- use technology to make a difference,” Abercrombie said.
Schlichting, who left Broderbund in 1996, has started NoodleWorks in Alameda. His software sits in a device called the NoodlePad, which lets kids create and tell stories.
And Simon has started a subscription-based educational Web site at kidsedge.com with more than 100 learning activities.
“In the early days, the magic of software was that it could respond to the child. It could adjust to how quickly the child was learning,” Simon said. “I can do the same thing on the Internet. Only now, I can give both the child and the parents much more feedback. So you have a deeper, more dynamic involvement in the learning process.”
The surviving companies have found similar ways to cope. Educational publishers are putting their classic titles on hand-held devices, game consoles and outlets other than just PCs. In September, for example, Scholastic Inc. put its 11-year-old “I Spy” PC software franchise on Nintendo Co.’s Game Boy Advance hand-held console.
Although sales generated at retail stores continue to fall for Learning Co., sales from direct-mail catalogs are growing, and the business is now profitable.
“We see growth opportunities that will extend our brand into other areas,” said Yates, who estimates that sales of consumer children’s software will grow in the “high single digits” next year. “We don’t call ourselves just software companies anymore. We’re looking to multiple channels, so our outlook is very strong.”
