Is the game over for the CD-Rom?

Sales are surging and the market is growing, but the industry is in trouble. Richard Phillips reports

Are the wheels about to fall off the great multimedia bandwagon? Reports of the death of the CD-Rom may be premature, but it is clear that the market is in a tangle.

Dorling Kindersley - a standard bearer for "edutainment" developers - has axed more than 50 staff. Its concerns follow a tougher US market, and fears for its all-important Christmas sales.

The problem is not confined to the UK and Europe. Much of it is a ripple effect from the crucial US market, where competition is intense. As Tim Rosen, joint managing director of the UK's Omnimedia, points out: "There are over 100 CD-Rom developers in San Francisco alone, all looking for the next big hit. They can't all survive." Shelf space in the States is at a premium, and only titles sold with the narrowest of margins and the best promotion stand a chance.

To be profitable, many British producers need to sell their titles in the US as well. About half of Dorling Kindersley's CD sales are in the US, compared to about 20 per cent from the UK. With the squeeze on there, publishers here suffer.

Dorling Kindersley is only one of a string of developers to hit the buffers recently. First Information Group - which obtained a stock market quotation in March, at 165p a share, to value it at pounds 33m - axed most of its staff a month ago. Its shares currently stand at 15p. Big book publishers Penguin, Marshall Cavendish and Harper Collins have all pulled back from CD-Rom publishing.

The news from Dorling Kindersley is especially severe, as it is seen as one of the industry's great success stories. For the financial year to 30 June 1996, sales of its CD-Roms rose 62 per cent to pounds 21.2m, in only the division's second year.

The recent reversal in fortunes for CD developers contrasts with the initial hype when the market first launched towards the end of 1993. Multimedia, where CDs and computers combine text, graphics, sound and video, was seized upon by companies as the next big consumer electronics boom. Sadly, hype has been replaced by reality. Philips brought out its own standard, CD-i. That too suffered severe problems, and sales of CD-i discs have nowhere near matched Philips's expectations.

Dorling Kindersley was seen as different, with its successful graphic books and cleverly illustrated text a natural to transfer to interactive electronic titles.

And sales of CD-Roms continue to surge, albeit mostly for games titles. In 1994, CD-Rom sales in the UK were fewer than half a million; by 1995, they had leapt to around 2 million units. For the first half of this year, sales were 1.8 million. With the Christmas period, which can account for as much as 60 per cent of sales, yet to come, industry watchers are confidently predicting a bumper year, with sales hitting the 4 million mark.

Dorling Kindersley, like First Information, had concentrated on premium- quality titles, which earned glowing reviews. Many - not least in the City, where Dorling Kindersley shares have enjoyed a stellar performance over the last two years - thought that it had cracked the problem of how a book publisher could adapt successfully to the vagaries of electronic publishing.

But if Dorling Kindersley is a high-profile victim of the market, dozens of smaller producers see their bubble bursting. Shares in the six quoted companies with interests in multimedia have all been in a spin over the past few weeks, including Omnimedia and Epic Multimedia.

The unpleasant paradox to confront such companies is that while sales of CD-Rom titles grow in leaps and bounds, profits remain but a distant mirage. Where has it all gone wrong? One factor is the huge upfront development costs of a disc. A half-way decent title can cost as much as pounds 500,000. Games titles, with flashy graphics and special effects galore, cost much more.

And it is not as if consumers have not taken to the idea of CD-Roms. Most computers sold for the home now come fully multimedia equipped - or, in other words, with a CD-Rom drive, speakers, and fancy graphics capabilities. According to research consultancy Inteco, there were 1.5 million CD-Rom drives installed in home computers in 1995. This year the figure is 2.8 million, and is forecast to hit 4.5 million by the end of next year.

However, the base of installed CD-Rom drives is still nowhere near big enough to satisfy the glut of titles now flooding on to the market. And at pounds 40 a throw for the premium titles, few households are likely to buy more than three or four a year.

Tim Rosen, of Omnimedia, identifies one of the problems as the failure of retailers to respond to the market. "Retailers are trying to treat it like a mature market when it's not. And there are far too many publishers around for the number of buyers out there." Most players foresee a round of mergers, consolidation and failures before the industry is back on a firm footing again.

The companies making money are producing games - an integral part of computer culture since the 1970s, when the first video games of Pong were closely followed by the likes of Space Invaders. Bar games such as this have faded, but computer games are now deeply entrenched in computer culture. Nor is it a market that has remained confined to nerdy teenagers. Games-makers say many titles now know no age limits.

It is in home reference, or edutainment as it is dubbed that the problems lie. According to Elspa, the European Leisure Software Publishers Association, of the 100 best-selling titles only five are not games. Edward Forward, an analyst at Durlacher Multimedia, who specialises in the sector, estimates that the average sale of each title in the UK is no more than 2,000 copies, of the 10-12,000 titles now available. "Very few publishers can be making any money from their titles on these figures," he says. To recoup the costs of a pounds 500,000 title, a publisher needs to sell well over 20,000 copies.

Problems are compounded by the feeble content of many titles and the technical problems consumers face if their operating system - such as Windows 95 - is incompatible with the title. As many aspirant home computer buffs find out, the technology can be poor.

And despite the wide range of titles, very few are available to the consumer. PC World, for example, stocks up to 100 titles - most of which are games. And the ever-gathering pace of change in technology will continue to hinder the establishment of viable back-catalogues for several years.

Finally, there are other threats - such as the Internet. Dorling Kindersley has already developed a web site, where buyers of its titles can gain free access to updates and information. Another development in the pipeline is the digital video disc. Whereas CD-Roms can store up to 650 megabytes of information a DVD stores seven gigabytes - more than 10 times as much. At present, there is an industry standards war between two competing formats for DVDs, and companies such as Sony want to market them as an alternative to videos for films. But the computer industry is assessing their potential as another medium for multimedia. Then the CD-Rom may truly become an item of dead technology.