Children's Software: A Humongous Challenge - For Headbone, Too -- Firms Take On Big Players

In the animated world of children's computer software, a yellow fish named Freddi looks for kelp seeds and a precocious boy named Elroy tracks a robotic insect.

In the real world of the software industry, the people who created those characters are caught up in a much more serious quest: winning customers in a market crowded with competitors.

Freddi's Humongous Entertainment and Elroy's Headbone Interactive, both based in the Seattle area, are gaining attention as up-and-comers in a market dominated by worldwide companies, including Microsoft, Disney, Capital Cities/ABC, Sierra On-Line and Simon & Schuster book publishers, a subsidiary of Viacom.

Two recent signs of competition in the market: Microsoft announced it was dropping prices on all its consumer software, including the popular "Magic School Bus" programs for children; and a niche leader, The Learning Co., was bought by giant Broderbund Software of California, maker of the best-selling "Where in the World is Carmen Sandiego."

Humongous and Headbone don't have the budgets or visibility of Microsoft and Disney, or even the track record of Redmond-based Edmark Corp., a 25-year-old leader in the children's market. But their software is earning national reviewers' awards, and their phones are ringing with offers from investors and larger companies interested in owning a piece - or all - of their future.

Their challenge now is to win more shelf space in stores, the loyalty of parents and ultimately more market share.

"In an arena with a lot of big players, a lot of money, the challenge is to get visibility and rise above the noise," said Humongous Vice President Alex Brown, head of marketing.

Woodinville-based Humongous was founded three-and-a-half years ago by Shelley Day and Ron Gilbert, two former game designers who met while working at LucasArts Entertainment in California. Humongous, which estimates 1995-1996 sales at $10 million to $15 million, now has eight titles and has gained praise for a series of stories revolving around Putt-Putt, an animated purple car that Day, 35, dreamed up while telling bedtime stories to her son, Travis, now 8. The latest in that series, "Putt-Putt Saves the Zoo," was released in August.

Also in August, Humongous gained worldwide attention when Microsoft featured another new title, "Freddi Fish and the Case of the Missing Kelp Seeds," during its launch of the Windows 95 operating system, raving about the program's animation and use of Windows 95 technology.

Freddi this month was given an Editor's Choice award by Newsweek magazine.

Headbone, based on Capitol Hill, is less than 2 years old but already is earning praise from reviewers for its three titles. "AlphaBonk Farm," released last December as the company's first title, was named in PC Magazine's Top 10 picks for kids last month and won the Parent's Choice Foundations Gold Award last week. The company's second title, "Elroy Goes Bugzerk," won high praise from the Washington Post and USA Today, among other publications, after its release in May.

Headbone is a family enterprise: Susan Lammers, 38, a former Microsoft multimedia manager, started Headbone with her husband, Walter Euyang, now chief operating officer. Their oldest child, 5-year-old Wally, is "chief of research," Lammers jokes, and Thomas, 2, helps test, too.

Diana Simeon, an analyst who writes a newsletter called Digital Kids for New York-based Jupiter Communications, considers Headbone and Humongous among analysts' affectionate favorites in the market for kids' entertainment/education software.

"They've produced good products and people are talking about them," Simeon said. But, she added, "The biggest problem is that there are just so many CD-ROMs, and so many companies producing CD-ROMs."

Warren Buckleitner, editor of Children's Software Revue, another national newsletter, said he knows of 1,550 children's software titles currently for sale. Washington state, Buckleitner said, is one of the nation's centers for multimedia, producing 93 of those titles - far fewer than California's 556 but much higher than most states.

Even so, "I'd call them standouts," Buckleitner said of Humongous and Headbone.

Buckleitner said Humongous has taken a big leap ahead with the beautiful animation of Freddi Fish, and Headbone's Elroy features a unique style using cartoons on a background of photographs, an approach he called "the talking comic book."

Sally Narodick, chief executive of Edmark, said she sees Humongous and Headbone "at all the major shows and industry conferences" and that both companies are well-regarded.

"Educational software is like books and records and videos," Narodick said. "If a customer has a good experience with them, they'll want to collect lots. During a rapid growth phase in an industry, lots of players can thrive."

Lammers said that even as recently as late 1993, when she started Headbone, "There were very few players. People were saying, `We're going to the moon.' "

Then, after years of slow growth in the industry, the big players jumped into the market.

"I don't think people really expected the big TV and book companies to rush into this after they had been standing on the sidelines so long," Lammers said. Suddenly, she realized, "We needed to do more than just get good reviews and recognition in the press."

Taking a scary step

Last spring, Lammers said, she grew frustrated that her titles, despite earning top reviews, "weren't everywhere - that retailers weren't calling us up."

She studied Edmark, a publicly held company she thought had been following the same slow path as Headbone until Narodick "said we're going to have to bite the bullet and play the game." In the past year, Edmark's stock has soared from $6.50 a share to more than $40.

Thinking about Edmark, Lammers said, helped her decide to spend half a million dollars on an advertising campaign.

Lammers' willingness to spend marketing money, along with strong press reviews, persuaded Egghead last month to begin stocking Headbone's three titles, Lammers said.

This month, the company begins a promotion with Egghead, giving away 20,000 free sample disks with Headbone coupons.

The company in August launched a World Wide Web site to promote its software on the Internet, which Lammers views as the radio of her industry because it entices people to buy software the way songs played on the radio entice listeners to buy recordings.

Headbone also is marketing through Scholastic Inc., which runs a software "club" similar to the book club it has run for decades, distributing fliers and order forms through classrooms. Lammers said she wants to do even more work with schools because parents often buy the same software at home that their children use in school.

Working through traditional retail channels, Headbone early this year struck a distribution deal with Sega of America, which sells its computer games in 20,000 stores. Such deals are key for small software companies because the software industry is controlled by a handful of distributers and retail buyers, analysts say.

In addition, Lammers has consultants working on international promotions, including a deal with a major German toy company, Ravensburger, that wants to make toys featuring Elroy. She's also pursuing a television cartoon strip starring Elroy.

Meanwhile, though, Lammers has scaled back development plans while she focuses on international marketing and other deals. Last spring she said she planned to have 15 titles by the end of this year; now she says 10 titles by the end of 1996.

"We don't want to grow just for the sake of growing," she said.

Growing tenfold in five years

Day and Gilbert share that philosophy. Nearly two years older than Headbone, Humongous already has passed the point where it began advertising heavily and broke into key retail stores. Now, though, the company is pushing into a new phase of growth.

Day said that within five years she hopes Humongous' sales will match those of Broderbund, which is now 10 times Humongous' size with $111 million in sales last year.

Humongous this summer began using nine "ambassadors" who conduct demonstration days at stores, malls and convention centers and visit merchants to answer questions. Electronic Arts, a California computer-game maker, helps with sales and Random House with distribution, both for a share of profits.

As the holiday buying season nears, Humongous plans new promotions and has negotiated to have two of its titles pre-loaded onto personal computers - Freddi on Creative Labs' computers and "Let's Explore the Airport" onto Acer America's.

"The key," said vice president Brown, "is you have to do a lot of things."

Humongous will begin developing a Web page next month and hopes to launch it early next year.

Also next year, Day said, the company will make a bigger push into schools, entering the long, sometimes political, evaluation processes that school districts conduct before buying.

Unlike Headbone, Humongous is not self-funded. Hummer Winblad, a Silicon Valley venture capital firm that specializes in high-tech companies, invested $1.2 million in the start-up. Random House invested an undisclosed amount as part of its distribution deal.

But Day and Lammers both said they aren't looking to be bought or to offer public stock - at least for now.

Rumors circulated earlier this year that Microsoft was about to buy Humongous. Day said other companies have called, but not that one.

Asked whether it's inevitable that a midsized software company would either go public or disappear into the arms of a larger company, Day said yes, that she expects to face that inevitability in three or four years.

But, she said, "ask me tomorrow and (my answer) might not be the same."

Lammers said she's taken calls from venture firms that "have more money to invest than they can place." But she believes her company can be more creative and focus more on quality - working slower if it has to - than it could with an outside partner.

"We're having too much fun," she said. "I'm not really interested in selling the company."

------------------------------------------------. . Humongous. Entertainment. . .

-- Location: Woodinville.

-- Founded: Early 1992.

-- Employees: 62.

-- Sales: $10 million to $15 million (estimated, fiscal year 1996).

-- Titles: "Freddi Fish and the Case of the Missing Kelp Seeds," "Putt-Putt Saves the Zoo," "Let's Explore the Airport," five others. . . Headbone Interactive. . .

-- Location: Capitol Hill.

-- Founded: Late 1993.

-- Employees: 16.

-- Sales: Began selling in 1995; won't disclose 1996 estimate.

-- Titles: "Elroy Goes Bugzerk," "AlphaBonk Farm," "Pantsylvania".