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Mass merchants captured a greater share of interactive CD-ROM sales during 1996, as hundreds of titles battled for shelf space and software suppliers weathered a shakeout that is likely to continue through 1997.

For some players in this young industry, multimedia's maturation in the mass market has been a painful process during the, past few months.

A clearer picture of the winners and losers in the highly competitive digital entertainment domain is now beginning to emerge.

The scale of growth of multimedia during 1996 was impressive and is an indication of the underlying health of the multimedia business.

The total number of units sold skyrocketed to 78.2 million in 1996, up 65% from 47.5 million in 1995, according to PC Data, a Reston, Va.-based market research firm.

Total sales generated by the CD-ROM market jumped to $3.05 billion in 1996, up from $1.9 billion in 1995, according to PC Data statistics.

Discounting's influence on CD-ROMs sales showed up in PC Data's breakdown of total unit sales by retail channel.

Mass merchants moved more units than any other retail channel, bringing in $642.3 million, selling slightly more than 20.5 million units last year vs. nearly 9.7 million in 1995. But computer superstores generated the most revenue from CD-ROM sales, taking in $871.3 million on sales of 19.8 million units.

PC Data lumps retailers that sell CD-ROMs such as Staples, Circuit City, Blockbuster and Imaginarium into a category it calls "other." This group of stores sold the second largest number of interactive titles in 1996, moving slightly less than 20 million units on sales of $708.3 million.

On the supply side of the CD-ROM business, life has been brutal.

The multimedia industry's problems were clear by last May at the E3 multimedia trade show in Los Angeles. A huge number of software companies occupied every available space in the Los Angeles Convention Center and approximately 1,700 new CD-ROM titles were announced.

Because many retailers were able to stock just a few hundred CD-ROM software skus at a time, the shelf life of many titles became breathtakingly short. What's more, the business became more hit driven and prices were often quickly slashed on any title that couldn't keep up a hot sales pace, industry insiders said.

Several retailers that were major outlets for CD-ROM software have taken big hits in recent months.

Egghead and Computer City are closing units because of weakness in the computer market. Incredible Universe, which boasted CD-ROM sections with 2,500 titles, is being shut down by its parent company, Tandy.

A number of big Hollywood studios have recently backed away from the interactive CD-ROM business. Warner sold its European interactive operations to GT Interactive late last year, and Philips Media was sold last month to European multimedia firm Infogames Entertainment.

"Overall, this business was a victim of inflated expectations," said Steve Standborg, vp of marketing for Philips Media. "In essence, 1996 was yet another year when even more publishers put out even more titles."

Standborg said that in the past few years, where there might have been room for mega-hit titles, for A-level titles and B-level titles, this year there really wasn't even room on store shelves for A-level titles.

"You sort of had to have mega-hit status," Standborg said. "The retailers had to be strict in the evaluation processes. Anything that wasn't selling after three or four weeks moved onto their D list."

Terri Bonoff, vp and gm of computer products for multimedia CD-ROM distributor Navarre Corp., agreed that the large number of mega-hits dominated prime positions in most retailers.

"There were some really strong hits, and there were maybe 20 AA-level titles," Bonoff said.

"The retailers, I believe, were really smart in bringing the big titles in as early as possible. They were able to see the movement," she said. "They were able to bring in huge amounts of backup so that they maximized the titles that were selling.

"I was impressed that retailers were able to predict which titles were going to be big hits and then get really behind them and have a lot of depth," she said.

There was no middle ground in this year's market.

"You were either a hit or you were dead," Bonoff said. "This year retailers seemed much more focused on consumer-driven demand."

Navarre took part in one of the season's biggest CD-ROM hits, Mattel's Barbie Fashion Designer, in addition to distributing Hasbro Interactive's best-selling line of electronic adaptations of its classic Parker Brothers and Milton Bradley board games.

The quick decisions about what was and wasn't selling were probably fair to the big game titles, but worked against quality edutainment and niche titles that traditionally don't generate big initial sales and take time to build volume, Standborg said.

"There was so much product out there that retailers began to apply the same judgments they would for quick lifecycle game titles to titles that simply don't behave that way," Standborg said.

Any title that took time to build, the way that Myst did two years ago, was pushed aside in this market, he said.

Even titles in genres that were in demand were affected by the glut of quality titles.

"If you didn't have a hit or a strong franchise to tie-in with, you were really dead," Standborg said.

One of Philips Media's titles released late last year was The Baby Sitters Club Interactive

Friendship Kit, a well-made title aimed at the underserved girl's software market. It was based on the decade-old, best-selling "Baby Sitters Club" juvenile fiction book series. Despite its strong brand identity and positive critical reviews, the title didn't sell as well as Philips Media officials had hoped.

"Baby Sitter's Club is doing fine. Retailers are satisfied with it and we're pleased with it," Standborg said. "But I think that as a matter of the overall circumstances in the industry it sold-in less than we wanted."

Another trend that took place was heavy promotions and price-cutting during the fourth quarter as some publishers slashed prices in an effort to keep market share.

"Across the board, those are the tools we've had to use to keep product out there," Standborg said.

GT Interactive, which is in the unique position of being the distributor of some of the hottest CD-ROM titles and the major software distributor to Wal-Mart, Kmart and Target, has been one of the clear winners in the interactive software wars.

"The mass merchant area, which we sell to, experienced very robust sales growth, up more than 60%," said Ron Chaimowitz, president and chief executive officer of GT Interactive.

"The continuing shift to the mass merchant channel is similar to what has happened in the home video and music markets," Chaimowitz said. "This is a shift we see happening as the installed base (of home computers) continues to increase."

Mass merchants also had strong sales of video games for the current generation Nintendo 64, Sony PlayStation and Sega Saturn platforms, Chaimowitz said.

"Next generation console sales are being made in Toys "R" Us, Kmart, Wal-Mart, Target and Kay-Bee. It's the toy stores and the mass merchants that are primarily selling next generation," Chaimowitz said.

Despite the strong performance of mass merchants, which was due to strong customer traffic and the fact that the big chains now have CD-ROM software in most stores, helped to drive sales, Chaimowitz said.

Kmart, for example, just finished the rollout of CD-ROM software to all of its stores last July, a Kmart official said.

But GT Interactive had anticipated weak demand during the fourth quarter and was initially disappointed in the number for Quake, Chaimowitz said.

"But once it got sold-in, the reorders were robust," he said.

In its own publishing efforts, GT will bring out more titles for set-top platforms during the next year, including Oddworld Inhabitants for the Sony PlayStation, which is being developed by GT with backing from Sony, Chaimowitz said.

Last year, GT Interactive had the No. 2 market share in front-line games and the No. 1 share in value-priced software, according to PC Data. Two of GT Interactive's games, Duke Nukem 3D and Quake, ranked among the year's top 10 best-sellers.

GT Interactive is also the primary supplier of its own and third party consumer software to approximately 2,245 Wal-Mart stores and about 739 Target stores, and supplies value-priced software under specially designed programs to approximately 2,149 Kmart stores.

In addition, the company has established direct selling relationships for its own software with major retailers including Sam's Club, Costco Cos., CompUSA, Best Buy, Egghead and Computer City.