New Pacts and Their Impacts - Industry Trend or Event - Column

Emedia Professional, Dec, 1999 by Debbie Galante Block

Recent months have seen the replication world careening into consolidations, and this ever more evident trend may have many content providers and publishers concerned about its consequences.

With all of the shuffling going on, and only so many replication lines to go around, who is to say which ones will roar on at their usual pace?

But December and the months preceding are the busiest times of any year for replicators and publishers alike, and software companies always face capacity constraints brought about by a strong season. According to replicators, any challenges in meeting production demands can be attributed to volume, rather than to consolidations or mergers, and would be happening anyway.

If any effects are being felt as a result of industry volatility, they should be positive in nature, according to the media manufacturers, equipment suppliers, and major replication houses. No one wants to admit vulnerability, and indeed, whatever the shakeups afoot, software publishers contacted for this article confirm replicator claims that they have not felt the stresses of industry change.

HOW MUCH TUSSLING CAN THE SOFTWARE BIZ TAKE?

In all of the industry tussling, one statement has echoed continuously throughout the frenzied confines of replication shops everywhere: "In order to get the best possible service all year, long-term relationships with vendors remain key for content providers." It's also a way of avoiding impersonalized service from an all-too-large vendor. This year, console game sales are expected to break records, PC application orders and sales have continued to increase, the music industry has the likes of Ricky Martin's "Livin' La Vida Loca" saturating the airwaves and jumping off retail shelves, and Hollywood has DVD exploding in the title marketplace. All of these developments have complicated matters for replicators trying to build a DVD business while still keeping their loyal CD customers satisfied. Most replicators say they will not drop a loyal client to service a one-time offer, no matter how lucrative--particularly during the busy season.

The optical disc production scene will certainly feel capacity constraints strained when Nintendo enters the market with its first DVD-based systems. How many millions of DVDs will they need? "You are going to have different businesses competing for available capacity, and I expect that trend to continue," says Sonopress president Bob Spiller. "Our business profile is geared toward working on a limited set of very large customers. If somebody comes to me and wants to buy raw discs, that doesn't thrill me." He suggests this analogy: "You've got somebody sitting in a steak restaurant drinking Cokes all day. At the end of the day, there's a line outside the front door waiting to buy a steak dinner. That's the heart of your business, and those dinners mean more to your business. Still, it's important to keep a customer promise. If we have to hold capacity available for those partners to deal with their ups and downs, we will do that."

Like SonoPress, Metatec looks at customers as partners, according to Rich Baker, director of corporate communications. What a customer is really buying from Metatec is a capacity insurance policy. "They are buying the availability of capacity year-round," Baker says. "They know they won't get shut our during the busy season."

Sean Smith, vice president of sales and marketing for JVC Disc America, says with the seasonal capacity crunch in full swing, he is told that replicators are turning away small and medium-sized clients. "We receive no less than 30 calls from disgruntled customers who were asked to leave by their current replicator," says Smith. "Industry consolidation leaves publishers fewer choices, but there still remains a plethora of small replicators to choose from. The challenge these clients face is peak capacity pricing. I am hearing replication quoted as high as $.70 to bring on peak business. Some clients have little choice but to pay the premiums. I am finding that the prospects who requested impossible price reductions last spring are the same clients who are looking for capacity today." CD manufacturers share the same woes as their customers during the busy season when they are looking to outsource some of their work to competitors.

Spiller says only certain companies will sell to them because it is only a one-time deal.

NEW MERGERS, NEW MILLENNIUM, NEW MARKET?

Despite the emergence of a handful of new powerhouse replicators that have been created as a result of mergers and acquisitions, the industry is still competitive and its dynamics should change very little in the first stages of the new millennium. Replicator consolidations, such as Cinram's purchase of Disc Manufacturing Inc., Technicolor's purchase of Nimbus, Metatec's purchase of Imation, and most recently, Allied Digital Technology's purchase of Vaughn Communications, have made the industry come full circle. In the early 1980s, much as today, there were only a handful of replicators.