Consumer giant champions new media with products and distribution

For some reason, the dance that’s been going on for more than a year between companies trying to sell multimedia software without a real player and those trying to sell multimedia players without software titles reminds me of the mating ritual of penguins.

In its early stages, two penguins face off and thrust their heads toward each other in a hypnotic rhythm. This goes on for so long you begin to wonder how they ever manage to propagate the species.

CD-I, CDTV, MPC … Back and forth, right to left. They were, and are, a picture-perfect vision of an industry in stasis, trying to guess the right moment to cut to the chase without getting beaked.

One hand clapping. Meanwhile, Sony Software announced a new Electronic Publishing Division specifically to produce interactive multimedia products. This move should have stopped the mating ritual dead in its tracks, but the various industries touched by Sony’s entrance into the software business–video game, CD-ROM and traditional computer program publishers in particular–were surprisingly quiet about the ramifications of Sony Electronic Publishing.

Judging by their lack of response, it was hard to believe that the world’s best-known consumer electronics company, with a reputation for technical excellence, more than a few computer products and a pretty good record for anticipating pop-culture trends (not to mention owning a couple movie studios, a TV unit, a theater chain and a record label)–had just announced that it was entering the competitive fray.

Sony does not engage in penguin mating dances. Unlike many technology-based companies, Sony rarely talks about its hardware products for the video game or new-media markets without also talking about the titles or software associated with them.

These close corporate ties have helped Sony shape a strategy that could make it “the” multimedia player company of the 1990s, straddling the present chasm between the consumer electronics and personal computer industries.

Its success depends on a number of variables, not the least of which is its ability to refrain from corporate hubris. The strategy itself, based largely on the motto “The consumer sets the standards,” is a significant departure from the approach favored by today’s hardware hopefuls, which are banking on big (around $1,000 at least) up-front investments by consumers.

THE SONY STRATEGY

A $2,000 software giveaway. In late May, Sony announced a new CD-ROM product for the PC. Called “Laser Library,” the package includes a drive, audio headphones and more than $2,000 worth of software. Suggested retail price: $699. (The kit includes not only the interface card to install in the PC, but the screwdriver you need to open the PC case, too.)

The drive is shipped with six well-known CD-ROMs such as Compton’s Multimedia Encyclopedia and Mixed-Up Mother Goose from Sierra On-Line, as well as foreign language-learning programs and manuals for the PC.

Olaf Olafsson, president of Sony Electronic Publishing, says there is a simple philosophy behind the bundling deal: “Lots of companies are developing software without any marketing channels. We have consumer channels for hardware, and we’re in the process of developing a special new sales force for new media products. They need champions.”

It’s said that those champions will be commandeering a dedicated distribution network for Sony’s software products, though Olafsson says the network will not distribute Sony products exclusively.

Leveraging the “installed base.” Laser Library sound quality is close to, but not quite, CD quality. And as you might expect, you can also use the player to listen to conventional audio CDs at true CD fidelity. The multimedia titles will work with computers that people already own–PC clones with CGA graphics, for example. Right now, the CD-ROM connects only to PCs, not Macintoshes. With headphones included, it doesn’t require any special add-on circuitry for sound. “We take advantage of what people already have. CD-ROM is relatively cheap now. Why make hardware more expensive for technical milestones?” Olafsson says.

So in Sony’s worldview, multimedia software vendors go to market with what they’ve already developed. Consumers with PCs doing nothing in their closet–waiting with bated breath to join the multimedia revolution–will spend a few hundred dollars to hang a Sony CD-ROM drive off the back and get $2,000 worth of today’s best-known multimedia software, “free.” Such a deal.

Calling the price question. Unfortunately, one of the things likely to stick in a consumer’s craw (at least it sticks in mine) is the apparent cost of the CD-ROM drive itself. A five-disc audio player is only $250 nowadays. Consumers, whether they own PCs or not, don’t know or care about the difference between a CD player and a CD-ROM drive. Since Sony is positioning Laser Library’s titles as “free” software, smart buyers are almost certain to call the question: why pay $700 (even $600, street price) for a CD-ROM drive?

Whether the software is compelling enough to rocket people into their local discount electronics store to drop $700 is also at issue, especially in a world where naive consumers don’t know how to assess the value of multimedia titles. Today they pay about $10 to $15 for an audio CD. Can Sony (or anyone else, for that matter) convince them that even though the Compton’s disc doesn’t look like a whole set of encyclopedias, that’s what it is?

Perceived value is a serious problem. I spoke to an old high school classmate last week, a Silicon Valley type with no clue about multimedia, who’d just attended his first CD-ROM Conference in San Jose. He said, “I walked all around that place, and I couldn’t for the life of me find anything I thought was interesting enough to buy.”

The answer to some of these concerns will become apparent when Sony splits the bundle into player and titles, which it intends to do at some point. But it’s important to remember that even if Sony drops the price to $400, so as not to destroy its profit margins completely, that’s still more expensive than Tandy’s new drive, which lists at $399.

These are interesting points to ponder.

What Multimedia PC? Though Sony’s idea for retrofitting existing PCs does require adding a CD-ROM drive, it is different in spirit from that of the Multimedia PCs (MPCs) now hitting the streets (see related story on page 17). MPC upgrades require both additional hardware (a sound board and CD-ROM drive) and software (Microsoft’s multimedia extensions to Windows), and cost just under $1,000 with no software. Because he believes “consumers set the standards,” Olafsson has a wait-and-see philosophy about whether Sony will publish software for the MPCs. But it’s clear he’s not enamored of Microsoft and is skeptical of the MPC as competition.

“Microsoft makes people pay its market development costs, dictates the hardware specs, dictates what the consumer wants and dictates the price point to enjoy it. The level of dictation may be too high,” he says.

“It’s the consumer hardware and software companies who are making the investment. Not everybody can afford a $3,000 PC, and when there’s a new technology like [multimedia], I don’t think that it’s polite to tell people that the PCs they already bought can’t do it,” Olafsson adds. “If people want to [upgrade to the MPC], it’s okay. But we’ll take advantage of what they have.”

The Diskman cometh. The mirror reflection of this problem is the DataDiskman, just introduced in the U.S. at last week’s Consumer Electronics Show. Another part of Sony’s home media puzzle, it’s devoted mostly at this point to portable information delivery and retrieval.

Not yet capable of handling much in the way of digital media (and completely incompatible with any existing CD format, don’t forget), the Diskman is not a contender in the short term as a multimedia player. Though it can play audio CDs, the DataDiskman information titles cannot incorporate other media, not even sound.

Sony’s market researchers say a typical customer for new Sony products is a 35-year-old professional white male making $50,000 to $60,000 per year. But Olafsson believes the DataDiskman has a far broader appeal, that a growing number of today’s Sony customers are women who are more education-and information-oriented. “Women will also buy DataDiskman products for their children, to have a portable library,” he says. “It’s information with consumer appeal.”

Sixteen bits of hope. It is no secret that Sony is working closely with Nintendo on CD-ROM hardware to hook up with Nintendo’s new 16-bit game machine, the Nintendo Entertainment System. A similar strategy has been announced by both Sega and NEC Technologies, which has adapted its own CD-ROM drive to its 16-bit TurboGrafx game machine (see a related news story on page 16).

If Nintendo remains market leader, Sony hopes the combo will be the jumping-off point for a true multimedia machine in the home. Video games are a natural repository for Sony’s connections into the film, video and music archives of Sony Software.

Already today, Olafsson says, when a property becomes available, executives meet and discuss three or four different ways they might repackage and resell it as software.

Though the game machine/CD-ROM strategy is one of the most hopeful for driving an entertainment player standard, it is also one of the riskiest. As Nintendo prepares to launch its 16-bit player, parents are starting to ask the question, “Why should I spend another X-hundred dollars on another game system?” And despite youngsters’ fairly steady level of interest in video games over the past few years, the market for 16-bit game machines is definitely unproven.

Hot-wiring the home. In any case, it is almost impossible to conceive that Nintendo can convince another 30 million customers to replace their present Nintendo units with the new 16-bit machines, and Sony’s new CD-ROM drive does not connect with Nintendo’s 30 million 8-bit machines.

This is not a trivial concern. It should be giving not just Sony, but all consumer electronics vendors pause before they introduce new, incompatible hardware products into the cyclical video game market–especially if they’re hoping to hot-wire them into multimedia entertainment centers.

It’s very likely that any combination of game machine and CD-ROM drive is going to have to provide value in more genres than entertainment.

Moreover, unless Sony can convince Nintendo to undergo a sea change regarding the way it displays graphics on its machines (it uses a primitive tile graphics display, good for keeping hardware cheap but very limiting and difficult to develop for), Sony is likely to find that its grand plans to repackage its massive stores of entertainment content–movies, videos, music–will be hard to fulfill.

Whither CD-I for Sony? Consumer appeal is certainly the question of the hour for Philips and its Compact Disc-Interactive (CD-I) devotees. Sony has a long history of collaboration with Philips on optical disc technology and standards, including an early commitment to CD-I. In fact, it is readying a CD-I player for market.

Philips and the software publishers it is wooing continue to perform the penguin mating ritual, which puts Sony in an awkward position. Listening to the shouting matches between Philips and other hardware and software factions at multimedia conferences makes it clear that despite Philips’s massive PR effort, the industry is not prepared to embrace CD-I, market-unseen.

Though not wanting to look as if it’s undercutting a partner, Sony is obviously among those waiting to see if a CD-I market materializes.

Olafsson believes that if CD-I is a success, it will most likely hit pay dirt in business and education, rather in than the consumer market. If CD-I looks as if it might make a dent in the marketplace, he promises Sony Electronic Publishing will be ready with titles to sell. “We haven’t limited our internal creativity in regards to other platforms or formats,” he says.

Muddying the waters. So that’s Sony’s strategy in a nutshell. Become the information and education multimedia player-and-titles publisher on the PC by enticing owners to hang a CD-ROM drive off the back of their dusty, closeted computers.

Bring another (proprietary) platform, the DataDiskman, into the U.S. market to deliver information and educational products to the home.

Grab yourself a CD-ROM port on the back of a Nintendo machine and become the multimedia player-and-titles publisher in the interactive entertainment and video game business.

Hedge your bets on CD-I and MPC. Clearly throw your weight behind your new Mini Disc (MD) read-write optical disc technology, extensions to the MPEG video compression standard, and a new high-density CD format. Then work hard and fast with companies like JVC and Matsushita on distributing digital movies.

Last but not least, start your own distribution network to “champion” new media products.

Hierarchy of needs. But there are some fundamentals Sony must heed to achieve media supremacy:

• The titles community is in a snit about a rampant rumor that Sony is going to close its dedicated distribution channels for interactive media to anyone but its own sweet self. Olafsson is adamant that this is not true; he says Sony will definitely use its channels to distribute product from other publishers. Let’s hope Sony continues to resist temptation. Though initially such a move might seem like a good way to jump-start a new industry, it is more likely that the converse is true. If a thousand companies are making and distributing new-media products, a diverse and lively market is born. Not to mention that by doing so, Sony can make some money off its competitors, too. Not a bad deal for all concerned.

• With so many incompatible optical disc formats on the market–at least two of them (MD and DataDiskman) sold right now by Sony–it’s vital that Sony start a developer relations (i.e., “evangelism”) program. Sony cannot afford to alienate third-party developers by being secretive about new hardware plans. (As a matter of fact, it might be nice if Sony even came up with a cross-platform authoring system.) Microsoft’s System Software vs. Applications Developers Dilemma is in effect here–Sony’s Electronic Publishing people haven’t quite figured out whether or not they’re competing with third parties. The answer is, “Yes, you are. And that’s a good thing.”

• Sony also needs not to be piggy about licensing content. It does own a lot of creative properties, which does provide it with competitive advantage–i.e., first crack at turning music, videos and film into multimedia–and it has good relationships with people who know how to create it. In the same way Sony can collect royalties from competing publishers by distributing their products, it can create another a tidy business from licensing content to them.

• Sony must move beyond the entertainment thing. Education and information will be giant consumer products for new media in the future. Despite Sony’s expertise in consumer/entertainment hardware and its holdings in creative content, attention directed toward useful, less volatile products will yield greatly in time. Luckily, Olafsson believes that both Laser Library and the DataDiskman, and probably CD-I as well, fall into this category. Still, there are a lot of information and education titles out there waiting to be created, and it would be helpful if he were to start cultivating independent developers now who are good and who want to do this kind of software.

• Probably most important, Sony must find and develop expertise in interactive software design. This is not the time to rely on people whose experience is text-based CD-ROM products–or for that matter, on film producers. There are lots of people in the business who know lots about making interactive products, and with the shape of the economy, they’re probably about to be laid off, so they’re around. If I were Olafsson, I’d get an AppleLink account right away and post my address.

No more mating rituals. Sony Electronic Publishing is in a powerful position, and Olafsson holds a great deal of power over the future of new media software. But he does not have an easy row to hoe. One developer put it rather succinctly: “I think it’s going to be difficult for him. In one way, I’m just amazed at what he’s created, but that comes with its own overhead and expectations.”

For some reason, those expectations always seem to center on a kind of benevolent-dictator fantasy, that the industry’s vastly powerful corporations–Sony, Microsoft, IBM, HBO, Disney–will use their power to do precisely the right thing for everyone involved. This is, of course, impossible. And in a world where these companies are engaged in a life-or-death battle for market supremacy, the most anyone should really hope for is to not get beaked during mating season.

Sony appears to have gone much farther than that, though, by using existing hardware as a platform for multimedia software, by opening its distribution channels and by encouraging the growth of the titles business. Though he knows Sony’s strategy isn’t necessarily perfect, Olafsson’s first priority is to get some multimedia products on consumer shelves now, not wait for just the right platform and software. No more mating rituals. “The idea is to do a little now and something fantastic later,” he says. “You can’t buy creativity, but nobody likes to work in an operation that loses money, not creative or business people.”

Denise Caruso