Broderbund Software

500 Redwood Boulevard
Novato, California 94947-6921
U.S.A.
(415) 382-4400
Fax: (415) 382-4582
Web site: http://www.broderbund.com

Wholly Owned Division of Mattel, Inc.
Incorporated: 1981 as Broderbund Software, Inc.
Employees: 550
Sales: $290 million (1998 est.)
NAIC: 42143 Computer & Computer Peripheral Equipment & Software Wholesalers; 51121 Software Publishers

Broderbund Software, which became a division of Mattel, Inc. in 1999, develops, publishes, and markets consumer software for home, school, and small business use. Recognized as a pioneer and leading producer of educational software, the company also became well known for its personal productivity and entertainment software. Through a series of mergers and acquisitions, the Broderbund software line has changed through the years, and its lineup in the late 1990s was overseen first by The Learning Company and then by ultimate parent company Mattel. Popular software titles available under the Broderbund brand name have included various versions of The Print Shop, Cosmopolitan Fashion Makeover, Mavis Beacon Teaches Typing, Compton ’s Encyclopedia, Totally MAD (the total collection of MAD Magazine), and Calendar Creator, the popular software series 3D Home Architect, American Greetings Cards, and National Geographic’, and Family Lawyer, Business Lawyer, and Family Tree Maker (formerly marketed under the Quicken brandname). This lineup of products was shuffled by Mattel when it acquired The Learning Company, and Broderbund along with it. Some original Broderbund titles, such as Myst and Riven are now published under other brand names and divisions in the Mattel corporate structure.

1980s Origins

Broderbund Software traces its heritage to two brothers, Douglas and Gary Carlston, who founded the company during the computer software industry’s infancy in 1980 in order to market computer game programs the elder Douglas had created. Douglas Carlston was first exposed to computers during the 1960s. As a college student he worked as a part-time programmer in Harvard’s Aiken Computation Laboratory. Carlston’s interests were myriad, however. During the 1960s and 1970s he also spent a year in Botswana teaching geography and math, returned to the United States to write Beginning Swahili, graduated magna cum laude from Harvard, wrote language texts for American Express, studied economics at Johns Hopkins School of Advanced International Studies, returned to Harvard and earned a law degree, and started a two-partner law firm in Maine where he resumed computer programming in his spare time. Utilizing a Radio Shack computer, Carlston developed his first two software games, Galactic Empire and Galactic Trader, which found commercial success after being published by outside companies.

By 1979 Douglas Carlston was earning more as a programmer than as an attorney. He then left his law practice and drove a ten-year-old car across country to Eugene, Oregon, where his younger brother Gary lived. The cross-country trip was apparently too much for the vehicle, given what Douglas Carlston later told Forbes: “We started the company because I was stuck without a car and didn’t have the money to buy a new one.” The name for the Carlston brothers’ new company was derived by adding the contrived word “broder” (a blend of Swedish and Danish words meaning “brothers”) to the German word “bund” (which in English means “alliance”).

With working capital of $7,000 obtained from family members, the “brothers’ alliance” was thus formed to market Douglas Carlston’s computer game software directly to retailers rather than through other publishers. By mid-1980, after establishing an alliance with StarCraft, a Japanese software house, the company began marketing home entertainment software. In 1981 Broderbund Software, Inc. was incorporated as a California company.

Douglas Carlston became Broderbund’s first president, and Gary Carlston was named chief executive officer. In 1981 the brothers were joined by a sister, Cathy Carlston, who became vice-president of educational market planning and was later instrumental in marketing software to schools. The company quickly grew to include more than 40 employees and sell millions of dollars worth of software annually. Broderbund relocated its operations from Eugene to California’s Marin County in 1982.

During the early 1980s Broderbund published and distributed what was principally entertainment software, developed in conjunction with freelance programmers. Concerned that the company have adequate back-up capital on hand during its infancy, Douglas Carlston courted a number of outside investors between 1982 and 1984. He raised $3 million, and while the funds were never needed, these investors later played a role in Broderbund’s initial public offering.

In 1984 Broderbund diversified, adding productivity and educational programs that the Carlstons believed consumers would want after computers gained widespread acceptance. In 1984 Broderbund scored its first major hit in the category of personal productivity with the release of The Print Shop, a pioneering “home creativity” program that enabled users with little computer knowledge to create calendars, greeting cards, fliers, posters, and signs.

Broderbund’s first educational software success came after the Carlstons observed increasing numbers of schools purchasing computers despite the limited availability of educational software. The company responded by developing and releasing Where in the World is Carmen Sandiego? in 1985. The program, the first of many Carmen Sandiego titles destined to become hits, was credited as the industry’s first “edutainment” software, blending both education and entertainment qualities. Based on a geography game the Carlston brothers had invented and played as children, the program was created in conjunction with Broderbund’s in-house developers. It soon gained widespread admiration and acceptance from parents and teachers. The educational value of the game was found in its entertaining goal: to piece together geographical and historical clues in order to track Carmen Sandiego, an international jewel thief traveling through time and around the world.

The early 1980s was a largely unregulated period for software developers. Recognizing that upstart companies sometimes created computer versions of arcade games without great consideration for royalties and copyrights, Broderbund utilized a private investigator to seek out those pirating the company’s software. The company’s efforts to protect its programs translated into several copyright infringement lawsuits during the mid-1980s, and in 1986 Broderbund won a groundbreaking suit that found that software maker Unison World Inc. had infringed on Broderbund’s copyright of The Print Shop. A federal court ruled that Unison had copied the “overall appearance, structure, and sequence” of Broderbund’s software. Broderbund won an undisclosed settlement, and the decision was later cited by other software companies claiming copyright law covered the appearance of a software program as well as a program’s basic computer code.

Reorganizing in the Late 1980s

In 1987 Broderbund was reincorporated in Delaware and announced intentions for an initial public offering of stock. However, a mid-year industry concern regarding the impact of a new IBM “personal computer” on the then-dominant “microcomputer” industry resulted in a major sell-off of computer stocks. About the same time, Broderbund earnings came in below projections, and the public offering was postponed.

In 1989 Broderbund released a software program called The Playroom. This program, which later became part of the company’s Early Learning Products group, featured two mice that taught preschoolers reading and math fundamentals. That same year Gary Carlston and Cathy Carlston left the company, while Douglas Carlston assumed his brother’s former titles of chairman and chief executive. Ed Auer, who had joined Broderbund in 1987 after 23 years at CBS, Inc., was promoted from chief operating officer and senior vice-president to president.

In 1990 Broderbund surpassed the $50 million mark in annual revenues, earning $6.2 million on sales of $50.4 million. In 1991 Broderbund flirted with the idea of merging with Sierra On-Line Inc. in a deal that would have made Broderbund a wholly owned subsidiary of Sierra, an entertainment software publisher. In March of that year the two companies signed a merger agreement for a stock swap worth nearly $90 million, but soon afterwards the deal was called off.

In 1991 Broderbund debuted Kid Fix, a children’s drawing and painting program initially developed by an Oregon art professor for his son. The program proved to be an affiliated-label hit for Broderbund, which had identified a market need for such a product. For Broderbund’s 1991 fiscal year (ending August 31, 1991), sales climbed to $55.7 million as earnings inched up to $7 million.

With some of Broderbund’s venture capitalists seeking to cash in their investments, in November 1991 the company went public. Investors sold a 36 percent stake in Broderbund for $11 a share. One month later the stock was selling for nearly twice its initial offering price.

Company Perspectives:

Broderbund Software, a division of Mattel, develops, publishes and markets a broad line of interactive software for use in homes, schools and small businesses. Since its founding in 1980, the Company has repeatedly broken new ground, conceiving and developing families of software products with enduring customer appeal based on creativity, innovation and ease-of-use. Broderbund is committed to providing its customers with engaging products that set quality standards and take advantage of the latest technologies.

In the early 1990s Broderbund benefited from widespread interest in Carmen Sandiego in the form of numerous licensing agreements and marketing opportunities. In 1991 the company signed an agreement with Western Publishing Company, Inc. to use the Carmen Sandiego adventures to market various printed materials, including books and puzzles. That same year PBS premiered a weekday quiz show that, while it did not garner any licensing fees, exposed a daily audience of one million viewers to the Carmen chase. In 1992 Broderbund sold the live-action film rights for Carmen Sandiego and began discussions with the California company University Games to develop a board game based on the exploits of Carmen Sandiego. A year later, the Fox network debuted an animated Carmen Sandiego show. Video games, clothing, albums, and a calendar also joined the growing list of licensed Carmen Sandiego merchandise.

Broderbund’s programs continued to demonstrate their staying power through sales records. In 1992 Carmen Sandiego titles surpassed 2.5 million in sales, while sales of The Print Shop titles eclipsed the four-million-unit mark. Conversely, the products offered by most of Broderbund’s competitors had a shelf life of less than a year.

New Products and Markets in the 1990s

In 1992 Broderbund made several moves to expand its product line and marketing opportunities. In July 1992 Broderbund acquired PC Globe, Inc., an Arizona-based manufacturer of electronic maps and atlases, for $1.5 million. As a Broderbund subsidiary, PC Globe went on to publish Maps ‘n’ Facts, a family atlas and geographical information program. The company also added mainstream retailers like Wal-Mart to its established retail base of computer specialty stores, and the expansion of merchandising channels helped accelerate sales; for the 1992 fiscal year Broderbund’s revenues rose to $75 million while earnings climbed to $9.65 million.

Gambling on the belief that CD-ROM drives would become commonplace on computer drives, Broderbund committed its future product line to CD-ROM platforms in the early 1990s. In February 1992 Broderbund released its first CD-ROM title, Where in the World is Carmen Sandiego?. In the spring of 1992, Broderbund released another product that reflected their belief that parents would pay in the neighborhood of $50 for an interactive storybook. Just Grandma and Me, Broderbund’s second CD-ROM product, was its first interactive children’s storybook designed to be read on computers.

Broderbund’s success during this time was noticed by the nation’s leading business periodicals. Both Fortune and Forbes lauded the company, and the latter labeled Broderbund “the country’s most successful maker of educational software.” For the 1992 holiday season, Broderbund’s titles dominated the computer software charts. Five of its programs claimed spots in the list of the top ten best-selling software programs. Broderbund’s holiday hits included three of the company’s six Carmen Sandiego titles as well as Kid Fix and The Playroom.

In March 1993 Broderbund’s affiliated-label program was dealt a blow when its largest affiliated label, the California developer Maxis Software, went independent after recording more than $10 million in annual sales; Maxis had been partnered with Broderbund since 1988. Nevertheless, Broderbund’s own revenues for the 1993 fiscal year mushroomed to $95.6 million, garnering the company $13.6 million in earnings.

Broderbund took important strides to expand beyond its traditional market of 10- to 14-year-olds in 1993. Targeting an older teenage audience, Broderbund debuted Myst, a nonviolent adventure-exploration game that encouraged players to employ puzzle-solving skills in a surrealistic world. Also introduced during this time was 3D Home Architect, a program designed to assist amateur home designers and remodelers in creating rooms or houses. The company also adopted the moniker Early Learning Products for its growing line of educational software programs for children aged three to ten.

Between 1991 and 1993 the number of CD-ROM software titles in the nation grew from about 20 to 400, and CD-ROM software grew to claim about a ten percent stake in the $750 million consumer software market. Broderbund’s gamble on CD-ROM technology began yielding concrete dividends in 1993. By the latter part of that year, the company’s first two CD-ROM interactive storybooks—Just Grandma and Me and Arthur’s Teacher Trouble —were among the top ten best-selling CD-ROM titles nationally.

To further expand on and accelerate its publication of interactive storybooks, Broderbund agreed in September 1993 to a joint venture with Random House, Inc. to create interactive multimedia storybooks. The storybook series, called Living Books, represented one of the first ventures between a leading consumer software publisher of interactive children’s books and a large print publishing house. Living Books was designed to expand existing distribution networks for both companies, capitalize on the growing market for interactive software for children, and accelerate development of each company’s electronic book plans. In attempting to captivate young readers while at the same time allowing for an interactive multimedia experience, Living Books titles adopted such features as animated illustrations, multimedia sound effects, and options for the reader. Objects on the screen could be activated through use of a mouse or stories could be narrated, with text simultaneously displayed in English, Spanish, or Japanese.

In December 1993 Broderbund stock—like the stock of a handful of other software makers—dropped precipitously, Broderbund’s $6 per share to $34.50, after the company announced it was taking a cautious view towards future growth. The announcement came at a time when the personal computer software market as a whole was making a transition from floppy disk to CD-ROM format. Concerns about Broderbund’s future stemmed from a decline in sales of Broderbund’s older software titles on floppy disks as well as the entrance of Microsoft Corporation into the home software market with programs similar to Broderbund’s Kid Fix and The Print Shop. During the 1993 holiday season, Broderbund’s sales of CD-ROM products rose, while sales of floppy disk products and affiliated-label programs fell.

A Failed Merger Attempt in the Mid-1990s

The company’s stock eventually rebounded into the $41 range, and in February 1994 Broderbund agreed to be acquired in a $400 million stock swap by one of its largest competitors, Electronic Arts Inc., which boasted three times the sales of Broderbund. The merger was expected to create one of the nation’s largest consumer software production companies. The company would serve the home entertainment-education market for both computers and video game players by combining Broderbund’s high technology and expertise in interactive software with Electronic Arts Hollywood productions skills and experience providing entertainment and video games for such companies as Sega, Nintendo, and 3DO. The merger also aimed to bolster each company’s durability against growing competitive threats: Microsoft, which was impinging on Broderbund’s turf, and Acclaim Entertainment, a video game manufacturer and Electronic Arts competitor. Broderbund also hoped that the merger would encourage international expansion opportunities and additional hardware platforms for its software.

As merger negotiations proceeded, Ed Auer retired his position at Broderbund and was replaced by William McDonagh, who had joined the company in 1982 as controller and had advanced through the ranks to the positions of chief financial officer and senior vice-president before becoming president. During this time, Broderbund created a new business development department to pursue alliances with other companies and increase international sales, which at the time represented less than ten percent of all revenues. Internal reorganizations resulted in Broderbund partitioning its program development operations into three separate segments designed to address the company’s principal market categories: early learning, entertainment and education, and personal productivity.

In the spring of 1994 the joint-venture Living Books took substantial steps to expand its available titles. It outmaneuvered its competition to acquire the multimedia rights to the books of Dr. Seuss (Theodore Geisel) from the author’s widow. Random House, Broderbund’s partner in Living Books, had been the exclusive publisher of the 48 Dr. Seuss print books, which had sold over a total of 200 million copies. That same month Living Books also acquired world multimedia rights to the “First Time” series of The Berenstain Bears preschooler stories, which had sold over 165 million copies since debuting in 1982.

In May 1994 Broderbund pulled out of its merger agreement with Electronic Arts after the stock value of both companies took a sizable drop. The devalued Electronic Arts stock reduced Broderbund’s take in the deal by nearly $100 million. Broderbund agreed to pay Electronic Arts $10 million to terminate the merger; nonetheless, Broderbund stockholders welcomed the move and the Broderbund’s stock value rose $6.50 to $41.25, approximately the level it had been trading at prior to the merger announcement.

During the 1994 fiscal year, Broderbund published 68 new products—50 percent more than the previous year—in part because of the need to address the diverse platform needs of its customers. Broderbund’s revenues for the year rose to $111.7 million while profits slid to $11 million. The company’s bottom line suffered from the more than $10 million in charges related to the terminated merger with Electronic Arts. Earnings were bolstered, however, by sales of CD-ROM software, which proved less expensive to produce and yielded a higher profit margin than floppy disk programs.

By the beginning of its 1995 fiscal year (September 1994), Broderbund had released a full line of CD-ROM software. A CD-ROM version of Myst that featured 2,500 original 3-D graphics and an original soundtrack became the company’s most popular product that year. Broderbund hailed it as the first ever blockbuster CD-ROM entertainment software program. By October 1994 the company’s stock had risen to $57.50 on the strength of the popularity of CD-ROM-driven computers and Broderbund’s Living Books, Early Learning, and Myst programs. Myst was credited by some analysts as an important reason for the substantial increase in sales of CD-ROM-based computers during the 1994 holiday season.

Broderbund entered 1995 with new generations of popular software, including The Print Shop Deluxe CD Ensemble and 3D Home Architect. The company also announced plans to release its first Berenstain Bears interactive storybook and other new entertainment titles. Its Myst II sequel to the original Myst program was targeted for release in 1996. For the first six months of fiscal 1995, Broderbund posted revenues of $98 million—better than all of 1993’s sales—and earnings of $21.9 million—better than earnings from any preceding full year. Named a Business Week “Hot Growth” company back in 1993, the magazine noted that by early 1995 Broderbund had brought investors a two-year return of better than 180 percent.

Settling In in the Late 1990s:

The “hot growth” slowed in 1997, however, when revenues increased to $190 million but net income fell below $10 million. As a consequence, Broderbund stock fell from a high of $76 a share in 1995 to a low of $17.75 a share in 1997. Once a haven for the creative, known for the demarcation between creators and “the suits,” Broderbund was forced to institute a system of cost controls more closely resembling traditional management models.

The end of the decade for Broderbund was characterized by acquisitions and mergers. In 1996 Broderbund acquired Banner Blue Software and T/Maker, Inc. In 1997 the company purchased the remaining 50 percent of the Living Books series from Random House, as well as Parsons Technology, Inc. Also that year Broderbund created its own in-house Red Orb Entertainment to develop games and entertainment. Acquisitions continued into 1998 with the purchase of the This Home and Designers Vision series from manufacturer Autodesk.

In 1998 the acquisition cycle reversed when The Learning Company merged with Broderbund, and Broderbund became a fully-owned subsidiary of The Learning Company. Under its new owners, Broderbund felt two effects instantly. In early September 1998, The Learning Company announced a planned campaign—“Broderbund is Back”—in an effort to return Broderbund to a position of leadership in the consumer software industry. This campaign was directed at improving national and international sales in its educational and OEM (Original Equipment Manufacturers) channels, among others. Later in September 1998, The Learning Company revealed the second effect of the acquisition, its plans to lay off 500 employees from Broderbund and to close the production facility in Petaluma, California. These maneuvers streamlined the operation of the two companies, reducing overlap and positioning the new company to challenge Simon and Schuster as the largest electronic publisher selling to K-12 schools. By March 1999, The Learning Company had captured more Codie Awards than any other company at the Information Industry Association’s 1999 Codie Awards ceremony; several Broderbund titles such 3D Home Design and Family Tree Maker were among the winners.

In an ironic twist to the merger/acquisition frenzy, The Learning Company itself was purchased by Mattel, Inc., in 1999. As a result, The Learning Company and its Broderbund unit joined Mattel’s $1 billion software division, bringing under one roof such popular software product brands as Reader Rabbit, Barbie, Carmen Sandiego, Hot Wheels, Matchbox, Family Tree Maker, The Oregon Trail, American Girl, and Fisher Price, among others.