Riding on Big-Company Coattails
In the software industry, it's possible to gain retail presence by riding on a big company's reputation. Under affiliated-label programs, veteran software publishers sell and distribute products from selected up-and-comers. "It's a very good way for small publishers to be seen by buyers and gain credibility," says Gary Kusin, president of Babbage's, a Dallas-based chain of 247 software stores.
The big publisher typically takes 20% to 30% of gross receipts as a fee for sales and distribution. The small software company is responsible for its own product development, packaging, and most of the consumer marketing. Electronic Arts, a $162-million software company in San Mateo, Calif., has the largest affiliated-label program. A handful of other publishers in entertainment and education software, such as $60-million-plus Broderbund, in Novato, Calif., also have programs.
It was Broderbund that Maxis, now a $14-million developer of simulation-software toys, in Orinda, Calif., turned to four years ago with its first title, a program that lets users create their own city. "We were about a year into work on SimCity before I started figuring out how to distribute it," says CEO Jeff Braun. "At first we thought we'd license the software for a royalty, but everyone turned us down." In 1988, however, Maxis struck a deal with Broderbund. The experience, says Braun, had its pros and cons.
The deal from the outset seemed positive. Rather than the 20% to 30% it would have gotten in royalties from a licensing deal, Maxis was getting 80% -- or $14 to $20 for every unit of SimCity sold. (The wholesale price to retailers is $18 to $25.) "That's how we funded our growth," says Braun. Broderbund also helped Braun get extended credit terms when he needed them.
But confusion among retailers began to arise about who owned SimCity. "A lot of buyers thought SimCity was developed by Broderbund," says Braun. "It was a big problem for us, as far as gaining identity in the marketplace went." He also felt he had little control over SimCity's destiny. "Their management determines what the sales force is going to push, not you. They'll always have more concern for their programs than yours." So once Maxis surpassed $10 million in sales, Braun laid the groundwork for Maxis to become independent by March 1993. Still, says Braun, "affiliated-label programs make a lot of sense for start-ups. We got wide distribution and strong product recognition." -- Susan Greco* * *
"Affiliated-label programs can be a financing vehicle. but if you have access to capital, as we did, investing in your own sales force is worth it. Our homework proved to us that we could introduce our products to the retail channel ourselves."
-- Sally Narodick, CEO, Edmark, a $7.5-million Redmond, Wash., educational-software company* * *