CD-ROM TITLES DISTRIBUTION
Why are we making the same mistakes?

Joanna Tamer is president of S.O.S., Inc. and specializes in building distribution channels for emerging technologies. She has her hands full with CD-ROM, as her commentary below will attest. Tamer recently completed consultations on distribution strategies for CD-ROM titles for a major platform manufacturer and for a special-interest titles distributor. She is based both in Los Angeles and Boston.

When I first addressed the audience at Digital World in 1991 on new media distribution strategies, I made a single, simple point: let’s not repeat the mistakes we made in distribution during the last 10 years in the software industry; let’s learn from our mistakes this time. Let’s think through the process of development, markets, end-user wish lists, reseller’s needs and distribution realities while we are in our early stages and save ourselves a lot of grief.

THE SAME OLD POWER STRUGGLES

No such luck. First, let me acknowledge my respect for the adventure of trying to gain dominant market share, of trying to become the de facto standard. My entrepreneuring, capitalist heart beats faster in the fight too.

However, the distribution strategies of multimedia CD-ROM titles reflect the same power struggles among platform vendors and titles developers that have plagued us for the last decade.

And let me point out that this time nearly everyone is at risk — except the channel.

Here’s why. Most current multimedia titles target the education, home or entertainment markets. CD-ROM in business is still primarily a storage and delivery medium for reference data and complex software.

However, platform vendors have significant development costs to recoup, and have priced their products too high at this point to drive a mass market. Despite that fact, platform vendors want titles developers to create titles as though the masses were waiting, and as though retailers were interested in helping them create that market.

No one will win. And to further confound progress, authors (developers) want their titles on multiple platforms to reach a broader market and to appeal to retailers, but there are no standards for development across platforms, few acceptable means available for “porting” across platforms and authors are often pressured by publishers to grant them exclusive publishing rights.

Publisher/distributors are pressured to balance the needs of their authors with the demands of the retailers who will accept or reject the products offered; this balancing act must be successful across many platforms and across many channels, and in an unusually tight timeframe for success. Given the above examples, no one is poised for a win.

There are some significant differences in the marketplace of 1992 that were not so in 1982, differences that will have a noticeable effect on the acceptance of new media products in the retail channel.

First, today’s market is slowing, not growing like the market in the 1980s. And in the ’80s, the business market proved the true user of technology, not the home market.

Next, the history of the software and video markets as they emerged showed channels begging for product, and accepting it as paid goods with minimal or no return privileges. In the software industry, the channels did not begin to gain any power until 1985 and later.

Emergence of earlier technologies followed a distribution lifecycle: from early adopters to a broader technology-buying base, to the mass market. With multimedia, we are jumping from early adopters (via mail order) directly to the mass-market channels and consumers. This jump pressures the multimedia industry to succeed in a very short time or risk being dismissed as a viable consumer category.

But at this point, the channels have the power to make, break, or simply delay not just a product, but an entire category of products. This can prevent a category from finding its market in a timeframe that allows a reasonable return on investment for its pioneers.

Players and power structure. At this time there are at least 15 major hardware and/or software vendors actively committed to the success of CD-ROM-based multimedia. Ten incompatible primary platform choices are available for title development, and the number will increase to 20. Many of them follow the computer industry model of upgrading to a new generation of CPU and/or system software every 18 to 20 months.

Keynote speakers at CD-ROM conferences, in the forefront of this market since 1985, complain that every year brings more chaos and more options, and renders the industry a step further from any standards or even an emerging leadership by major players. “How long until anyone can make money?” they ask.

Anyone interested in the successful distribution of CD-ROM titles must master the confluence of the consumer electronics, computer and publishing worlds.

Interested parties will be buffeted by the forces of the computer and consumer electronics industries, the record and video industries, and the book industry. Authors must choose among publishers who tout their “Affiliated Labels” programs and manufacturers who woo them with financing to develop on their platforms. Publishers and distributors must assess the market potential of various manufacturers and watch which authors are the most savvy and productive.

DON’T GENERALIZE ABOUT RETAILERS

The retail outlets sought by the publishers and distributors span numerous categories such as software, books, audio, video, consumer electronics and general/mass merchandise. Examples of such retail outlets include:

• Computer software-only stores: Egghead, Electronic Boutique.
• Computer stores: CompUSA, Computer City.
• Consumer electronics stores: Silo, Circuit City, Highlands.
• Video stores: Blockbuster.
• Audio stores: Musicland, Tower Records, Sound Plus.
• Mass merchandisers: WalMart, Target, Sears.
• Office/Warehouse clubs: Price Club, Office Depot.

Each is serviced by representatives dedicated to its category, and each buys, sells and returns products according to its category’s traditions. It is interesting to consider the collision of these traditions on the distribution of CD-ROM titles, and the risk it poses to the publisher/distributors.

But don’t forget whose prevails. The publishers of CD-ROM titles approach the licensing of titles from their own tradition of either books, records or software. Some offer advances on royalties, similar to the book industry; others deal in margins for finished product like the software industry. But as they bring these products to the retailer, it is the distribution tradition of each kind of retailer that will prevail. And it is the retailer that takes the least risk of all.

HEIGHTENED RISK FOR ALL INVOLVED

The publisher/distributor typically has 15 to 20 margin points to work with, whether he or she is using a book, record or software model. There is not yet a standard model among publishers for licensing, distributing or pricing titles. This is not unusual for emerging technologies or markets, but it does heighten the risk for all involved.

CD-ROM players for computers cost between $199 and $699. Non-computer CD-ROM platforms (such as CD-I and CDTV) cost about $800. CD-ROM titles will range between $29 and $79 suggested retail list price, with some titles appearing as low as $19 and as high as $129.

Cheap software, expensive book. It is likely that the prices for many titles will quickly reduce to $29, which is inexpensive for software (an impulse purchase) but still high for a book.

But with CD-ROM titles, the publisher assumes a greater risk than the software, record or book publisher: the product is unproven as a consumer category in the marketplace, and there are four separate marketplaces plus each marketplace’s channels in which it must gain acceptance.

The channels are expected to embrace CD-ROM titles in this order: mail order (currently), computer and consumer electronics stores, audio/video stores, and finally, bookstores.

These channels all address mass markets, and the retailers expect 100 percent return privileges for all stock still unsold after 90 days. Sometimes this privilege is expected for a 12-month period.

The power is with the retailer. See where the power lies? It lies solely with the retailer. His or her concern is for return on linear feet of shelf space and for inventory turns of products that are in demand by customers. The retailer will not create the market. He or she may refuse to use shelf space for the titles because the inventory does not move, then charge for the square footage upon which the point of purchase display sits, when the P.O.P. display is the alternative to shelf space. If the product does not move within the first 90 days, it will be returned.

So the publisher/distributor is at significant risk to create market demand within a tight timeframe. Many are targeting Christmas 1992 for the emergence of this new market category, even though consumer buying indices are down, and titles and players are priced beyond an impulse purchase level.

But many believe that the first publishers in place will own the market. Since the retailer is so key to success, it may be true that primary relationships with those retailers must be built now, so that the strength of the relationship establishes the success of the market for next year’s (1993) Christmas season. This risk for primary position in an emerging industry underlies all the other risks that drive this market.

Shelf space imperatives. This pressure for shelf space gives rise to other mass merchandising imperatives. It is best for authors to create their titles on multiple platforms, and for publishers to publish those multiple-platform titles on a single disc whenever possible.

Publishers and platform vendors must also create easily identifiable logos and labeling to fit the front and sides of the disc’s packaging, so that the customer can instantly identify what he or she is seeking.

As the smaller and more ecologically sound “jewel box” is becoming the CD standard, this visibility becomes even more important. These strategies offer the most visibility for authors, publishers and platform vendors in minimal shelf space among the mass of merchandising.

The winners will be those who allow consumers the most flexibility for their dollars: those whose technologies (either platforms or utilities) can access all titles across platforms, giving buyers more choices — those who create a usable standard where there is none.

WHERE IS THE MARKET? WHEN WILL IT EMERGE?

Market data upon which to build a business plan is woefully lacking. Much of the CD-ROM player data is buried in numbers about optical disc readers, and not segmented to address the questions of this multimedia marketplace.

A PC Computing/Infocorp forecast predicts an installed base of 9.1 million drives by 1995, with CD-ROM player unit sales reaching 2.7 million.

No way to know. But there is no segmentation in this information among the many competing vendors of CD-ROM players. We don’t know the installed base of players for computers by platform, because several third-party vendors supply this market as well as the primary vendors. We don’t know the sales figures for CD-I or CDTV, for example, because Philips and Commodore aren’t talking numbers.

So no decisions or projections can be made about which platforms an author should develop for, or which titles (on which platforms) a publisher should seek out, or which titles a retailer should stock. I cannot find anyone out there who will say there are more than 500,000 CD-ROM multimedia players out there on any platform, or more than 300 titles that might be available by January 1993.

No figures guessed today will help us interpret the projections for 1995, or help us put together a business plan upon which to assess our risks for today.

Half a million’s not a market. A true mass marketer — in audio, video or books — driven by the market demands faced daily by the retailers, will not yet see a market in 500,000 players, all incompatible, with 300 titles. Retailers may offer some trial shelf space for it, this Christmas and next, to carry the cutting edge of new technology, but they will not risk a linear foot until the market demand is at the door.

And since the retailer can return the product, he or she incurs no risk, and so has no investment in the category’s success. Retailers can afford to wait until the market is ready.

So, although there is a market emerging, and pioneers are committed to establishing their presence in it now, it is difficult if not impossible to predict the timing of market acceptance, the price tolerance of the consumer, or the models of distribution that will drive most of the choices of all concerned. And all these factors lie in a context of an economy slow to rally.

Perhaps the risks we took 10 years ago to launch the desktop computing industry were as significant as this, but we took a longer, slower view of the market acceptance. In addition, hardware, software and channels were emerging and defining themselves at the same time, sharing the risk of market development simultaneously.

A tighter time frame. Now we are spending more in a tighter timeframe for success (this Christmas season and next). The channels are available and powerful, not emerging, not in need of product and not sharing the risk. We are selling expensive products into an educational- and home-based market in a slowing economy. This makes for a very different arena.

In the 1980s, when home computers and software moved from specialty stores to the mass market, the retailers owned that product and could not return it. When the home and educational user did not respond, price wars ensued and the category of “home computing” died for a time, re-emerging successfully later as low-cost game machines with limited functionality.

If we see this scenario again, the retailers will simply return the titles, not create a price war.

START SWEATING THE MUNDANE

We may yet see the steady emergence of multimedia as a market force that successfully merges what has been called “couch technology” and “desk technology.” But to do so will require careful planning, and the time frame is likely to be longer than anyone anticipates (as it was with desktop computing, video, audio CD and audio books).

To know the book industry’s distribution model is not to understand the models of software, consumer electronics, audio or video. To be a major player in the audio mass market does not prepare you for the attitudes of the computer industry about its “intellectual property.”

To be an author without knowledge of retail channels is to be powerless to negotiate a publishing deal that supports your future efforts and livelihood. These conflicts of style and culture across industries are not minor and can have a serious impact on the way deals are struck, margins are won or lost, and success in any particular channel is achieved.

The planning of our course — as author, publisher and distributor — must be informed by extensive knowledge of all targeted channels (software, consumer electronics, audio, video and books) and the current hard realities of mass market retailing.

To miss the details — what various kinds of retailers care about, the margins at which product is licensed vs. each retailer’s way of buying and returning it, the price sensitivity of the current consumer, the “so what?” attitude about new technology that lives in the mind of the mass market buyer — is to threaten the launch and viability of multimedia itself.

Joanna Tamer