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Big Sales, Small Profits For Kids’ Software Market

After a breathless year of consolidation and net-to-zero sales, kids’ software vendors are regrouping with a sharpened focus on branding and marketing.

The flurry of mergers, including Mattel’s purchase of The Learning Company (TLC) and Purple Moon, and Havas Interactive’s purchase of Cendent, has resulted in 80% of the kids’ software market now going to two top players, according to industry observers. And while there is no slowing in demand for kids’ entertainment and educational software, profits are close to nonexistent in a market where shelf space is increasingly scarce and margins razor thin.

According to Ann Stephens, president of PC Data, Reston, Va., kids’ software sales this year should continue to see double-digit gains, on top of 36% unit growth in 1998 over 1997 and 19% growth in dollars. Total unit sales for 1998 reached 31.4 million and dollar volume totaled $701.5 million.

Brand-name products such as Blue’s Clues, Teletubbies, Rugrats and Barbie continue to be big sellers, but profitability remains a key challenge for vendors.

“Ten years ago anyone could come out with an edutainment title, and likely they would make money,” Stephens said, “Today you would be hard pressed to find any software company that admits it is making money, and probably 80% of the products out there do not make money. It’s a really tough business.”

Valerie Rice, Humongous Entertainment’s new business development VP, said: “There are more new releases with less shelf space at retail. Computer City left the business, and Toys ‘R’ Us closed some stores. Retailers have a shorter and shorter window for products that face out on the shelves. If they don’t sell, they either come back or go to a less prominent place in the stores.”

But profit opportunities exist for vendors, Rice added, “if you have a great brand and the means to play the retail game, which is spend the dollars to build the brand.”

Heading into E3, it is no surprise that branding and marketing initiatives are heating up, with companies including Disney Interactive and IBM getting more aggressive on both fronts.

Disney is expected to announce a new initiative that consists of redesigned software packaging to accentuate the Disney name and characters. In addition, the company is improving its retail relations, calling on retailers directly and adding new merchandising programs. The initiative kicks off in June with the release of three Tarzan titles, followed by the release of the company’s first toddler program, Winnie the Pooh Toddler.

In April, IBM announced a licensing agreement with Workman to publish a line of Brain Quest-branded CD-ROM titles for kids. Workman has sold 14 million Brain Quest trivia quiz card decks, and IBM will combine its technology with the Brain Quest content in a new CD-ROM series to preview at E3.

In other branding efforts, The Learning Company said it will continue to push its Oregon Trail Series and plans to release “totally new products in that family that focus on real-life decision-making and real-life adventures in modern-day products,” said Karen Davidson, upper elementary marketing director. Though she didn’t provide titles and pricing, the releases should be in stores by the end of June.

Mattel, which has lead the charge in branding, marketing, and adding new brands through acquisition, will introduce its largest number of titles ever this year. These will be under new brands, reaching into new age groups – including the preschool market with Sesame Street and the adult market with a title based on the book and Mattel board game, Men are From Mars, Women are from Venus.

Russell Kelban, marketing director for Disney Interactive, said the company’s new marketing plans will “leverage the Disney brand in a major way, which we have not done in the past. You will see a large Disney logo across the top of the package, and the second read on the box identifies the category.”

“We now separate them by color,” Kelban detailed, “where learning is red, games is a silver brush-metal look, and creativity is a white box with a rainbow Disney logo. Then you’ll see the characters in the title will be featured through the three-circle Mickey head logo, which is now being used company-wide.”

Among the new Disney titles are the Tarzan-themed CD-ROMs slated for release June 15, including: Disney’s Activities Center – Tarzan, which allows kids ages 4-8 to interact with the characters via jungle theme games; and Disney’s Tarzan Action Game, for age 8 and up, which lets players take on the role of multiple characters from the Tarzan movie. A third title, Disney’s Print Studio, has an estimated street price of $19.99, while the first two titles have estimated street prices of $29.99.

Disney’s first toddler title is set for release in August and is part of a new series based on Winnie the Pooh.

Winnie the Pooh Toddler (18 months to 3 years) includes five activities such as balloon-popping, dancing and singing. Winnie the Pooh Preschool (ages 2-4) is based on a Pooh adventure that teaches a lesson in friendship. Winnie the Pooh Kindergarten (ages 4-6) is based on the story of Christopher Robin going off to school. Each of the three titles has an estimated street price of $29.99.

Other new titles announced prior to E3 include:
• Blue’s 123 Time Activities from Humongous Entertainment, slated for release in June and based on the popular Blue’s Clues TV show for pre-schoolers. Jointly produced by Humongous and Nickelodeon, it is the third title in the Blue’s Clue’s CD-ROM series. Estimated street price is $19.99.
• Scholastic’s new I Spy Spooky Mountain, for kids 6-10 years old and I Spy Junior, for preschoolers. Set to ship in August and October, respectively, each title carries a $29.95 suggested retail price.
• And The Learning Company’s Reader Rabbit’s Complete Learn to Read System for kids ages 3-7, released April 12. The title comes with two sets of flashcards, a 128-page workbook, and two CD-ROMs at an estimated street price of $69.95.

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