New Technology Shelves Software Distributor
BY Jim Kling
K. C. Aly, former CEO of MicroDisk Services, explains how his software duplication and distribution company went under because it failed to keep up with the shift from disks to CD-ROMs.
THE BUSINESS: Software duplicator and distributor
CAUSE OF DEATH: Failure to respond to software shift from disks to CD-ROMs
In 1983, K. C. Aly's wife, Karen, created an educational software program. But she and Aly couldn't find a company to help duplicate and package it.
"We had to do it ourselves," Aly recalls. Though that software didn't survive, the experience gave him another idea: "Software companies aren't going to want to spend their weekends stuffing disks in a machine and shrink-wrapping boxes. But we can do that." Thus was born MicroDisk Services. As the software industry blossomed, publishers came to MicroDisk to duplicate disks and assemble software packages. Later, Aly would ship the finished products to distributors and end users. By 1991, when Aly sold MicroDisk Services to a group of investors (who rechristened it Prism Group Inc.), it had revenues of about $7 million a year.
Aly had visions of transforming it into a national service company with future earnings as high as $125 million. But the software-manufacturing and -distribution business had become vastly more competitive as the software industry grew and publishers sought to increase their profit margin by putting pressure on companies like Prism. Simultaneously, changes in media platforms--from software disks to CD-ROMs--eroded Prism's profit margin. While $100,000 worth of disk-duplicating equipment could pay for itself in a few good weeks, with CD-ROMs "we were looking at millions of dollars' worth of capital-equipment investment and skinny margins," Aly says.
So Aly conceived a plan to acquire several regional suppliers and transform Prism Group into a service company that could take orders from customers and distribute software electronically, taking its cut from each transaction. That strategy, he reasoned, would shield Prism from the costs wreaked by future changes in media platforms. Prism's board of directors didn't agree. The board viewed Prism as a purely manufacturing business and focused on increasing sales and streamlining operations. In 1993, Aly was ousted as CEO.
As software companies switched to CD-ROMs, business steadily declined. By 1995, Prism Group had acquired another software manufacturer and formed a subsidiary, Prism Software Production. Nearly half of the subsidiary's $21 million in sales came from three customers, and that summer the largest one--WRQ Inc., a software developer in Seattle--dropped Prism Group for a competitor.
Trying to catch its second wind, in May 1995 the company had brought Aly back as CEO to pursue something close to his original plan to turn Prism into a full-service order-processing, manufacturing, and distribution company. After some debt consolidation by Aly, the company's performance improved--reducing its net loss from more than $5 million in 1994 to about $860,000 in 1995--but Prism's considerable debt and a slow market transition torpedoed the recovery. The company closed its doors in 1996. Much of its assets and many of its employees transferred to Pac Services Inc., a Redmond, Wash., competitor.
The experience was a bitter pill for Aly, who is currently a strategy consultant. If nothing else, he says, he learned to diversify, counting among his current clients computer software, hardware, and even chemical companies.