From the June 26, 1995 issue of Smart

Education Software: Shut Out at Retail?

By David English

Three years ago, the Software Publishers Association predicted a boom in educational software for the home. "Everybody on earth at that point started to develop products, and now all those products are coming to the market," says Renee Courington, vice president of the kids' division at Sanctuary Woods.

The number of CD-ROM programs tracked by PC Data, a research firm in Reston, VA, expanded from 197 titles in January 1993 to 2,057 titles in December 1994. Yet PC Data's survey of retailers showed that nearly 20% of those December 1994 titles sold just 10 copies or less, and 90 of those titles sold only a single copy. On the vendor side, the situation is especially grim. Of the 912 multimedia-software developers surveyed last year by Gistics, a consulting firm in Larkspur, CA, only 4% were profitable.

As a result of the glut of new titles and the inability of retailers to stock more than a fraction of those titles, many software publishers are going belly up or drastically cutting back. RoundBook Publishing Group closed its doors before Christmas, a year after being praised by the press as one of the rising stars in multimedia publishing. Putnum New Media, a division of Putnam/Berkeley Publishing, called it quits in April—despite winning awards for its children's CD-ROM title, Big Anthony's Mixed-Up Magic. Mammoth Micro Productions, which is majority owned by The Washington Post Company, has sharply cut back its staff. Even Compton's NewMedia, one of the top CD-ROM publishers several years ago, has cut its work force by 30% and reduced the number of titles it sells from 328 to 60.

New to the Party
Despite the continuing bloodbath, new educational publishers are appearing at an alarming rate. "If I were a new publisher now, I would be sweating it, because it's really tough," says Ileana Seander, vice president of sales at Maxis. "The number of titles coming this Christmas will be absolutely phenomenal. We still have all these new publishers coming in."

The top four educational software publishers—The Learning Company, Microsoft, Broderbund, and Davidson—accounted for 41% of all educational software sales in 1994, according to PC Data. "They'll always get their products on the shelf because of their track record, but everyone else is fairly new to the party," says Courington. "There are a lot of people who have come on in the last three or four years, so they don't have the history with the retailers to guarantee that they'll get the shelf space.

"And God forbid if they're brand new, because then with no track record, they're competing with the entrenched competitors and hundreds of other new companies."

The top 30 educational software publishers accounted for 87% of sales in 1994. That doesn't leave much opportunity for the others to capture shelf space and work their way to the top.

Three Paths
New software publishers essentially have three options. First: They can go it alone by self-publishing and self-promoting their titles. Many of these companies are floundering, as they often overestimate the quality of their own products and underestimate the time it takes to become profitable. Most are also severely under-financed.

Second: They can join forces with a larger, well-established company, as an affiliated label or in a close financial arrangement. Many of today's second-tier educational publishers grew from the ranks of yesterday's affiliated labels. A few, such as Maxis and Sanctuary Woods, now have affiliated labels or strategic partners of their own.

Third: They can attempt to buy their way in by throwing money at the channel. These are usually the larger companies from other media (movie studios, book publishers, magazine publishers, and newspaper companies) or software firms strong in other genres. They're willing to lose a lot of money—up to a point—in order to establish market share and learn their way around the industry.

Small and Scrappy
Virtual Entertainment is a good example of a new software company that has been successful at the tricky business of self-publishing and promotion. It has taken the small company disadvantages—small size and lack of funds—and turned them into advantages—quick decision making coupled with niche products designed to grab the spotlight.

"Because we've a small company, we can turn on a dime," says Steve Thomas, vice president of marketing/communications. "In-house, we're still 10 people."

The company's IQ Test for Windows, which let's the user test his or her your own I.Q., has received a substantial amount of press coverage. "We don't have a huge PR firm to keep on retainer for $10,000 a month," says Thomas. "Yet we've in the Wall Street Journal, Newsweek, U.S. News & World Report, Entrepreneur Magazine, Nautilus CD-ROM, HomePC, CD-ROM Today, and PC Magazine. It's an impulse buy and a hot topic." The street price is around $14.95.

The company's next product, Milk Kap Mazes, will ride the POG game craze that's sweeping the grade schools on the West Coast. A product planned for next year, called Election '96, will serve as a field guide for the upcoming presidential elections and allow consumers to download up-to-the-minute information on the progress of the campaign via an Internet web site. "It's a shot-gun approach, but we've trying to go with what we see as popular and cultural trends," says Thomas.

United We Stand
By joining forces with large companies that already have a presence at retail, small companies can get their products into the stores more easily. In January, Syracuse Language Systems signed a copublishing agreement with Random House to help it gain market share in the bookstores.

"Because of the relationship with Random House, we don't have to invest in developing the bookstore channel," says Larry Rothenberg, vice president of marketing at Syracuse Language Systems, which specializes in language instruction CD-ROMs. "That will be taken care of, so we can focus exclusively on the consumer hardware and software channels, which is where we think we can do the best job." The company publishes a variety of language-instruction CD-ROMs.

Rothenberg believes that many early-stage publishers give up too easily on their strategies. "Sometimes that's justified—you may have picked the wrong strategy," he says. "But it does take time. With an under-capitalized company, you often feel that time is the one thing you don't have."

For Rothenberg's company, the most difficult issue was finding the right strategy. "We tried a couple of different strategies. One was an affiliated label program with Compton's NewMedia. Then we tried unsuccessfully with a kind of nationwide rep firm. It wasn't until we committed to a small number of manufacturers' reps and committed the resources and time to properly train them—and stuck with them for an extended period of time—that we started to see results."

Category Hopping
Sometimes a company that's new to a category isn't a new company at all. Corel is firmly established as the industry leader in graphics productivity software. Like Microsoft and Novell, it has launched a home division to publish educational, entertainment, and reference products. The company has ambitious plans to spin out 50 new titles in 12 months, but it will have to win over a whole new set of retail buyers.

"They know who Corel is, but they don't really know us," says Kyle Hall, the company's retail manager. "That was the big jump for us—to deal with another genre of buyer and to convince them that we can play in this market."

Hall says that Corel provides excellent support in the channel for its new home-based products. "We probably spend as much as anyone out there—or more," he says. "So essentially we bought a lot of shelf space without actually paying for shelf space."

The strategy seems to be working. Hall reports that, despite having to be accepted by a new group of buyers, Corel's mainstream accounts are signing up. "The next challenge for us is to go after the accounts that are not traditionally productivity accounts—the ones that don't know us from a hole in the ground."

Education Versus Entertainment: Each Has Unique Strengths

Many retailers expect their educational titles to sell as fast as their top-selling games. But as in the tale of the tortoise and the hare, the slow and steady competitor may be the one that finally wins the race.

"Educational products have a much longer life than entertainment products," says Sally Narodick, CEO at Edmark. "First, there's a brand new audience with each new group of kids. Second, the audience that's there is buying four to six titles a year, which is going up. Third—and the most powerful reason—educational software is driven by word of mouth referrals from neighbors, friends, kids to kids, and teachers. And word-of-mouth referral momentum has a very long life."

Narodick says Edmark's first retail products from three years ago are still strong sellers. And many of the all-time bestsellers in educational software are products such as Reader Rabbit,Math Blaster, and Carmen Sandiego, which have been around for 10 years or more.

The Learning Company regularly points out to retailers that educational and entertainment software are mirror opposites when it comes to selling cycles. The company looked at PC Data's bestsellers' list for December 1994 and found that only 20% of the top 40 entertainment titles had been around for a year, while a full 80% of the top 40 educational titles had been around since the previous Christmas.

"Educational software, because it's based on meeting an educational needs and those educational needs don't change so much over time—especially in the younger ages—those products have much longer lives than entertainment software," says a spokesperson.

Still, the pressures on retailers to have each software shelf perform as well as any other can cause them to become impatient with the category. "They play a little bit of the game that's done in entertainment, where you take it in conservatively," says Tom Hanson, vice president of home sales at MECC. "When it starts to take off—which should be anywhere between 30-45 days after release—buy big and get rid of all that other stuff that slowed down."

Some educational software publishers point out that there have been times when they wanted to but in-store positioning, but couldn't because the retailers wanted to leave those slots open for entertainment titles. Not only will a retailer sell more of a game in a much shorter period of time, but the price point is higher for the average game than for the average educational program.

On the other hand, retailers could be missing an opportunity to build a strong base of steady customers if they choose not to carry educational products. "You have to have a breadth of offering, because some customers that are there to buy DOOM might also want to buy a spelling product," says Renee Courington, vice president of Sanctuary Woods' kids division.

The Changing Channel

With the movement of educational software into the mass merchant stores, the product category is beginning to take on the characteristics of an add-on impulse purchase.

"Generally when customers decide to go to Egghead, they've already made a decision that they're looking for software, or they've already made a decision that they're looking for educational software for their kids," says Sally Narodick, CEO at Edmark. "But when customers decide to go to a Wal-Mart, they may have made a decision to get plants or to get underwear for the kid, but while they're there, they go by the software section."

If they see a title or brand name that they recognize, they often throw the software package into the basket. "It's an easy add-on purchase, so the sales per store visit goes up," says Narodick. "This customer is not price sensitive."

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