IIMS 94 contents
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Building a market one niche at a time

William Clark
Optical Data Corporation, New Jersey, USA

Optical Data was founded in 1980 by myself and two friends. At the time, we were running a small educational film strip business. When we read about laser videodisc technology, we recognised immediate applications to audio/visual business. An afternoon of phone calls uncovered the sobering fact that there were only 28 laser videodisc players in US schools. While clearly an obstacle, we were young and foolish and chose to ignore the obvious. With the clarity of hindsight, we thought we were starting a business, but actually we were launching an industry.

Today, 13 years later, Optical Data alone has placed 65,000 videodisc players in US schools and strung together an impressive list of industry firsts. In reflecting on these firsts, I think these first cumulatively represent a strategy of "building a market one niche at a time."

In discussing Optical Data's experience, it should be noted that it is a unique story, the details of which probably are not transferable. However, we have practised some basics - most importantly the use of innovation as a competitive advantage - that I believe can be generalised.

Driving a company's growth with innovation is not for the risk-averse. In spite of Optical Data's record of innovation and growth, our company museum is littered with interesting false starts - little proprietary hardware items, software programs for CPM machines, great looking videodiscs that didn't sell. But in each of these products lie lessons. Each product was aimed at a market niche that either didn't materialise or disappeared before the product could achieve commercial success.

That's the exciting and dangerous thing about being an industry pioneer. When markets are very small, but growing rapidly, niches can appear, change, disappear or never materialise. This is a function of the small number of participants - commonly called customers - commercially active in the development of an emerging market. Their needs, often unrecognised by the customers themselves, or their whim, which are even more elusive, drive the direction of the embryonic market. The role of companies like Optical Data is to recruit new participants - make the customer base larger - usually by creating new niches with innovative products.

Eventually one of three things happens. A catalytic event takes place and the market evolves into a true mass market. The cumulative effect of cobbling niche after niche together produces a respectable market. Or the market fizzles and everyone packs their tents and goes home.

Laser videodisc, through a frustratingly slow, arduous process, has grown into a tidy market in the last few years. However, in time, it will be run over by a new storage and display technology or paved over by the Information Superhighway.

In developing Optical Data's story, I would like to first describe our use of guiding principles in planning. These are the business basics that are critically important to the survival and success of a pioneer. We have used four at Optical Data. I will then march through Optical Data's key innovations, showing how each either created niches or broadened niches. Finally, I will provide some thoughts on what I think it will take to succeed in the new, white hot multimedia game.

Let's start with the guiding principles.

The first principle is identify and scale your target audience. The most important question a pioneering company must answer is: "Are we in the revolution or evolution business?" Do our products or services require customers to make radical departures from past practices or simply extend their past practices in new, but familiar ways? Almost every product development and marketing decision a company makes will be affected by the answer to that question. As you will see, at Optical Data we felt it essential to stay rooted in the familiar while positioning our products as a professional challenge to teachers.

The answer to this fundamental positioning question is important because it immediately sizes your potential customer base. We know from research on implementing change that every population can be divided into groups of individuals anxious to change, individuals that will follow the change leaders, individuals reluctant to change and individuals who will never change. The more radical your product or service, the smaller your leader group. Overestimating your initial customer population can be disastrous.

To give a simple example, if you plan a party expecting 100 guests to arrive and only 25 show up, you probably will overspend buying food and drink.

The second principle is define your business model. We do this at Optical Data by producing two matrices. The first plots the value that can be delivered to the customer versus the cost of creating that value. In our archival videodisc business, this helps us answer the question of whether we should store 1,000 or 10,000 still frames on a videodisc, the later being a very expensive proposition. The second matrix plots the cost of promoting the product's value versus penetration of the customer base. Chasing customers in the slow to change category can be very expensive.

You put the two together searching from the right balance. It's very similar to a max-min problem in calculus. By doing this rigorously, you can avoid the READY! FIRE! AIM! problem of so many businesses.

The third guiding principle is highly tactical - plan your next innovation now in anticipation of competitor response. In most cases, your move will threaten somebody else's livelihood or future opportunities. It's usually easy to predict your competitors' response options. We like to plan ahead and identify what our response will be to their response.

The fourth guiding principle is more subjective - don't be seduced by the technology. I suspect everyone in this room shares by fascination with multimedia technology. That's a dangerous situation. I encourage you to plot yourself on the change continuum and ask the question: "How much of the market do my preferences represent?" The number will be very low. It constantly amazes me how many people in our market haven't seen or heard about laser videodisc or even audio CD.

I would now like to show you have we have practised these guiding principles to build a m~ for our products one niche at a time. As a company, Optical Data has gone through three growth periods - proof of concept, start up and adolescence.

We now are entering our fourth phase, mature growth, and not surprisingly the world is convulsing. Multimedia has arrived. Entertainment, information and education are converging in an orgy of opportunity and risk. The total international market is expected to reach $4 trillion by the turn of the century. Billion dollar mergers or acquisitions are commonplace as large companies jockey for position. Companies large and small are announcing co-development projects daily.

What does it all mean and how can you be a player? I certainly don't have all the answers, but I can share my thoughts. Over the next several years we will witness a staggering amount of investment in so-called multimedia. I think there will be some spectacular winners and stunning losers. Let's concentrate on the consumer software market, whom many of you hope to play. Given the strong growth potential of the consumer software industry, the market will be deluged with products from new and old companies alike. This product glut will produce a consolidation that will be characterised by steadily growing barriers to entry. Company size should provide some advantage. However, size alone will not guarantee success. I think the companies that prevail will most likely have several common characteristics. As you will hear, I think the one niche at a time strategy practiced successfully by Optical Data with laser videodisc is a loser in this new environment.

Growth phaseInnovationNiche

Proof of concept
Will anybody buy this thing?
Visual database (archival videodisc)College astronomy
Is it a viable business?
Apple II interactivity
Textbook correlations
Bilingual sound tracks
HyperCard interactivity
Multimedia Library

Educational microcomputers
Junior and senior high schools
Federal and state programs
Educational microcomputers (Standardise to increase penetration of all niches)
Can it be a big business?
Multiple media "textbook"
Texas adoption
Staff development

Textbook funds
$13 million science adoption
Broaden penetration with competitive response
Update and Curriculum Publishing KitBroaden penetration with competitive response

Media expertise

The key to success will be the ability to create production teams that can cost effectively translate storytelling skills and technical expertise into innovative, popular products. The three main variables such teams will work with are technology, creativity and content. In recognition of this new reality, publishers are building production studios similar to those found in the record and video industries.

Product line breadth

Product line diversity and breadth strengthens a company's ability to withstand an expected product glitch, unforeseen competitive threat or shift in market conditions. Those companies that are platform independent and can spread their fixed costs across either a wider development base or more market segments will have a distinct advantage.

Strong distribution

Several trends make it difficult for smaller publishers to compete. To mitigate financial risk, retailers tend to select titles with recognisable icons and prefer to work with financially strong publishers. In addition, the entry of mass merchants will translate into fewer titles being marketed broadly. Thus the traditional distribution channel is likely to force a contraction in the number of successful titles while significantly boosting unit volumes of "hit" titles. Once the installed base of CD-ROM drives reaches a critical mass, the distribution of multimedia software will more closely resemble that of entertainment media, such as video, audio and books.

Brand name recognition

The "star quality" of characters resident in the software or the particular credibility of the publisher will play an increasingly important role as the market experiences product glut. Those companies that have access to recognisable personalities or can develop captivating fictional characters can create product franchises.

Financial resources

Financial strength will increasingly become a competitive advantage. Development costs have steadily risen over the last few years. The rise of CD-ROM will accelerate this trend. Movie quality games cost in excess of $1 million to create.

Relationships with partners

The establishment of solid relationships represents a growing trend not just in consumer software industry but in the entire interactive multimedia/ telecommunications arena. With the emergence of content on demand systems, very few companies will be able to grow over the long term without partners and a multi-disciplined technology, product and marketing strategies.

Clearly these characteristics favour larger companies. However, I believe there is substantial opportunity for small companies and even individuals, provided they keep their wits about them and develop innovative strategies and products. This is entrepreneurialism at its finest - conquering disadvantages.

Recommended reading

Roster, Richard N. (1986). Innovation: The attacker's advantage. Summit Books.

Author: William Clark, Chairman and Founder, Optical Data Corporation, 30 Technology Drive, Warren NJ 07059, USA. Fax: +1 908 668 4929.

Please cite as: Clark, W. (1994). Building a market one niche at a time. In C. McBeath and R. Atkinson (Eds), Proceedings of the Second International Interactive Multimedia Symposium, 99-101. Perth, Western Australia, 23-28 January. Promaco Conventions. http://www.aset.org.au/confs/iims/1994/bc/clark.html

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© 1994 Promaco Conventions. Reproduced by permission. Last revision: 20 Jan 2004. Editor: Roger Atkinson
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