CD-ROM industry headed for shakeout

Medio Multimedia Inc. did about as well as a start-up company could do in the burgeoning CD-ROM industry. With such award-winning titles as The JFK Assassination and its well-recognized multimedia magazine, the Redmond, Wash., company was touted as one of the region's top contenders in the competitive world of entertainment software.

But less than two years after its genesis, Medio has had to lay off 40 employees, more than half its work force, and is seeking new investors just to stay afloat.


Medio's dramatic turnabout signals the risks and costs small companies face in the still-immature multimedia industry -- a reality that contrasts sharply with the hype surrounding the fledgling market.

Anecdotal evidence and surveys draw a portrait of an industry headed for a shakeout. Gistics Inc., a California research and consulting firm, estimates that only 4 percent of the 1,950 or so multimedia software developers nationwide were profitable in 1994, a figure that isn't expected to change much in the next few years.


"There was a time when everyone seemed to be turning to multimedia as a new opportunity," said Halle Eavelyn, president of Hyperbole Studios, a Seattle company that makes interactive movies. "But now a lot of smaller companies -- and even some of the larger ones -- are opting out. The ones that are not in it for the long haul are realizing that they don't want to do this anymore."

Much of the problem is caused by the industry's lopsided supply and demand as well as the disparity between the high cost of developing a CD-ROM title and the slim chance it will become a profit-producing hit.

The number of CD-ROM titles vying for shelf space has outpaced sales of personal computers capable of playing the interactive disks. The result has been a glut of products, many of poor quality.

PC Data Inc., a Reston, Va., research firm, said the number of CD-ROM titles it tracks exploded to more than 2,000 by late 1994 from less than 200 in January 1993. Still, most software sellers still stock only 300 to 500 titles.

One result is unpredictable sales patterns, Medio founder Steve Podradchik said. Even the holiday season, which usually means booming sales, brought the company only a modest increase last year.

"The CD-ROM title business is a very difficult business. We were expecting a lot better Christmas this year than we got," Mr. Podradchik said.

Some companies have been fortunate enough to taste success. Microsoft's Encarta encyclopedia and Broderbund Inc.'s interactive game Myst, with its top-notch graphics, have been long-standing hits.

But for every blockbuster, scores of others collect dust on store shelves.


"In terms of getting a hit, it's gotten particularly hard because the leading titles are staying on the Top 10 lists longer than they used to," said PC Data representative Kim Field. "Titles like Myst have been there over a year, and that doesn't leave much opportunity for up-and-coming companies."

Determined start-ups such as Seattle-based educational software developer Headbone Interactive are trying to establish a loyal customer base by producing a series of CD-ROMs -- new adventures featuring familiar and popular characters. This approach has been highly successful in book publishing with such series as Nancy Drew and in software publishing with follow-up games such as Mario Brothers II.

Consumers and executives alike are complaining that fly-by-night companies are only making things worse by saturating the market with cheap programs of scant entertainment or educational value.

"Customers pay about $49 for certain titles, and a lot of them just aren't worth the money," said Headbone founder Susan Lammers. "As a parent, I was struck by the finding that some of them had only six to eight different activities and only a few hours of play time."

But with greater quality comes the often overwhelming expense of developing and marketing a CD-ROM title.

It costs a minimum of $100,000 to develop a new title, and at least $500,000 to create one that has the potential to sell 100,000 units or more, according to stock analyst Scott McAdams of Ragen MacKenzie in Seattle. Blockbusters -- titles that sell more than 1 million units -- can cost up to $5 million to produce.


This financial burden is often too weighty for tiny companies.

Even established businesses have had to scale back.

Microsoft Corp., the largest software company in the world, is "constantly re-evaluating" the market and has even dropped CD-ROM projects after beginning them, said spokeswoman Monica Harrington. She said the company has learned that niche titles such as Microsoft's Composer series have limited appeal.

Hot sellers include children's programs, games and mass-appeal titles such as Encarta, Ms. Harrington said.

Like movie, record and publishing companies, several small multimedia firms are turning to outside partners -- large studios and publishing houses with financial and distribution clout -- for help. Educational software developer Edmark Corp., for example, signed a key development agreement with Harcourt Brace School Publishers late last year. Edmark gained access to the national textbook publisher's large sales staff and distribution network.