Who will be in the CD-Rom business this Christmas? Not Creative Labs if it has the choice, seems to be the message from the company chairman and CEO Sim Wong Hoo, the man we ought to refer to as Mr Soundblaster.
At Creative Lab's European forum last week, Sim was less than bullish about future growth prospects for his company, and bearish about the future for other companies in his sector. 'The multimedia sector probably went through a $1 billion loss last year,' he says. 'The biggest and best companies were those that lost the most money.'
Not surprisingly, Sim puts Creative in that category. He calculates that last year's CD-Rom high jinx cost his company $250 million. 'These sort of losses are staged to repeat themselves,' he says. 'So how can we prosper in this wacky environment when people are giving things away for free?'
You don't have to look too far to find Sim's answer to that conundrum - Creative gave up manufacturing CD-Rom drives this year, preferring to share technology with Samsung and buy what it needs in future. This means that Creative gets unlimited quantities without the associated risk. It is one example of how Creative, having grown to a $1.3 billion company almost overnight, now finds its business assailed from all sides.
If the disaster over the glut of CD-Rom drives was a hitch, it may yet turn into only a minor irritation, compared with the problems of maintaining the necessary momentum behind the sound card business.
Having risen to prominence by selling sound cards, and having reached the point where it is selling a million a month, Creative suddenly finds Intel making plans to eat at the same table. Intel's MMX architecture, by which it emulates multimedia functionality on the main processor, may only deliver low-quality sound, equivalent to that of a Soundblaster 16, but that still cuts the heart out of Creative's sound business.
The question that the channel will soon be asking Creative is whether there is a $1.3 billion business in rebadging CD-Rom drives and selling high-end sound cards or not. The answer at the moment has to be, no there isn't. But don't write Creative off just yet.
Two factors combine to give Creative continued strength. The first is its rapid response to tough market conditions. The second is its emerging business in 3D graphics cards.
Since the sky fell on its head at the end of 1995, Creative Labs has managed a job of reducing inventory and regrouping that would be beyond many companies. Holding a sale and posting a $47 million loss isn't everyone's idea of achievement, but starting from where Creative was, it's a victory of sorts.
Compared with this time last year, the quarterly results show Creative's cash position to be relatively healthy at $200 million - up 60 per cent - and inventories are down to $166 million from $286 million.
Creative admits to many problems, but not to bad faith in the channel.
'We did not stuff the channel,' Sim insists. 'But this CD-Rom drive syndrome, where the bigger you are, the more disadvantaged you are, is scaring the industry to death.'
The other step Creative has taken is a general realignment of its business into focused product groups. There will now be a multimedia group to cover audio, graphics and video, and a communications group to cover videoconferencing and Internet products.
Sim is determined that each should be set specific tasks. 'We should focus on profitability, not growth. The market can-not go on selling me-too products,' he says.
This is dangerous for a company that dominates the retail sector, where it could be argued that me-too sells. But if you separate actions from words, you realise that Creative's creativity this Christmas will mostly be on price.
In sound, the major development will be enhancements to the top-end AWE32 product and a price drop to u109 for the SB32. The idea is to ease the SB32 into the first user slot and push the ageing SB16 off the bottom of the scale, along with (it hopes) MMX. Sim predicts that 25 million users will be upgrading their Soundblasters, but why should they?
The AWE32 and the demonstrated beta of the 64-voice AWE64 are certainly impressive when compared with the playback you get from the homely SB16.
But for more than double the price, Creative has a hard sell on its hands. Can you play games and audio CDs if you only have a SB16?
Of course you can.
Marketing manager for audio products Mike Chandler, whose move from Olivetti a year ago must seem like a case of out of the frying pan into the fire, puts the figures on Creative's migration plan. 'By Christmas we expect 70 per cent of our retail business to be CD-Rom quality sound, and expect that the FM cards will quickly drop back. The SB32 will be the biggest volume card,' he says.
For the punters that want a full multimedia upgrade, marketing manager for upgrades Jan Hauer predicts stable prices for CD-Rom drives will mean a renewed push in that sector - again with the 32-bit card. 'We think that eight-speed CD-Roms will hold up through Christmas. The CD-Rom has been a fly in our ointment for nine months. Now 12-speed drives are coming along that won't recognise badly printed CD-Roms.'
In the graphics card market, Creative has a different problem. While it has continuing revenue from the sound card, whether the users want power or just price, Creative needs to win over users to the 3D graphics card market because it never tried to launch a 2D product.
This Christmas the job will get much easier with the launch of the 3D Blaster PCI card, the companion to the 3D Blaster VL card that underwhelmed the market earlier this year. But Creative accepts that most users have little understanding what a 3D graphics card does.
When a 2D card is not only cheaper, but performs faster in 2D mode than the 3D Blaster and plays all the games that a 3D Blaser would, you realise that we are in early adopter territory here. Not just early adopters, but early adopters that just want to play games.
If ID's Quake had not been optimised for 3D cards, it would be hard to name a single frontline software product to justify it. This will probably change, but for now, as Creative brand manager Chris Boyce admits, 'it is analogous to the sound card market in the early days. 3D is all about buying more and better games'.
Of the technologies on show at the forum, Creative had the least to offer in terms of originality among its communications products. The problem is that the Internet, whether used for browsing, joining an online service or making a phone call, does not deliver the sort of compelling functionality that Creative's customers will demand, and there is nothing that all the bundling in the world can do about it.
'When the standards and quality of infrastructure are acceptable, that is when this sector will really take off,' says Tony Bowers, Creative Internet products brand manager. 'Once that barrier is overcome, we are certainly talking about a mass market, but at the moment the pipes are overloaded.'
If selling 3D graphics cards harks back to the days of the original Soundblaster, then selling the Phoneblaster surely recalls the days of the ZX81. Internet telephony may one day become popular.
With a product that has unreliable connections and built-in delays, at the moment Creative is selling nothing more than a difficult way to do something that users can already to very well with a low-margin device called a telephone. But to be fair, every competitor is too.
Having been battered by technology issues in 1995, this year will see finance and marketing taking their place in Creative's priorities. 'When I got started in 1993 our sales were less than $50 million in Europe,' says general manager Michael Sullivan. 'In 1996, they were more than $350 million. We now have 120 distributors in Europe, and are going to work on those channel margins that have increasingly become an issue. I think overall we have been good, compared with companies like Hewlett Packard.' Which is rather like saying you have been demure compared with Demi Moore, but the sentiment is laudable.
These are certainly uncomfortable times for Creative, but as sales and profits rocketed in the early 90s, only a fool would have predicted that the multimedia industry would escape the laws of economic competition entirely. It is just that equally few thought the correction would be so hard and so swift.
On the horizon is another challenge for the multimedia specialists, managing a smooth introduction for the Arnold Schwarzenegger-sized CD-Rom that is DVD. The Danny De Vito-sized Sim isn't too optimistic that the sales curve will be any smoother than that of CD-Rom in the past two years. 'By pooling our resources with Samsung we can run much faster because we are not wasting money doing the same thing,' he says.
'Three years of technical advantage doesn't buy you much benefit in today's market, and although the movie industry is holding the PC business hostage over DVD, the technology is mature enough to be deployed. But we have to be careful about that CD-Rom case of eveyone coming into the business and everyone losing money.'
On the one side stands a rock - that's Intel. On the other is a hard place - an understatement for the state of the multimedia business. In the middle is Creative Labs and its focused, though vulnerable, product set. If Creative can continue to grow at the historically low rate of eight per cent, as it did last year, it will take all of the company's legendary Singaporean entrepreneurial acumen.
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