With no market and little funding, disc-based products are labors of love — and faith

Devoting a career to creating optical-disc-based media products is a risky business, right up there with buying real estate via mail-order catalog. There’s no appreciable installed base, and production tools are still primitive. Potential customers, not to mention investors, are still skeptical about the benefits of interactive stuff. And unlike in the world of computer software, a lone programmer cannot merely sit in his or her bedroom and plunk out a code. Creating multimedia is a collaborative, costly process — most estimates for interactive titles with a noticeable amount of visuals hit in around $200,000 or higher.

There’s just no market yet. But “yet” is the operative word, and each of the companies surveyed below plans to get to “yet” is a study in what it takes to launch a new technology into the mainstream. The big question is “How long can they hold out?” Their answer: “As long as it takes.”

GTE IMAGITREK
A phone company with an eye to the future

Alan Rinkus is the business development director of multimedia projects for the ImagiTrek division of GTE Corp. — yes, that GTE, the international telecommunications design and production facility to develop optical-disc-based games, magazines and interactive music, education and training projects.

Understanding the issues. What’s unusual about ImagiTrek’s business plan is its eye to the future of fiber optics into the home. “GTE is looking at the long term from a digital content point of view, being a carrier that will be putting in more fiber optics,” says Rinkus. “As a corporation, they need to understand how content is being produced and shaped. In the long term, strategically, what we’re doing helps them understand those issues.”

After winning a special dispensation from the Federal Communications Commission, GTE set up a test facility and state-of-the-art laboratory called “Mainstreet” in Cerritos, CA, and is testing the delivery of different consumer services over coaxial and fiber-optic cables into Cerritos homes.

Though it’s funded by GTE, ImagiTrek is a for-profit operation, says Rinkus, and “depending on which month,” it has already turned a profit by selling its projects to media partners, which reduces the financial risk to both parties.

Delivery to the home. “We’re a long way from platforms becoming moot,” he says. “Applications will migrate from the compact disc and merge with the online delivery of programs — there will always be some form of offline delivery that’s optical-based. I don’t have a crystal ball that will say which standard will make it — but in the middle of that, the phone companies will play a large role in how these technologies are shaped.”

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ImagiTrek produced, designed and originated the concept for the innovative roundtable on Verbum Interactive, the first CD-ROM-based magazine (see Vol. 1, No. 3, p. 22). It produced an interactive videodisc for the game maker Sega called The Hologram, and it is working on a Japanese version. ImagiTrek is also working on a Compact Disc-Interactive (CD-I) application demonstration disc for Philips Interactive Media. “Today we look at CD-I as being more competitive in commercial applications, as opposed to consumer,” he says. “That will change over the next two years.”

Rinkus believes there is an element of passion to working with interactive media. “But there is also a pragmatic approach that we take to the business, so we review market penetration, predictions and techniques very carefully,” he says. “We understand how to produce them, how much they cost to produce, and we also understand how they can be sold. Is that profitable? That’s very questionable at this point. But they can be, on occasion, and you strive for that.”

INTERACTIVE PRODUCTIONS
The quintessential new-media entrepreneur

Rob Fulop, founder of Interactive Productions in San Mateo, CA, doesn’t have ImagiTrek’s corporate safety net. A former game producer at Atari (he developed the computer version of Space Invaders, among other titles), Fulop has long been smitten with interactivity and how it can help people collaborate. He is, in senses, the quintessential entrepreneur for a new technology — with all the attendant sorrows and joys of having great ideas and trying to find time and money to bring them to fruition.

Another component. So how does a fledgling company such as Interactive Productions support itself until the market happens? “Basically, I don’t think you can be exclusively in the titles business without having another component,” he says. “There are two ways to support yourself in the titles business. One is to get advances from people who put out a piece of hardware. The other way is to work for hire, or consulting — a company has a new piece of hardware and they need some help to make sure it’s the best. Or Apple goes to a trade show four times a year and they need someone to do booth stuff. Or Microsoft wants to send out a piece of direct mail on a floppy.

Right now, he says, consulting occupies about 10 percent of his time. That’s good news — last year, work-for-hire was well over half is business. Fulop today has two CD-I titles in productions, funded by Philips Interactive Media, and two in the design phase.

In addition, Fulop has an ongoing business doing online games and 16-bit video games. “I couldn’t make it doing exclusively optical discs, because the advances aren’t enough to cover the overhead,” he says.

Right now, Interactive Productions is focusing on CD-I products in what Fulop calls “entertainment with an enrichment touch to it. For example, I’m very big on doing something for kids, to help kids learn how to make video. I also like things that teach collaboration, how to work together.”

Sticking with CD-I. A difficult question for a developer such a Fulop is which player to develop for, since his success depends on the player’s success in the market. At this point, he’s sticking with CD-I. “From my perspective of the universe right now, CD-I has the best chance,” he says. “I’ve talked to this whole industry, as a very skilled producer with really neat stuff to show them. And from our perspective, Philips is who’s coming to the table actively, soliciting titles to get done. We could talk to Sony and Nintendo forever, but the Philips people write a check.”

And that’s the bottom line. “The question is not necessarily what’s the best player, but where you get the money to develop stuff,” he says. “CD-I might not be the best player; any piece of hardware that works in the consumer market is always inferior to what it could have been. But there’s no way in the world I can raise independent financing to do an optical disc yet. We’re all trying to make TV show before there’s a television, that’s what it is. It’s not like there’s an optical industry that’s not doing well. There is no industry. And it’s a couple year before there is an industry.”

Profitable in 1993. Fulop, who’s just signed MacroMind president John Scull as a partner, says he believes Interactive Productions will have a profitable year with optical disc titles in 1993. “That’s when the titles will start paying for themselves,” he says. “It will then make sense to do nothing but make titles and be self-sufficient. Right now, you’re just dumping money in and hoping you’ll make money back later.”

To be profitable, he says, the company will need to be able to publish a title every couple of months. It will do so using templates and “formats,” such as comic books, which lend themselves to series production. “The appetite for this stuff will be voracious. If it’s taking a year or two to do a title, that’s just research and development,” he says. “A title a month is a lot, but the guys that made money in the movies — like Keystone Productions — figured out a way to make a show every couple of weeks. They just turned the crank. Those are the kinds of products we’re really focusing on the most right now.”

“VOLUME WILL NOT DRIVE THE MARKET”
CD-I producer/publisher Garry Hare goes against the grain

As a long-time producer, Garry Hare — founder of interactive entertainment company Fathom Pictures in Sausalito, CA — was well acquainted with the economic vagaries of creating products for a market that doesn’t exist. He was also “single-minded” about the media he wanted to work in, and the kinds of hardware he wanted to develop products for.

Those two components were not exactly a formula for success. How did he survive? “I was a very high-priced organizational consultant two days a month, and my wife worked,” says Hare. “If it weren’t’ for that Fathom would have folded years ago.

It’s not that Hare wasn’t busy during those lean years. Fathom created the first interactive movie, called Matchmaker, and the first interactive point-of-sale kiosk. It produced titles in association with ABC Sports, the National Football League, the Professional Golfers’ Association, Lucasfilm, Norman Lear’s Embassy Television and Warner Communications.

Today, Fathom is a $5 million company, developing titles funded by Philips exclusively for CD-I. And Hare, who’s resigned from his salaried position and appears on-site at Fathom only for creative and financial reviews, is now president of Philips Interactive Media Europe.

His unique position as a producer has given him a certain amount of insight about developing interactive titles — “There’s a lot of blood on the floor here, much of it mine” — and his view of how CD-I will win market acceptance is vastly different from the company line.

Vision-driven software. “Everyone says, ‘You need 150 titles to create the consumer market,’ but volume will not drive the market for CD-I,” says Hare. “What’s required is a niche strategy — targeted, market-driven applications. And one piece of vision-driven software could do it.”

This seems diametrically opposed to the view held by Philips, which has invested multi-millions of dollars in creating a massive titles library to push CD-I into consumer’ homes. Hare believe an equal amount of energy should be expended developing the corporate commercial market, and he plans to implement just such a strategy as soon as possible.

The first move, he says, is for Philips to get serious about professional publishing — a market that Hare believes can be a giant moneymaker for Philips — by helping producers think about its potential in commercial applications.

As part of this strategy, Philips must develop market research resources to develop these niches markets, and it must introduce producers to those markets so they can become successful immediately. Rewarding success in that way, Hare believes, will keep talented producers developing titles for CD-I.

Hand puppets. For example, a pharmaceutical firm asked about using CD-I for an interactive learning title on pregnancy, to put in doctors’ waiting rooms. “It’s a good consumer title, too — people would pay money for it. We were lucky we had a similar title laying around that we could adjust a little, say ‘So and So presents…’ on the title screen,” he recalls. “But usually we walk into companies and expect them to visualize this stuff like hand puppets. We need to spend as much time on previsualizing the potential of the professional market as we do the consumer market. If we hadn’t had a title in-house to show them what could be done with CD-I, we couldn’t have explained it.”

Corporate-sponsored educational discs could ease development costs and give companies another venue for name recognition, he says. Already, a large financial institution is funding an educational product about money, markets and how the system works. Using the same basic structure for a variety of corporations, Hare says, Philips can approach a company and say “We’ll commit to the education market, but we need your help.” In this way, CD-I titles for schools can be provided either free or very inexpensively, while retail versions are made available at the same time at a low cost.

“We can get corporate participation until the producer breaks even,” says Hare. “It’s good business. Even if they only sell 5, 000 copies, it doesn’t require marketing money.” This is important when, as Hare says, high-end CD-I titles can cost from $200,000 to $400,000 to produce.

At the same time, he says. “We have to be more realistic about pre-unit royalties,” he says. “Today producers fund advances against breaking even, paying royalties on a percentage of gross wholesale. But with zero machines installed, or even half a million, 10 percent is nothing if there are no profits. We need to pay developers per unit sold to reward success.”

Another radical, yet sensible, thought is that producers should become resellers of CD-I machines. “They know the markets better than we do,” he says. ” this builds the installed base and helps producers be successful more quickly.

THE VOYAGER COMPANY
Working at breaking even

Bob Stein, a partner and cofounder of the seminal Voyager Company in Santa Monica, CA, makes no bones about Voyager’s business strategy in the business of disc-based media. “We haven’t made much of a profit yet, but we’re really good at breaking even,” he says. “That’s been our strategy for years — to break even.”

Voyager is the joint venture with New York-based Janus Films and Stein runs the company with partners Aleen Stein and Janus’s William Becker and Jon Turell. With no outside funding, Voyager is now an $8 million-plus business with 70 employees. It’s been selling interactive videodiscs and software since late 1989 and is the most highly regarded company in the business today.

The yardstick of quality. The company had already built a strong reputation on its Criterion Collection of definitive films on laserdisc, and its newer multimedia titles are now also considered the yardstick by which quality is measured. They include the National Gallery of Art Laserguide, the CD Companion to Beethoven’s Symphony No. 9, a series of discs for children called Amanda Stories, and most recently, a moving CD-ROM photo-and-sound essay by one of Latin America’s most prominent photographers, Pedro Meyer. Stein says Voyager has seven more CD-ROM titles coming out this fall.

But despite Voyager’s reputation, Stein is brutally realistic about his market, and he is committed to making Voyager last for the long haul. So far, it’s worked. “We’ve been very canny, and we put our money where it counts,” he says. “We haven’t done much advertising or marketing. We concentrated on making products, then we let word-of-mouth carry it.”

As a result, the company hit so many home runs in so many areas that everybody wants to deal with it. One company, says Stein, loaned Voyager a quarter-million dollars to produce several products. “If they sell, we pay them back out of revenues.” he says. “If they fail, they don’t get their money back.”

Picking the player. Stein says the company spends an amazingly frugal $20,000 to $100,000 on each CD-ROM title. All of Voyager’s discs are based on the Macintosh right now, but its first Microsoft Windows-compatible products will be done this year. As a devotee of breaking even, he must pick his hardware carefully — despite the fact that he’s courted IBM, Apple, Next, Sony, Panasonic, Philips, you name it.

“Everybody out there wants Voyager to do stuff for them, but the question is whether there’s any machines,” he says. “At the moment, we’re doing just CD-ROM. [Commodore's] CDTV I think we can pretty safely say isn’t going to make it. CD-I, we’ll find out. But the player that I’m most interested in right now is a notebook computer. Someone will sell a lot more notebooks than Philips will CD-I devices.

Despite their present monomedia capabilities, Stein is interested in notebooks because Voyager is going to publish a series of floppy-disk-based books — including Martin Gardner’s Annotated Alice in Wonderland and Douglas Adams’ Hitchhikers Guide to the Galaxy. “Dedicated multimedia players I think are a ways away,” he says. “I’m not interested in things that play on TV sets because the resolution is so low. Philips said they’re putting Shakespeare onto a CD-I disc — can you imagine reading Shakespeare from your TV? That’s completely the wrong direction.”

Publishers can’t jump-start it. The right direction says Stein, is “high-density, information-type products” that he can sell in small numbers and still break even. “We’re a small publisher not by virtue of our vision, but because the market is small,” he says. “I don’t think a publisher can jump-start the market because the hardware isn’t there. We have a few years worth of interesting, elegant work that people are excited about, but that aren’t breakthrough products in terms of market share. That’s it. That keeps our reputation up.”

Much of Voyager’s successful reputation, says Stein, is driven by intangibles. Titles are produced because of “gut stuff” — the intuitive knowledge that they will be of value. “You’re dealing in cultural values and ideals, and you can’t be driven by a need to make a profit,” he says. “I don’t mean to sound sappy, but it doesn’t work if all you’re thinking about is making money. You have to think, ‘How do I get these ideas out?’ In the long run you have to make money, but that shouldn’t be why you get started.”

BRODERBUND SOFTWARE
CD titles are easy on the bottom line

Despite any natural proclivity the creative minds at Broderbund Software might already have toward disc-based media, for chairman Doug Carlston it boils down to this: his CD-ROM products are cheaper to produce than computer software.

Though Carlston says disc-based media are “zero percent of our business right now,” a CD-ROM-based version of the hugely successful Where in the World is Carmen Sandiego? title, to run under MS-DOS (with MPC and Macintosh versions to follow), is in beta test. It has 130 digitized photographs, 150 traditional and folk-music samples, more than 10 talking characters, 500 digitized foreign language clues and hundreds of animations.

Cost of goods. In addition, Broderbund is developing a new line of animated, talking children’s stories on CD-ROM called Living Books. “It’s usually a truism that as storage capacity expands, costs go up accordingly,” says Carlston. But this isn’t the case for CD’s which for 75 cents hold what would cost $5 to store on floppies. Carlston says those aren’t significant numbers if you’re talking about a $250 piece of software, but when it’s a $50 entertainment product, Broderbund’s margins increase significantly as a result of lowered cost of goods.

He says the cost to produce a Living Book will eventually be under $100,000 — “substantially less” than a typical floppy-based title. “At this point, we’re building engines for each optical platform, so we can just go directly from the data stream to the product, with no programming at all,” says Carlston. “When we started this project two years ago, we decided the ‘virtual machine’ approach was the only way it seemed to make sense — it was a simple programming question. There was no rush to market, because there was no market.”

Audio is cheap. Unlike many developers of disc-based media, Carlston doesn’t tear his hair out about motion video and all its attendant costs and headaches. “A lot of content can be acquired at low cost,” he says. “It’s not very hard to take a graphic material, scan it, touch it up and animate it. Textual content is more expensive than voice, so we don’t worry about it — we use lots and lots of audio instead. To the consumer, it’s like the movement from silent movies to talkies.”

Since consumers are already accustomed to using a lot more data than they produce, he doesn’t think the “read-only” capacity of CD-ROM is likely to bother them “if the play is cheap enough.” But today, the only real “players” are relatively expensive computers.

Unfortunately, he says, he’s not banking on that situation changing. “We’ve had a lot of conversations with a lot of people,” he says. “We’ve had multiple experiences of being promised production and delivery dates that have evaporated that we’ll believe it when we see it.”

THE ELECTRONIC PIÑATA
Making sense of the shift from paper to electronics over the next two decades

Paul Saffo is a research fellow at Menlo Park, CA-based Institute for the Future, studying the long-term business effects of new information technologies. Here, Saffo uses the metaphor of a piñata — a papier-mâché­ balloon filled with gifts and goodies — to illustrate the point that the effect of technology on the publishing industry is much greater than it appears.

Are we headed for a paperless future or not? I think that a curious paradox in the way we consume paper offers an important clue. The consumption of communications paper in the United States has grown at a rate greater than the growth in gross national product for every year since World War II. Meanwhile, the consumption and growth of electronics for communications purposes has increased much more rapidly.

The relationship between the two is spherical — it parallels the relationship between the surface area and the volume of a sphere. As a sphere expands, its volume inside increases more rapidly than the surface area.

ELECTRONICS ARE THE HIDDEN CORE

The publishing industry today is like a huge electronic piñata, a thin paper crust surrounding an electronic core. The paper crust is what consumers see, but it is produced by a hidden core of enabling electronic technologies. For example, the Wall Street Journal is written and edited on computer screens, and then the final copy is bounced off satellites to remote printing plants all over the country, just hours before the presses begin to roll.

In offices, the same pattern explains why electronics have not replaced paper, but merely accelerated the production of greater volumes of paper than ever. Xerographic copiers are a classic piñata technology — they automated paper generation.

Shallow dives, deeper dives. Think of the copier as lying just under the surface of the piñata, with users and information on the outside. The copier represents a very shallow dive into that electronic core because when you slap a page onto the glass screen, the image is converted into electronics only long enough to make another copy. There’s no manipulation going on.

Desktop publishing — a laser printer hooked to a PC — goes a bit deeper, since now the technology is used to manipulate the image. The Wall Street Journal goes deeper yet, exploiting a suite of computer and communications technologies to produce its daily edition.

The piñata model also offers a useful metaphor for thinking about relationships among the different pieces of technology. For example, the laser printer is really just a typesetter for copiers in offices and for small newsletters and the like (see figure 1), the two technologies occupying adjacent positions on the sphere, and the information skipping in and out of the sphere as it goes from idea to electronics to paper, to electronics to copy.

A fundamental change. The way that we used paper changed fundamentally when desktop publishing arrived. We think of paper as a communications medium, but it has really been a storage medium above all.

Sometime in the mid-1980s, it became cheaper to store information electronically than on paper. Paper today is an interface rather than a storage medium. It is an increasingly volatile, disposable medium for viewing information on demand. We are well on our way to a future in which we reduce information to paper when we’re ready to read it, then promptly dispose of it when we’re done.

The cross-impacts of various pieces of electronic technology and paper output are what make forecasting the future of new media so wildly unpredictable. Recall that Apple failed to recognize the desktop publishing explosion because it didn’t think about what would happen with copiers and LaserWriters together. Fortunately, the market explained it for them.

THE CHALLENGE: BLEND OLD AND NEW

The challenge in new media today is to elegantly blend old and new into compelling new products. More bluntly, it is to tame raw new technologies into compelling media of expression.

Two strategies suggest themselves. First is to use electronics in ways that leverage paper in interesting and new forms. One example is that of newspapers combining 976 response numbers with personal classifieds. The print ad is given free to would-be advertisers because the profits from the 976 responses are so large.

Diving deeper. Other examples, such as database publishing, dive deeper into the electronic piñata, exploiting sophisticated computer, communications and printing technology to create custom and semicustom products. Examples include selective binding in advertising and the McGraw-Hill/R.R. Donnelley effort to create customized textbooks (i.e., order the pages you want). Perhaps Kinko’s will end up as a partner as well.

More personal technologies, such as facsimiles, will be sucked into the vortex. Interactive fax reader response systems being used by magazines are one example. This substitute for mailed-in reader response cards provides instant consumer gratification and better preference capture for advertisers.

In the longer run, though, the Group 3 fax standard will probably become the equivalent of ASCII text for the 1990s — the default text and data transfer format for a whole menagerie of information appliances that will crawl into our cars, briefcases, pockets.

PAPER INTERFACE, DIGITAL STORAGE

For the foreseeable future, paper will remain the dominant interface in publishing. But it is going to become increasingly a transient display and control medium. A historical note: paper has been a control medium ever since Hollerith invented the punch card to control his census calculators in the late 1800s. Add in environmental trends, and it is clear that paper will become short-lived, lightweight, ever more biodegradable.

But the dominant form of storage is going to be digital. You all are familiar with CD-ROM, and that suggests something yet bigger is going on.

Holes and thin spots. As the balloon expands, thin spots and holes begin to appear. These gaps represent places where paper is eliminated. So far, holes have been exceptional cases, or outright failures. Videotex was one such failure, but Minitel is a modest, solid success. I should add, though, that Minitel was intended to replace paper directories, but now the French print more than ever. Actually, Minitel proved to be a replacement for the telephone operator information service.

The holes and thin spots appear in very odd spots on the piñata’s crust, but the holes also are growing, and they’re beginning to drift together. These are the first halting signs of a new paperless world. It will take about 30 years for it to happen completely, but the process is well under way today.

Unexpected competitors. Competitors on the surface will come from unexpected areas. Publishers are fighting for market share with each other. Meanwhile, Sony is trying to become a vertically integrated information company in a new information world where it will own the software that goes on the disks it presses, which play on the drives it builds, which are installed in the machines it sells.

Incidentally, this isn’t a new strategy — RCA did the same thing in the first half of this century with the radio business when phonograph records came along. And the phone companies are dying to get into the business, recently with the reluctant blessing of Judge Harold Greene (see Vol. 1, No. 3, p. 7). His reluctance has good historical basis. The phone company invented the radio advertisement in the 1920s and then tried to patent it — without success, fortunately.

The telcos pioneered television distribution in the 1950s via coaxial cable, and then, with the Telstar satellite, they got into television broadcasting. They also invented movie sound, and now they’re eager to get involved again, having decided that the only way to pay the bill for optical fiber to the home is to deliver television and information services.

Editorial functions change. Finally, the piñata metaphor also explains how editorial functions are changing. Newspapers are organizations whose inventory walks home every day after work, and their relationship with their readers is rather remote — a 90-degree relationship (see figure 2), limited to the odd editorial letter and the like. But the changes in electronics will make the relationship much more intimate.

READER BECOMES EDITOR

At the extreme, the editor and the reader will become the same individual, as on today’s online services such as Dialog and Nexus, where users do their own editing on the fly. At a commercial level, the Dow Jones news service is the first example of a compelling blending of print-based human editors and electronics.

A computer in Princeton “watches” for certain kinds of events, such as a stock moving to an unusual level, and alerts a writer at the Wall Street Journal in New York. The writer then takes a quick look at the event and offers a first impression to electronic customers on DJ.

In turn, the alert also helps writers with their editorial work at the Journal. Paying attention to the distance on the sphere between editor and reader is very, very important in how you position and think about your products.

New headaches. Five years ago, the problem was that everybody was worried about electronics, but there weren’t any options to really do things with. Today, we’re all involved, and the headache is not finding an option but picking among the various options that are available — videotex, audiotex, pc-based things, television-based things, wireless delivery, wire-based delivery. It was Marshall McLuhan who observed, “I don’t know who discovered water, but it was not a fish.” His message is that to succeed, you’ve got to step back and take a larger and longer view of the information industry, because seeming competitors may be your most important strategic partners, and vice versa.

And telling one from the other, competitor from partner, on the piñata will be very hard indeed. For example, Apple and Microsoft can’t decide whether they are partners or enemies. Ultimately, though, your biggest enemy could be yourself. There’s an old Pogo cartoon that says, “We have met the enemy and he is us.”

That’s true. But there’s a second frame of the Pogo cartoon that we forget. It read, “We are surrounded by insurmountable opportunity.” I think that’s very much the situation for companies in new media today.

Paul L. Saffo