Multimedia Distribution, A Nightmare of Confusion
- Fifth Annual International Macromedia User Conference
- Marriott Hotel
- San Francisco, California
- Sunday, September 25, 1994
- Presentation of
- Tay Vaughan, President
- Timestream, Inc.
Good morning, and welcome to the first session of this four-day conference. Some of you may be fresh, but some of you may already be survivors: of the midnight hacker sessions, a crack-of-dawn breakfast, the Opening Address from Bud, and Larry Ellison's follow-on Keynote Address. Lunch is coming up at 12:30. Then there is another Keynote Address from Dave Nagel, followed by a selection of excellent afternoon panels, then a Sneak Preview, Dinner, a real Entertainer, and another Late Night Hacker Session starting at 9:00 tonight. Welcome to the multimedia information storm... to the revolution!
My message to you this morning is about distributing multimedia titles into a chaotic new-born marketplace where the rules for doing business, and the business itself, are unformed. The multimedia marketplace is a nightmare of uncertainty.
It's a strange place fraught with allies and enemies, mergers and acquisitions. Business and money people have heard the mewling of our infant industry, and they circle now, just outside the firelight, waiting to make their play.
Good developers, however, will fashion order out of chaos; some will survive this infancy. They will be smart, strong, and enduring craftsmen who will challenge the equations of the marketplace, and shape the numbers to fit.
Marketing gurus, sales experts, creative talents, programming geniuses, and strong leaders will not only team up to MAKE multimedia, they will aggressively SELL it in this emergent industry.
08 To the Marketplace
Other sessions at this conference will address content, creativity, and production: the "front-end" of multimedia. In this session, I am going to explore the very important "backend," the MARKETPLACE, and provide maps you can use to get there. But you should keep in mind that this huge place is under construction: some roads may be dead-ends, others may lead to danger. I will talk about:
- The Players
- The Customers
- The Channels
- The Deals
- and provide some Tips for Survival
09 Who's on the Road?
Who will you meet on the road to market?
These are small, usually boot-strapped, operations with few staff members and much of the required creative and technical talent in-house. They produce one title at a time in a development cycle usually exceeding 12 months.
Small Development Companies
These have staff on a real payroll, use contract workers, and produce more than one title per year, each title typically being independently funded.
Medium-size Multimedia Publishers
These companies already boast multimedia sales that exceed $10 million a year. Staffs are larger, and they not only DEVELOP titles, they SELL them. Often they will allow small developers to hitchhike to the marketplace as "Affiliate Labels," charging, of course, a fare.
These entertainment, software, and communications megacorps boast extensive distribution and marketing capacity in at least one channel. They have money, and can purchase know-how and skill. Already in place, they have 800 numbers, lawyers, warehouses, special deals with FedEx, and a strong sales force, often international. Some of them don't have a clue.
The established multimedia publishers already have stalls and shelf space at the marketplace; the giants, if they have no position yet, will design and build to suit.
- Garage Shops (< $1M): Amuse, Eden Interactive, Luminaria, PopRocket, Red Hill
- Small Development Companies (▒ $1M): Amazing Media, Drew Pictures, Medior, Morgan Interactive, SF Canyon Company, Sumeria
- Medium-size Multimedia Publishers (> $10M): Br┐derbund, Creative Labs, Voyager, Sanctuary Woods, Software Toolworks, MediaVision
- Corporate Giants (> $50M?): Warner New Media, Turner, Microsoft, LucasArts, National Geographic, Paramount, Compton's, ABC, Time Inc., Viacom
10 What's in the Trucks?
CD-ROMs are going to market. There are no customers, YET, for Interactive Television products or for multimedia sold down broadband pipes. I will talk about the broadband future later.
11 Who are the Customers?
Customers of today's multimedia titles are owners of computers with CD-ROM drives attached. DataQuest predicts that 17 million CD-ROM drives will ship in 1994, a 153 percent increase over the 6.74 million drive units shipped in 1993. In 1994, CD-ROM owners are expected to purchase about $450 million dollars worth of reference, entertainment, and educational titles costing between $25 and $100 each. Title sales will be up from $325 million in 1993. Approximately 3,000 titles are available today by mail order and from retail shelves, and another 1,500 new titles are expected by Christmas this year.
12 Retail Channels
Five retail channels are emerging for CD-ROM multimedia: video rental stores, book stores, record stores (really Audio CD stores now -- the vinyl records are in special bins mixed in with the 8-inch floppy disks), warehouse stores such as Costco/Price Club, Wal-mart, Sears, and Kmart, and the computer software chains such as Egghead and CompUSA. Traditional software chains will continue to provide the primary retail sales points for CD-ROMs during the next year or so, but will diminish in importance unless they evolve to meet new demands.
- Video Rental Stores
- Book Stores
- Record Stores
- Warehouse Stores
- Computer Software Chains
13 The Shelf Squeeze
According to a recent Wall Street Journal article, more than 1,700 NEW titles will vie for retail store shelf space by Christmas '94. In this marketplace, small developers are quickly overwhelmed by the immutable laws of physics and economics: with one or two titles to sell, gaining a piece of this diminishing real estate is the work of Sisyphus. But you should know that the big guys, too, suffer these same laws: Compton's seems to have half the shelf space of two years ago, yet offers twice as many titles in its product line.
Graphic: The Top Ten (from CD-ROM World, September, 1994)
- Star Wars Rebel Assault
- The 7th Guest
- PrintShop Deluxe
- 5 foot 10 Pack
- Betrayal at Kondor
- Ultima VIII: Pagan
- Key Color Clip Art
14 How Big is the Shelf?
Large software chains such as Egghead, CompUSA, SoftwareEtc., and Babbages provide shelf space for approximately 300 CD-ROM titles per store. Costco carries approximately 80 titles, and Wal-Mart carries only the top-selling 25 to 30 titles.
15 The Shelf Wars
It's a crisp, cool morning at the multimedia battlefield. The Players are staking out POSITIONS, driving icons and strategies into the turf like Medieaval crests. Experts huddle around product lists and marketing weapons, tuning and adjusting, waiting for the sun to rise.
"Getting retail shelf space for multimedia is the
art and magic of this business. Keeping it in
1995 and 1996 will be what separates the
major players from the rest."
Craig Moody, CEO
Time Warner Interactive
(Advertising Age, August 1, 1994)
16 Channel Blurring
Stores targeting specific demographies have begun to blur traditional retail boundaries. LearningSmith, for example, sells games, wooden toys, books, chemistry sets, music, AND multimedia products to upscale parents.
17 Channel Costs
The Moire blur of channel boundaries and huge increases in the number of titles in the marketplace are forcing title marketing costs steeply upward. A study by GISTICS estimates that developers and publishers can expect to spend an additional 35 to 50 percent of a title's production cost to promote and market it. Innovative in-store campaigns, cross channel marketing, branding strategies, and direct mail campaigns cost money, and ad agencies and PR firms are becoming a part of the scene. Creative Multimedia has partnered with LIFE Magazine, Dr. Ruth, Fodors Travel, and the Smithsonian Institute to develop titles. Microsoft has licensed Disney characters for three upcoming Microsoft Home products, and has recently inked a deal with Scholastic to develop kids titles. Broderbund has joined with Random House to produce the Living Books Series, and has purchased electronic rights to the Dr. Seuss Books.
- In-store campaigns
- Cross-channel marketing
- Branding strategies
- Direct mail campaigns
- Ad agencies
- PR firms
18 Alternate Routes
Direct marketing of multimedia through catalogs and direct mail will, however, remain an important method of selling titles for the next two years Today, approximately 20% of CD-ROM title sales are by direct mail. Over time, these catalog companies will evolve into niche market specialists because consumers will buy multimedia from mainstream store-fronts and discount warehouses in the same way they buy their music, groceries, and Levis. To put your product into a catalog today, be prepared to pay a buy-in fee as high as $10,000 just for the listing, and then more for advertisements.
19 The Superhighway
Of course, in the end, multimedia titles, unlike groceries and Levis, will be sold from automated server-driven warehouses along the data highway. Why do you think Oracle is involved? They want to supply the tracking and point-of-sale machinery to these warehouses, or become the warehouse itself. The World Wide Web, or "Information Superhighway," is growing at greater than 300% per year; if Microsoft has its way, every television in the world will ship with a Windows operating system on its mother board or in an external set-top box that connects it to the Web. Apple would like System 12 or 22 on the mother board. When this phase shift occurs, probably by the year 2010, today's CD-ROM superstores will adapt to something unpredictably new or go out of business. Macromedia is playing in this arena, too, and will port Director to the MicroWare operating system. MicroWare is the main competitor to Microsoft's Tiger server.
20 Rough Road Ahead
This session's advertised lead-in reads "Many publishing houses are getting onto the information highway, tempting independents to sign up or sign off. As a small developer, what are your options?" Well, it's a pretty grim business for the small guys. In the buffeting, windy journey to the emergent multimedia marketplace, five-year plans last five months, then melt away like winter's road salt. Financing blows up and leaves a scattered wreckage of mortgages, marriages, credit cards, and short-term equipment leases. Efforts stall and good ideas fail. There are collisions. While the widening of retail channels and increasing demand for new multimedia products implies that many more titles will reach the marketplace, limited shelf space will never accommodate all the titles flooding in. In the competition for market share, the bar is rapidly rising.
21 What Can You Do?
You must get competitive along three fronts at once. First, your content and creative material must be excellent. Second, you must be able to successfully turn your ideas into a compelling multimedia product. Third, and this is the topic of today, you must have in your pocket a strategy that will transport you to the marketplace and get your product ONTO THE SHELF. Never launch a multimedia venture without a plan that addresses all three fronts!
22 Going to Market
You can publish yourself, or you can strike a deal with an established publisher or distributor and, for a fee, hitchhike your way to the market. Today, according to Compton's, the average CD-ROM title sells between 15,000 and 20,000 units before it dies. More than 40,000 units is a great success!
23 Publishing Deals
The Medium-size Multimedia Publishers and Corporate Giants, who already produce and distribute multimedia products and "own" shelf space, have stepped forward to offer varied deals to damp your marketing and distribution headache, but it's expensive medicine. Be prepared for tough negotiations, and bring a good contracts and intellectual property lawyer.
24 Book-style Deals
In return for a production advance and royalty stream to you ranging from 5 to 15 percent of wholesale net sales (depending upon the type of title and your track record) publishers will do marketing, distribution, packaging, billings, collections, customer service, and inventory; they may also require copyright and ownership transfer of some or all of your title or its content. This is the oft-used book publishing model: you will begin earning royalties as soon as the product ships. If your publisher can sell 20,000 copies before the product dies, you will earn $40,000. So hope for a blockbuster if you want to make lots of money. And negotiate a no-recourse advance, or you may end up owing the ADVANCE AGAINST ROYALTIES back to the publisher if your title dies before hitting break-even.
Production costs ($200,000)
Net Sales (50% of MSRP) ($20)
Royalty Stream (10% of Net)
Return to Developer ($2)
Number of Units Required to
Cover Production Costs (100,000)
25 Affiliate Labels
In an "Affiliate Label" deal with a publisher, you usually retain ownership of the title, but typically handle more of the marketing and support functions. An Affiliate Label publisher may market and distribute your title only in certain parts of the country, on certain platforms, or in certain channels. You may be responsible for packaging, marketing, inventory management, and customer service. Affiliate deals vary greatly: you may be able to negotiate funding for development and a royalty stream, or you may simply sell your completed product to the publisher at a 65 to 85 percent discount from your MSRP. Many Affiliate Label publishers require an exclusive agreement, and they may require cash outlays for marketing.
Though the Affiliate Deal appears more lucrative than the straight-up publishing arrangement, you will have to put significant effort into marketing.
- Production Costs ($200,000)
- Market Launch/PR ($75,000)
- MSRP ($40
- Net Sales (@ 50%) ($20)
- Royalty Stream to Developer (25% of MSRP)
- Return to Developer ($10)
- Returns/Defectives Fund (10% of Net)
- Net Return to Developer ($8.00)
- COG (Press, Package) & Inventory ($4.00)
- Marketing @ 2% Net Sales ($0.20)
- Cash Flow to Developer ($3.80 per Unit)
- Number of Units Required to
- Cover Up-front costs (72,400)
If your title has a clearly defined and focused audience, then agreements with channel distributors and wholesalers may be a good choice. For example, if you have a product with strong potential in book channels, an agreement with a book wholesaler such as Ingram Books may mean greater sales and royalties than an agreement with a multimedia publisher. Bear in mind that you will have complete responsibility for marketing, PR, packaging, pressing and inventory, and may have to work with outside companies and consultants. You must design the box, make sure replication goes smoothly, create channel push (that is to say, develop a product image), contact reviewers, and keep on top of your distribution. While self-publishing is still possible, shelf-space shortages make this route more difficult than in the past.
- Development Costs ($200,000)
- Marketing Costs for Launch ($75,000)
- MSRP ($40
- Net Wholesale @ 45% of MSRP ($18)
- Cost of Goods ($4.00)
- Inventory Costs ($1.00)
- Marketing Costs (15% Net) ($2.70)
- Return to Developer ($10.30)
- Number of Units Required to
- Cover Up-front costs (26,700)
27 Some Publishers
Here are some publishers who are seeking content and contracts with developers.
- Br┐derbund 415-382-4583 Todd Power
- Compton's New Media 619-929-2500 Patricia Quimby
- Creative Multimedia 503-248-6825 Len Jordan
- Davidson and Associates 310-793-0600 Mike Albanese
- Electronic Arts 415-571-7171 Kelly Conway
- Medio Multimedia 206-867-5500 Steven Podradchik
- Microsoft Home 206-882-8080 Patti Stonesifer
- Putnam New Media 703-860-3375 Chris Popenoe
- Roundbook 408-438-4222 Greg Smith
- Sanctuary Woods 415-578-6340 Michael Scott
- Timestream 510-339-2463 Donna Booher
- Time Warner Interactive 818-955-9999 Mike Gutentag
- Voyager 212-431-5199 Philippe Stessel
- Xiphias 310-841-2790 Peter Black
28 Beyond Production
I want to close with some tips aimed directly at small and start-up developers. First, finance and marketing are as critical as producing a cool product. If you don't like budgets, marketing, management, and distribution, find someone who does, and sign them up. Whether you are going it alone or dealing with a publisher, do your homework; don't get run over because you don't understand the business side.
Deep sea fishing is a great mystery for most developers. You bait a hook, pay out the line until the lead weight hits bottom, and then you wait, clueless about how many and what kinds of fish are in the sea. Sales and marketing people, on the other hand, have a strategy."
... Tay Vaughan
29 Know your Market
The marketplace will seem different to each player, depending upon approach and position. Study all its aspects and viewpoints. Before you begin developing a product, know that it will sell and to whom. Try focus groups. Or send demo disks to a hundred people who fit your audience and measure their response. Be market-driven.
30 Marrying a Publisher
Signing up for the wrong deal can take all the fun out of making multimedia.
Always ask these questions?
- Can the publisher sell to the right channels for your title?
- How many stores does the publisher sell to in each channel?
- Does the publisher's title line complement or compete with your product?
- Does the publisher treat Affiliate Label titles such as yours as well as its own in-house titles?
- Have you called references and checked Dun & Bradstreet?
- What help will the publisher give you with marketing, PR, and package design?
- Will the publisher assist you with direct marketing and catalog sales?
- Have you signed away rights of first refusal on your future titles, or simply a right of first negotiation?
- Will you be properly compensated for sub-licensing deals such as for foreign distribution?
- Have you established a rate for ancillary or related products like dolls, t-shirts, and stickers?
- And, of course, a myriad more questions...
- Access to channels and stores?
- Complementary titles?
- Rights and copyrights?
- Good treatment?
- Marketing and PR help?
- Packaging strategy?
- Catalog with ads?
- Mailing lists?
31 The Upside
Even as I describe to you a chaotic, rapidly-growing market without a track record or long-standing rules for behavior, the future of small independent multimedia developers is actually bright! SOMEONE has to make the vehicles and provide the cool ideas that will travel to the multimedia marketplace. That's you. Like the Chinese fortune cookie says, YOU ARE AT THE RIGHT PLACE AT THE RIGHT TIME TO ACCOMPLISH GREAT DEEDS.
You are in the Right Place at the Right Time with the Right Skills!
- Debbie Lefkowitz
- Donna Booher
- Kent Sokoloff
- Johann Hamberg
- Terry Thompson
- Hank Duderstadt
Graphics & Annimation