Broderbund Software, Inc.

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Broderbund Software, Inc.

500 Redwood Blvd.
P.O. Box 6121
Novato, California 94948-6121
U.S.A.
(415) 382-4400
Fax: (415) 382-4582

Public Company
Incorporated: 1981
Employees: 450
Sales: $111.77 million
Stock Exchanges: NASDAQ
SICs: 7372 Prepackaged Software

Broderbund Software, Inc. develops, publishes and markets consumer software for home, school, and small business use. The company is recognized as a pioneer and leading producer of educational software that has entertainment qualities. In addition to its educational software, the company offers software in two other consumer categories, personal productivity and entertainment. The company’s product strategy focuses on developing software for the entire family that is engaging and easy to use and has lasting market appeal.

Since the early 1990s Broderbund has embraced CD-ROM technology as its major software format and has become a leader in interactive children’s storybooks through its Living Books joint venture with Random House, Inc. Broderbund’s leading products include The Print Shop (and descendent programs), one of the all-time best-selling consumer software programs with more than eight million units sold since debuting in 1984; the Carmen Sandiego line of educational games, which has sold more than four million units since premiering in 1985; and Broderbund’s entertainment blockbuster Myst, which has sold more than one million units since its initial release in 1993. In addition to producing its own software, Broderbund also publishes the works of independent developers through an affiliated-label program. The company sells its software to distributors and directly to schools, end-users, and retail outlets; Broderbund products are available in more than 16,000 stores nationwide. The company’s distribution and sales network includes seven national sales offices, a European sales and marketing office in London, and distribution arrangements in Australia and Japan.

Broderbund Software, Inc. traces its heritage to two brothers, Douglas and Gary Carlston, who founded the company during the computer software industry’s infancy in 1980 in order to market computer game programs the older Douglas had created. Douglas Carlston was first exposed to computers during the 1960s. As a college student he worked as a part-time programmer in Harvard’s Aiken Computation Laboratory. Carlston’s interests were myriad, however. During the 1960s and 1970s he also spent a year in Botswana teaching geography and math, returned to the United States to write Beginning Swahili, graduated magna cum laude from Harvard, wrote language texts for American Express, studied economics at Johns Hopkins School of Advanced International Studies, returned to Harvard and earned a law degree, and started a two-partner law firm in Maine where he resumed computer programming in his spare time. Utilizing a Radio Shack computer, Carlston developed his first two software games, Galactic Empire and Galactic Trader, which found commercial success after being published by outside companies.

By 1979 Douglas Carlston was earning more as a programmer than as an attorney. He left his law practice and drove a ten-year-old car across country to Eugene, Oregon, where his younger brother Gary lived. The cross-country trip was apparently too much for the vehicle, given what Douglas Carlston later told Forbes: “We started the company because I was stuck without a car and didn’t have the money to buy a new one.” The name for the Carlston brothers’ new company was derived by adding the contrived word “broder” (a blend of Swedish and Danish words meaning “brothers”) to the German word “bund” (which in English means “alliance”).

With working capital of $7,000, all obtained from family members, the “brothers alliance” was thus formed to market Douglas Carlston’s computer game software directly to retailers rather than through other publishers. By mid-1980, after establishing an alliance with StarCraft, a Japanese software house, the company began marketing home entertainment software. In 1981 Broderbund Software, Inc. was incorporated as a California company.

Douglas Carlston became Broderbund’s first president and Gary Carlston was named chief executive officer. In 1981 the brothers were joined by a sister, Cathy Carlston, who became vice-president of educational market planning and was later instrumental in marketing software to schools. The company quickly grew to include more than 40 employees and sell millions of dollars worth of software annually. Broderbund relocated its operations from Eugene to California’s Marn County in 1982.

During the early 1980s Broderbund published and distributed what was principally entertainment software, developed in conjunction with freelance programmers. Concerned that the company have adequate back-up capital on hand during its infancy, Douglas Carlston courted a number of outside investors between 1982 and 1984. He raised $3 million, and while the funds were never needed, these investors later played a role in Broderbund’s initial public offering.

In 1984 Broderbund diversified, adding productivity and educational programs that the Carlstons believed consumers would want after computers gained widespread acceptance. In 1984 Broderbund scored its first major hit in the category of personal productivity with the release of The Print Shop, a pioneering “home creativity” program that enabled users with little computer knowledge to create calendars, greeting cards, fliers, posters, and signs.

Broderbund’s first educational software success came after the Carlstons observed increasing numbers of schools purchasing computers despite the limited availability of educational software. The company responded by developing and releasing Where in the World is Carmen Sandiego? in 1985. The program, the first of many Carmen Sandiego titles destined to become hits, was credited as the industry’s first “edutainment” software, blending both education and entertainment qualities. Based on a geography game the Carlston brothers had invented and played as children, the program was created in conjunction with Broderbund’s in-house developers. It soon gained widespread admiration and acceptance from parents and teachers. The educational value of the game was found in its entertaining goal: to piece together geographical and historical clues in order to track Carmen Sandiego, an international jewel thief travelling through time and around the world.

The early 1980s was a largely unregulated period for software developers. Recognizing that upstart companies sometimes created computer versions of arcade games without great consideration for royalties and copyrights, Broderbund utilized a private investigator to seek out those pirating the company’s software. The company’s efforts to protect its programs translated into several copyright infringement lawsuits during the mid-1980s, and in 1986 Broderbund won a groundbreaking suit that found that software maker Unison World Inc. had infringed on Broderbund’s copyright of The Print Shop. A federal court ruled that Unison had copied the “overall appearance, structure, and sequence” of Broderbund’s software. Broderbund won an undisclosed settlement, and the decision was later cited by other software companies claiming copyright law covered the appearance of a software program as well as a program’s basic computer code.

In 1987 Broderbund was reincorporated in Delaware and announced intentions for an initial public offering of stock. But a mid-year industry concern regarding the impact of a new IBM “personal computer” on the then-dominant “microcomputer” industry resulted in a major sell-off of computer stocks. About the same time, Broderbund earnings came in below projections and the public offering was postponed.

In 1989 Broderbund released a software program called The Playroom. This program, which later became part of the company’s Early Learning Products group, featured two mice that taught preschoolers reading and math fundamentals. That same year Gary Carlston and Cathy Carlston left the company, and Douglas Carlston assumed his brother’s former titles of chairman and chief executive. Ed Auer, who had joined Broderbund in 1987 after 23 years at CBS, Inc., was promoted from chief operating officer and senior vice-president to president.

In 1990 Broderbund surpassed the $50 million mark in annual revenues, earning $6.2 million on sales of $50.4 million. In 1991 Broderbund flirted with the idea of merging with Sierra On-Line Inc. in a deal that would have made Broderbund a wholly owned subsidiary of Sierra, an entertainment software publisher. In March of that year the two companies signed a merger agreement for a stock swap worth nearly $90 million, but soon afterwards the deal was called off.

In 1991 Broderbund debuted Kid Pix, a children’s drawing and painting program initially developed by an Oregon art professor for his son. The program proved to be an affiliated-label hit for Broderbund, which had identified a market need for such a product. For Broderbund’s 1991 fiscal year (ending August 31, 1991), sales climbed to $55.7 million as earnings inched up to $7 million. With some of Broderbund’s venture capitalists seeking to cash in their investments, in November 1991 the company went public. Investors sold a 36 percent stake in Broderbund for $11 a share. One month later the stock was selling for nearly twice its initial offering price.

In the early 1990s Broderbund benefitted from widespread interest in Carmen Sandiego in the form of numerous licensing agreements and marketing opportunities. In 1991 the company signed an agreement with Western Publishing Company, Inc. to use the Carmen Sandiego adventures to market various printed materials, including books and puzzles. That same year PBS premiered a weekday quiz show that, while it did not garner any licensing fees, exposed a daily audience of one million viewers to the Carmen chase. In 1992 Broderbund sold the live-action film rights for Carmen Sandiego and began discussions with the California company University Games to develop a board game based on the exploits of Carmen Sandiego. A year later, the Fox network debuted an animated Carmen Sandiego show. Video games, clothing, albums, and a calendar also joined the growing list of licensed Carmen Sandiego merchandise.

Broderbund’s programs continued to demonstrate their staying power through sales records. In 1992 Carmen Sandiego titles surpassed 2.5 million in sales, while sales of The Print Shop titles eclipsed the four-million-unit mark. Conversely, the products offered by most of Broderbund’s competitors had a shelf life of less than a year,

In 1992 Broderbund made several moves to expand its product line and marketing opportunities. In July 1992 Broderbund acquired PC Globe, Inc., an Arizona-based manufacturer of electronic maps and atlases, for $1.5 million. As a Broderbund subsidiary, PC Globe went on to publish Maps ‘n’ Facts, a family atlas and geographical information program. The company also added mainstream retailers like Wal-Mart to its established retail base of computer specialty stores, and the expansion of merchandising channels helped accelerate sales; for the 1992 fiscal year Broderbund’s revenues rose to $75 million while earnings climbed to $9.65 million. Broderbund’s success was noticed by the nation’s leading business periodicals. Both Fortune and Forbes lauded the company, and the latter labeled Broderbund “the country’s most successful maker of educational software.”

Gambling on the belief that CD-ROM drives would become commonplace on computer drives, Broderbund committed its future product line to CD-ROM platforms in the early 1990s. In February 1992 Broderbund released its first CD-ROM title, Where in the World is Carmen Sandiego? CD-ROM. In the spring of 1992, Broderbund released another product that reflected their belief that parents would pay in the neighborhood of $50 for an interactive storybook. Just Grandma and Me, Broderbund’s second CD-ROM product, was its first interactive children’s storybook designed to be read on computers.

For the 1992 holiday season, Broderbund’s titles dominated the computer software charts. Five of its programs claimed spots in the list of the top ten best-selling software programs. Broderbund’s holiday hits included three of the company’s six Carmen Sandiego titles as well as Kid Pix and The Playroom.

In March 1993 Broderbund’s affiliated-label program was dealt a blow when its largest affiliated label, the California developer Maxis Software, went independent after recording more than $10 million in annual sales. Maxis had been with Broderbund since 1988, Broderbund’s own revenues for the 1993 fiscal year mushroomed to $95.6 million, garnering the company $13.6 million in earnings.

Broderbund took strides to expand beyond its traditional market of 10- to 14-year-olds in 1993. Targeting an older teenage audience, Broderbund debuted Myst, a non-violent adventure-exploration game that encourages players to employ puzzlesolving skills in a surrealistic world; and 3D Home Architect, a program designed to assist amateur home designers and remodelers in creating rooms or houses. The company also adopted the moniker Early Learning Products for its growing line of educational software programs for children aged three to ten.

Between 1991 and 1993 the number of CD-ROM software titles in the nation grew from about 20 to 400 and CD-ROM software grew to claim about a ten percent stake in the $750 million consumer software market. Broderbund’s gamble on CD-ROM technology began yielding concrete dividends in 1993. By the latter part of that year, the company’s first two CD-ROM interactive storybooks— Just Grandma and Me and Arthur’s Teacher Trouble —were among the top ten best-selling CD-ROM titles nationally.

To further expand on and accelerate its publication of interactive storybooks, Broderbund agreed in September 1993 to a joint venture with Random House, Inc. to create interactive multimedia storybooks. The storybook series, called Living Books, represented one of the first ventures between a leading consumer software publisher of interactive children’s books and a large print publishing house. Living Books was designed to expand existing distribution networks for both companies, capitalize on the growing market for interactive software for children, and accelerate development of each company’s electronic book plans. In attempting to captivate young readers while at the same time allowing for an interactive multimedia experience, Living Books titles adopted such features as animated illustrations, multimedia sound effects, and options for the reader. Objects on the screen could be activated through use of a mouse or stories could be narrated, with text simultaneously displayed in English, Spanish, or Japanese.

In December 1993 Broderbund stock—along with the stock of a handful of other software makers—dropped $6 to $34.50 after the company announced it was taking a cautious view towards future growth. The announcement came at a time when the personal computer software market as a whole was making a transition from floppy disk to CD-ROM format. Concerns about Broderbund’s future stemmed from a decline in sales of Broderbund’s older software titles on floppy disks as well as the entrance of Microsoft Corporation into the home software market with programs similar to Broderbund’s Kid Pix and The Print Shop. During the 1993 holiday season, Broderbund’s sales of CD-ROM products rose while sales of floppy disk products and affiliated-label programs fell.

The company’s stock eventually rebounded into the $41 range. In February 1994 Broderbund agreed to be acquired in a $400 million stock swap by one of its largest competitors, Electronic Arts Inc., which had three times the sales of Broderbund. The merger was expected to create one of the nation’s largest consumer software production companies. The company would serve the home entertainment-education market for both computers and video game players by combining Broderbund’s high technology and expertise in interactive software with Electronic Arts Hollywood productions skills and experience providing entertainment and video games for such companies as Sega, Nintendo, and 3DO. The merger also aimed to bolster each company’s durability against growing competitive threats: Microsoft, which was impinging on Broderbund’s turf, and Acclaim Entertainment, a video game manufacturer and Electronic Arts competitor. Broderbund also hoped that the merger would encourage international expansion opportunities and additional hardware platforms for its software.

In 1994 Ed Auer retired and was replaced by William McDonagh, who had joined the company in 1982 as controller. He advanced through the ranks to the positions of chief financial officer and senior vice president before becoming president. That same year Broderbund created a new business development department to pursue alliances with other companies and increase international sales, which at the time represented less than ten percent of all revenues. During an internal reorganization in 1994, Broderbund also partitioned its program development operations into three separate segments designed to address the company’s principal market categories: early learning, entertainment and education, and personal productivity.

In the spring of 1994 the joint-venture Living Books took substantial steps to expand its available titles. It outmaneuvered its competition to acquire the multimedia rights to the books of Dr. Seuss (Theodore Geisel) from the author’s widow. Random House, Broderbund’s partner in Living Books, had been the exclusive publisher of the 48 Dr. Seuss print books, which had sold over a total of 200 million copies. That same month Living Books also acquired world multimedia rights to the “First Time” series of The Berenstain Bears preschooler stories, which had sold over 165 million copies since debuting in 1982.

In May 1994 Broderbund pulled out of its merger agreement with Electronic Arts after the stock value of both companies took a sizable drop. The devalued Electronic Arts stock reduced Broderbund’s take in the deal by nearly $100 million. Broderbund agreed to pay Electronic Arts $10 million to terminate the merger; nonetheless, Broderbund stockholders welcomed the move and the Broderbund’s stock value rose $6.50 to $41.25, approximately the level it had been trading at prior to the merger announcement.

During the 1994 fiscal year, Broderbund published 68 new products—50 percent more than the previous year—in part because of the need to address the diverse platform needs of its customers. Broderbund’s revenues for the year rose to $111.7 million while profits slid to $11 million. The company’s bottom line suffered from the more than $10 million in charges related to the terminated merger with Electronic Arts. Earnings were bolstered by sales of CD-ROM software, which proved less expensive to produce and yielded a higher profit margin than floppy disk programs.

By the beginning of its 1995 fiscal year (September 1994), Broderbund had released a full line of CD-ROM software. A CD-ROM version of Myst that featured 2,500 original 3-D graphics and an original soundtrack became the company’s most popular product that year. Broderbund hailed it as the first ever blockbuster CD-ROM entertainment software program. By October 1994 the company’s stock had risen to $57.50 on the strength of the popularity of CD-ROM-driven computers and Broderbund’s Living Books, Early Learning, and Myst programs. Myst was credited by some analysts as an important reason for the substantial increase in sales of CD-ROM-based computers during the 1994 holiday season.

Broderbund entered 1995 with new generations of popular software, including The Print Shop Deluxe CD Ensemble and 3D Home Architect. The company also announced plans to release its first Berenstain Bears interactive storybook and other new entertainment titles. Its Myst II sequel to the original Myst program was targeted for release in 1996. For the first six months of fiscal 1995, Broderbund posted revenues of $98 million—better than all of 1993’s sales—and earnings of $21.9 million—better than earnings from any preceding full year. Named a Business Week “Hot Growth” company back in 1993, the magazine noted that by early 1995 Broderbund had brought investors a two-year return of better than 180 percent.

As Broderbund moved towards the conclusion of its 1995 fiscal year, the company continued to benefit from a number of market factors: rapid acceptance of CD-ROM-based computer drives (shipments jumped from 16.5 million in 1993 to 53.9 million in 1994), growing company name recognition, and the sustained popularity of Myst, which maintained its place as the country’s top consumer software program during the first three months of 1995. Broderbund expected to increasingly benefit from a more cost-effective market environment as hardware platforms consolidated, rendering unnecessary various program versions for DOS, Windows, Macintosh, floppy, and CD-ROM platforms. Most future Broderbund products were expected to be released for CD-ROM-based Macintosh or CD-ROM Windows platforms.

As Broderbund looked to 1996 and beyond, the company expected to continue to capitalize on its historic strengths: its ability to identify emerging consumer interests, utilize emerging technology, and develop software that can make learning fun, appeal to third parties like parents and teachers, and sustain popularity. In its drive to publish popular software, the company also expected program development to continue to focus on interactivity and ease-of-use design ingredients.

In terms of its growth prospects for the remainder of the 1990s, Broderbund appeared well positioned to benefit from several continuing trends: the growth of CD-ROM-based computers; the increasing affordability of high-powered home computers; and the company’s expanding merchandising network. With both history and newer trends on its side, there was strong reason to believe that if the education and entertainment software industry continued to meet its projected annual growth rates of 25 to 30 percent for the late 1990s, Broderbund’s growth could at least follow suit.