Pioneer CD-ROM Maker Hit by Hardball Competition
THE BUSINESS: Publisher of consumer-oriented CD-ROMs
FOUNDED: 1989 CLOSED: 1996
PRIMARY CAUSE OF DEATH: Maturation of nascent industry
SECONDARY CAUSES OF DEATH: Increasingly clogged channels of distribution; disappearing margins
Two years ago this month Mark Engelhardt of Grand Rapids, Minn., was a very happy man. His 17-employee CD-ROM software publisher, Wayzata Technology, had hit $2.2 million in sales, having grown by 856% in just five years. Engelhardt, the company's founder, seemed to have entered the right market at the right time. But by New Year's Day 1995, the CD-ROM industry's pioneering era was over.
Engelhardt had begun producing Macintosh CD-ROMs--almanac titles such as The World Factbook--in 1989. His personal investment of $10,000 from two credit cards had paid off. "We touched the nerve of the CD-ROM business," says Engelhardt, "and in '93 and '94 we couldn't get products fast enough to fill orders." But the ensuing explosion of titles proved more than many companies could handle.
"There were many more players than most people anticipated, and the number of titles was huge," says Kathleen Lilley, a sales manager at suburban Minneapolis's IVI Publishing, a competitor of Wayzata's that sold $8.3 million in consumer CD-ROMs last year. With so many titles available to them, consumers became more sophisticated, and the once-heady $80 wholesale price Wayzata could command for many of its products plummeted to $4. Plus, the industry went distinctly PC while Wayzata remained singularly Mac. By 1996 there were more than 20.7 million CD-ROM players in the United States, but only 3.4 million of them were Mac-based.
What's more, the explosion of titles made retail shelf space a highly valued commodity. That trend devastated Wayzata. Retailers like CompUSA demanded slotting fees from publishers. A more seasoned supplier might have anticipated such a development, but Engelhardt hadn't.
"Distributors have the upper hand because they have so much to choose from," says Lilley. "Small publishers couldn't get their foot in the door." Only the big companies could seriously compete. By the end of 1995, according to PC Data, the top 18 CD-ROM companies--including Microsoft, Softkey, and Davidson--earned almost 72% of the industry's $1.5 billion in revenues; the rest fought for the remaining 28%.
At Engelhardt's little shop, profits disappeared. Without capital, Wayzata couldn't develop titles. And without enough titles, it couldn't command shelf space. Money was scarce, and a planned initial public offering was scuttled. Revenues had shrunk to $750,000 by 1996. Payroll became impossible to meet. Soon only five employees were left. Hopes were dashed when a prospective buyer balked. Bankers pressured Engelhardt to liquidate; by April 1996 he agreed. In August he packed up and drove to California with his wife.
Ensconced on a sailboat in California, Engelhardt is now a consultant for another high-tech venture. He's philosophical about Wayzata, its rapid ascent, and its quick fall. "They say that pioneers get arrows in their backs," he says, "and that's absolutely true. By February of this year, I had taken so many hits that there was nothing I could do."