If Magic Tales can come through Stories for children may tell the future of area software firm; Far from Silicon Valley; Capitol Multimedia hopes it's now moving in the right direction

THE BALTIMORE SUN

The past year might well be remembered as a storybook chapter for Robert Bogin and the small computer software company he heads, Capitol Multimedia, which specializes in developing interactive programs for children.

For one, the small company is proof that a software producer angling for the mass market doesn't have to have an address in Silicon Valley or the San Francisco Bay area, the heart of the industry. The Baltimore-Washington corridor -- Maryland's emerging high-tech hub -- will do just fine, says Mr. Bogin, a former securities and tax attorney.

More importantly, Mr. Bogin has navigated the company through a year of difficult transitions: selling off an unprofitable division, firing 40 of its software programmers and acquiring a promising computer animation company whose key artists work in Russia.

Perhaps most pivotal for Capitol Multimedia has been the launch of the first titles in Magic Tales, a line of cinematic-quality interactive computer stories for children.

With the launch of those programs, Mr. Bogin now has Capitol Multimedia firmly focused on the rapidly growing -- and ferociously competitive -- children's market for interactive software.

His aim: produce high-quality programs at below industry costs, and build brand-name recognition through licensing software programs to the industry's major publishers.

But before this aim took shape, the company had to weather the upheaval of change.

"Our company was clearly moving in the wrong direction," Mr. Bogin said.

"There was a lot of pain in the recognition that our strategy wasn't going to work. But we said let's cut our losses, take the pain and move in a new direction. There's been a complete reinvention of the company."

The skewed direction involved the firm's dependence on producing programs in a software format known as CD-i for Dutch electronic giant Philips Media. The format, geared to computer games, never really took hold among American consumers.

Mr. Bogin decided to jettison the division working on CD-i. The company's stock price had already slid into the basement; in April it bottomed out at $2.50 per share -- down 50 percent from its 1992 offering price.

In August, Capitol sold off its CD-i division to Philips, a move that entailed firing all of its programmers and taking a $3.1 million hit on CD-i software and equipment.

Also, 40 members of the firm's 60-person staff were let go. Ten others left voluntarily.

With the toughest decisions behind him, Mr. Bogin is upbeat about the year ahead, largely because of Magic Tales and a deal that Capitol Multimedia struck with software stalwart Davidson & Associates for the stories, which are to be based on ethnic folk tales from around the globe.

For one, the executive expects to boost Capitol's staff, which today numbers about 120, by more than 50 to handle the expected increased workload.

Financially, the company is looking sounder, too. For the first six months of its fiscal year, which ended Sept. 30, Capitol Multimedia netted $404,000, or 8 cents per share, not counting the sale of its CD-i division, on $2.7 million in revenues. Its stock, traded on the Nasdaq small cap market, closed Friday at $3.375 per share.

During the comparable period of 1994, the company lost about $20,000, and the three years before that were marked by red ink as well.

Meanwhile, 1996 may prove even stronger financially if the alliance with Torrance, Calif.-based Davidson, which had sales of $88 million in 1994, pays off.

Davidson is one of the big names in children's computer education and entertainment software. Its sales last year placed it ninth nationwide in the software industry.

Jack Allewaert, Davidson's chief financial officer, said the company's creative team was "stunned" when it got a first look at the Magic Tales programs.

"We get sent hundreds of software programs every year," said Mr. Allewaert. "All but one or two a year are rejected because they lack the richness and quality we look for. Capitol's &r; programs were stunning, absolutely beautiful. They're Disneyesque. We knew immediately we had a winner."

Mr. Allewaert estimates that had Davidson produced a similar cinematic-quality children's series at its California studios, the artistic labor costs alone would have been more than $1 million.

For now, what the Davidson deal means for Capitol Multimedia is leverage for precious shelf display for Magic Tales at the nation's software retailers, note industry experts. In some retail outlets, Davidson commands its own display areas and has marketers showing off the company's programs to shoppers.

Under the licensing agreement, Davidson assumes the responsibility for marketing, distribution and sales of the Magic Tales line.

Capitol Multimedia gets 50 percent of the net proceeds from sales. Neither Mr. Bogin nor Davidson executives would offer an estimate of how much Magic Tales is likely to generate in revenues during the next 12 months.

Davidson shipped 100,000 of the first three Magic Tales titles to retailers for the Christmas season. Mr. Allewaert, Davidson's chief financial officer, is tight-lipped about how many have sold.

Mr. Bogin said initial reports indicate that none of the titles, which sell on average for about $40, has broken into the top 10 sales list. The series, however, has garnered recognition from several publications, including Parents magazine. Mr. Bogin and Allewaert are counting on growing name recognition to generate strong sales next Christmas. Davidson plans to release three new titles in the spring.

Still, Magic Tales faces a cavalcade of competition from 3,000 new children's titles expected out on CD-ROM this year, say industry analysts. The other reality Capitol Multimedia faces: less than 10 percent of the software titles released annually gain wide market acceptance.

"Capitol Multimedia does a good job; they have good titles and good software programmers; but the key in the business is distribution as much as it is good programs," said Ian T. Gilson, an analyst for Van Kasper & Co. in California.

Mr. Bogin, though, is leaving that worry to others. His strategy: strike licensing deals for new kids' programs with major software publishers. Let them take on the marketing and distribution tasks.

He wants the company's reputation to be built on the quality of the programs it can produce.

That strategy, he believes, will relieve the company of the heavy financial burden of marketing and distributing programs, and won't hamstring the company should the way software programs are delivered shift with the changing tide of the communications industry.

Said Mr. Bogin, "Whether it's CD-ROM, satellite, the Internet or cable doesn't matter. Our focus is on controlling the content.

"And content," he says emphatically, "is king."

Mr. Bogin believes that if Capitol Multimedia can succeed in building a reputation as a producer of very high, cinematic quality software programs for kids, it opens the door to marketing spinoffs, from action toys to books based on characters. To keep that option open, the company retains copyrights of the programs it produces.

Also the strategy allows the company to shop itself to software publishers as a hired gun. For example, in November Capitol Multimedia signed a deal with Simon & Schuster to develop three interactive programs in an emerging genre called "action/learning," targeted at children ages 9 and above.

For now, the company's biggest hopes rest with the Magic Tales line.

The first three titles in the planned six title series hit the market in October. They include "Baba Yaga and the Magic Geese," based on a Russian folk tale, "Imo the King," based on an African folk yarn, and "The Little Samurai," based on a Japanese tale.

To establish some continuity, Capitol Multimedia's creative teams cooked up Grandpa Mouse, a benevolent character that appears in all of the titles as the storyteller reading the tale to two of his grandmice.

There are two other consistent elements in all of the tales: Lively music. Lots of it. And "hot spots." Lots of them.

These "hot spots" are aimed at interesting children and parents in exploring each "page" of the story. Users of the program can click their mouse on say, an urn sitting in a tent during the "Imo and the King" tale, and watch as the urn begins to jiggle and break into song.

Concepts for the programs are created at the Bethesda headquarters and then handed to a team of writers at Animation Magic Inc., a Cambridge, Mass.-based company that Capitol Multimedia acquired last February. There the story line is researched and written. The actual character and scene creations occur in St. Petersburg, Russia, where Animation Magic employs about 90 artists.

Final production work occurs in studios at the Bethesda headquarters.

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