CDs draw players into £20bn game

David Bowen examines the prospects for the new face of the software leisure market

WHEN Fergus McGovern was 18, in 1984, he was trying to sell a computer game called Devil's Crown to potential distributors. They would not see him because he was so young, so he did something only a youngster would do. He hired a midget, dressed him up as a demon, and sent him into his targets' offices throwing smoke bombs and fire crackers - and leaving sealed boxes on the buyers' desks.

Many bomb scares later, during which "we got into a bit of trouble", the orders started coming in. Every one of the companies opened the box, found the game, and liked it. Mr McGovern is now managing director of Probe International, a computer games company based in Croydon that has been valued at £50m. He and his brother own the whole company - and he is just 29.

It was stories such as this that made Pearson, the media and entertainment group, pay £310m for Software Toolworks of California last May. It was convinced that the way to real riches lay in the ability to develop computer games - and that it was worth paying 70 times historical earnings for a company with 180 programmers.

It was wrong. Mindscape, as Software Toolworks is now called, made £3.5m profit in the last seven months of 1994, and Pearson's earnings were diluted drastically. But Lord Blakenham, the chairman, said that Mindscape would come into its own because of its expertise in CD-Rom, which he described as an "explosive market".

There is no doubt that Pearson paid far too much for the Californian company. BCE, a small, British, quoted company, paid a mere £14m for two games developers with programmers between them. Pearson might also have done better shopping closer to home. Between 30 and 40 per cent of all computer games are written in Britain: it is one of the few industries where the UK leads the world.

There is equally little doubt that Lord Blakenham's analysis is correct - which is why there has been a rush of acquisition activity. "CDs are absolutely huge," Mr McGovern says. "Over the next three years, they will grow massively."

David Tabizel, multimedia analyst for Durlacher, the London stockbroker, believes that sales in the "global leisure software market" - the vast bulk of which is games - will grow from £14bn last year to £20bn in 1998. And the share of CD-based games, now 10 to 12 per cent, will zoom to 75 per cent as they blast the cartridge-based Super Mario and his like off the screens.

Right now, CDs are one of the few growth areas in a limp computer games market. When a number of groups announced a year ago that they had plans for new, ultra-powerful CD-based machines, the market for existing equipment went into freefall. In the UK, it fell by 30 per cent in 1994 and several companies, including Software Toolworks and Sega, were lumbered with piles of unsold cartridges.

At the same time, sales of CD-Roms - which are played through personal computers - took off. A year ago, 31 per cent of personal computers sold in Britain had CD drives; now 78 per cent do. There were 375,000 CD-Rom drives in the UK at the start of the year, Mr Tabizel says. Now there are 600,000, and he expects the million mark to be cracked in June.

Until now, these PC-based devices have not been fast enough to join the "zap 'em" market - they have concentrated on information, sophisticated but gently paced games, and "edutainment", such as multimedia encyclopaedias. As PCs become more powerful and disks spin faster, that is changing: Mr Tabizel believes CD-Rom will have the biggest share of the computer games market by 1998.

But the most powerful boost for CD-based games will come in the autumn when the long-promised specialist machines finally arrive in the shops. Sony is coming into the market for the first time with its Playstation, Sega is launching the Saturn, 3DO (a company backed by Matsushita) has a powerful new machine, while Atari - working with Leicester-based Virtuality - is producing a virtual reality version of its Jaguar.

Next spring, after several delays, Nintendo will launch Ultra 64. This will initially use cartridges but Mr Tabizel believes it will quickly convert to CDs.

As sales of these systems gather pace, demand for software will build. "I think the boom will come in 18 months time," Mr McGovern says. "It will be a very exciting time."

CDs are replacing cartridges because they cost about 35p to make instead of £20, and because they can be turned out at 24 hours' notice. This makes them temptingly easy to pirate, but has great commercial advantages - not least that companies will never again be lumbered with warehouses full of unsold games. In theory, it should mean that the £50 price tag of cartridge games can be reduced, though this depends less on cost than strategy.

At the moment, games companies cross-subsidise their machines with their software. This is why the Saturn, which is more powerful than a Pentium personal computer, sells for £250 instead of £1,500.

But however fast the technology develops, a vital element in the game- production process is slowing down. The first computer games were produced in a few weeks by one person; current ones take 30 programmers up to 18 months and £1m to produce.

Shrinking supply combined with expanding demand inevitably means that the value of new games - and that of the companies that produce them - will rise. That is why giants such as Pearson, Sony and Time Warner, as well as specialist UK groups such as BCE and Centregold, have been paying 20 to 30 times profits for publishers and developers. Many of the targets have been British: Blockbuster has taken on Virgin Interactive, Electronic Arts has bought Bullfrog of Guildford, and BCE has bought both Rage of Liverpool and Software Creations of Manchester.

Computer games can be a rapid route to riches. Three years ago Paul Finnegan put £10,000 into a new company called Rage and employed six people in Liverpool's Albert Dock. They developed Striker, a football game that has sold 700,000 copies, generating £2 to £3 per copy in royalties. Last year Mr Finnegan made £1.2m when he sold out to BCE.

The British have long been leaders in software: something to do with the education system encouraging the flexible mind, experts say. But games skills come from a more specific source: the boom in home computers in the early 1980s. If one man can be given credit, it is Sir Clive Sinclair. The Sinclair ZX81 was crude by today's standards, but it did have one unusual feature - users could programme it. While American kids bought Nintendos, sealed units that ran games and nothing else, their British equivalents had Sinclairs.

Just as the development companies have become more valuable, so have their employees.Salaries of £40,000 to £50,000 are not uncommon. City slickers eat their hearts out. The people to envy no longer wear suits. They are serious - and seriously clever - young men in jeans and anoraks.