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SoftKey Sells Software Just Like Other Commodities

November 1, 1995

Forget about chocolate bars, trashy novels or comic books. SoftKey International Inc. believes your next impulse purchase should be a slick, new package of software for your home computer.

Most consumer software is sold at computer superstores like CompUSA Inc. Producers typically aim to develop innovative ``killer applications″ that can command fat prices of $45 and up. But SoftKey is growing fast by turning software into a commodity, selling plain-vanilla items such as CD-ROM calendars for as low as $12.95 at Kmart Corp. stores, supermarkets and convenience stores.

Now SoftKey wants to apply its strategy to educational software, with two audacious bids for Learning Co. and Minnesota Educational Computing Corp. valued at a combined $950 million. They may look like a bit much to swallow for SoftKey, which is based in Cambridge, Mass., and is expected to have only about $161 million in revenue this year.

What the skeptics don’t understand, says SoftKey, is that software is a lot like candy bars, clothing or soap. ``We take our lessons from Nabisco and Procter & Gamble and apply those same marketing principles to our products,″ says Kevin O’Leary, president and founder of SoftKey, which has introduced products like a CD-ROM version of the Sports Illustrated Swimsuit Calendar and a Muppets calendar, both for $29.95. Mr. O’Leary’s first job out of business school was working as assistant brand manager for Nabisco.

As the book publishing, recording and home-video industries have seen product prices fall and become more standardized as those technologies matured, industry analysts say the CD-ROM publishing industry is headed for lower prices and consolidation in the number of players. And SoftKey executives say they are determined to be at the forefront.

``While having SoftKey software is not something a retailer would necessarily advertise, there’s certainly room in the market for companies who want to sell software by the pound, appealing to impulse purchases by customers who are intrigued but don’t want to drop $40 for a piece of software,″ says Casey Dworkin, publisher of Retail Price Week, which tracks pricing and distribution of consumer software.

In educational and ``edutainment″ software for the home, SoftKey sees a hot growth market. In the first six months of 1995, software sales in that segment were approximately $200 million, up 35 percent from last year, analysts say. Some 33.2 million U.S. households own personal computers, about 17 million of which are equipped for CDs. But in a full 40 percent of homes with children where PCs are being used, parents don’t buy separate software for the kids, notes Thomas Miller, vice president of the emerging technologies research group at Find/SVP, a consulting firm in New York that recently did a study on home use of computers.

``A child may use a given piece of software for six or maybe even 10 months, but then, boom, it’s over,″ Mr. Miller says. ``So it essentially becomes a disposable. If you can lower the price threshold so software costs no more than a paperback book, then you may trigger some purchases from that 40 percent of parents who perhaps didn’t want to spend $40 for a disposable.″

SoftKey’s proposed acquisition of Minnesota Educational, already approved by both boards, is expected to go smoothly. But the future of its unfriendly bid for Learning Co. is uncertain. Learning Co. says it hasn’t decided what to advise its shareholders yet. Broderbund Software Inc. says it remains committed to its planned acquisition of Learning Co., which was agreed upon in July.

But with the explosion of multimedia computers _ last year the number of CD-equipped homes grew 241 percent _ the time may be right to adopt a SoftKey-style mass-consumer-product marketing approach to software sales, analysts say. ``Multimedia has opened up the software market to the mass consumer because 1/8it 3/8 makes using a computer almost as easy as watching a TV,″ said Betty Lyter, an analyst at Montgomery Securities. ``With PC manufacturers taking a mass-market approach to it, it’s a very logical step that the consumer software market becomes a consumer market as well.″

SoftKey’s approach is virtually identical to that a laundry-detergent maker might take, marketing a premium-brand version, a lower-end brand and a generic version of the same product. If SoftKey succeeds with its bid for Learning Co., it intends to take its flagship Interactive Reading Journey software program, which currently sells for around $80, and repackage it for a number of different price points, says Mr. O’Leary.

He notes that in the past, when the company reduced prices on products from $49 toward $12.95, unit sales jumped into the hundreds of thousands from 20,000 or 30,000. That kind of development is going to accelerate the downward push on prices throughout the industry, analysts say.

SoftKey also borrows a page from pantyhose marketers that set up their own Lazy-Susan-style racks in retail outlets and assume responsibility for product selection, mix and inventory. ``What drives retail is gross margin per linear foot of shelf space,″ says Mr. O’Leary. To maximize that, SoftKey was the pioneer in introducing revolving racks with its software packaged in the same standard CD cases used for music CDs, tripling the amount of product that can be displayed in the space.

Critics question whether SoftKey has the same commitment to new quality programming as it does to repackaging old products in new ways to make more money with them. The basic technology driving their line of calendar products was developed by a company that had been acquired by Spinnaker Software Corp., which SoftKey in turn acquired in early 1994. ``It’s pretty fast and dirty software development. Some of the products are pretty rough,″ said one industry executive.

Still, the strategy seems to be working for SoftKey, which has emerged as the second largest seller of software into the consumer market after Microsoft Corp. in terms of units sold.

SoftKey Chairman and Chief Executive Michael Perik says the company has a history of managing acquisitions. The creation of SoftKey International itself was the product of a three-way merger in 1994 of then SoftKey Software Products Inc. with WordStar International Inc. and Spinnaker Software. And in the past year and a half, the company has pushed through another six acquisitions valued at around $90 million. Asked whether SoftKey plans still more acquisitions, Mr. Perik responds with an unequivocal, ``Yes.″

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