CUC International Gathers Momentum and Partners
for Online Commerce
Source: The Register-Guard
The Register-Guard via Knight-Ridder/Tribune via Individual Inc. : By Sherri Buri Knight-Ridder/Tribune
Business News
Dec. 31--With a click of the mouse here and a click of the mouse there, retail sales are ringing up on the
Internet. But cyber shopping can be humdrum. Most commercial web sites are serviceable, not sexy.
A Connecticut-based membership services company, which sells everything from cars to vacation packages
to 63.8 million members worldwide, wants to change all that. The conglomerate, CUC International Inc.,
is blasting its way into commercial cyberspace, and it's taking Eugene-based computer game maker
Dynamix Inc. along for the ride.
How did Dynamix, founded in 1984 by two University of Oregon students, end up a passenger? In July,
CUC acquired two computer game makers: Davidson & Associates, of Torrance, Calif., and Sierra
On-Line, of Bellevue, Wash. -- the parent company of Dynamix. CUC bought the companies hoping the
game makers' creative talents could jazz up the one-stop web site it plans to unroll this summer.
"We wanted the development talent that inspired people to come on (the Internet) and come back, and have
a really exciting, dynamic experience," said Laura Hamilton, CUC's vice president of investor relations.
"Clearly, an entertainment development company does provide that expertise."
Instead of simply contracting for help, CUC bought the industry leaders. Sierra is the top-ranked publisher
of entertainment games, while Davidson holds the No. 1 spot in the education category, said Diane
Freedman, manager of SofTrends, a research firm in Port Washington, N.Y.
CUC's agenda, however, shouldn't change the day-to-day operations at Dynamix, the developer of such CD
ROM games as the Red Baron flight simulator game and the Front Page Sports series of football, golf and
other titles, company officials said.
"CUC to date hasn't made any sizeable changes to us, and I don't expect them to," said Randy Dersham,
general manager at Dynamix. "We'll focus on what we've always done, which is to make really fun
games."
But the ownership switch does signal that this homegrown success probably won't become the huge local
presence some had hoped for. When Dynamix became Riverfront Research Park's lead tenant in 1991, Tony
Reyneke, the firm's chief executive officer, predicted employment could swell to 350 by 1994.
That never happened.
Instead, Sierra On-Line, which had bought Dynamix in 1989, pursued a new style of corporate
management: the so-called virtual corporation. Modeling itself after Hollywood film production companies,
Dynamix keeps a core group of developers in Eugene and contracts out the rest of the work, Dersham said.
When production is in full swing, the 130-employee company adds up to 30 temporary workers and
independent contractors, said Candie Wilk, , human resources director at Dynamix. Dynamix is still the
largest computer software developer in the Eugene area, as measured by number of employees.
In restructuring last year, Sierra cut about 30 Eugene workers, Wilk said. Top executive Reyneke was
among those cuts. Reyneke figures his job was lost in the shuffle of acquisition. "They needed fewer layers
of management," he said.
But Reyneke isn't opposed to Dynamix's new corporate strategy.
"I think that (outsourcing) is the wave of the future, and I was encouraging that before I left there," he said.
Reyneke said he left Dynamix a year ago, at which time he signed an agreement not to start up a
competing company for two years. The contract expires next December. Reyneke declined to comment on
whether he plans to eventually launch his own business. He also declined to speculate about Dynamix's
future under new ownership.
At the same time Dynamix has trimmed some positions, it has added others. In November 1995, Sierra
acquired SubLogic Inc., a flight-simulator computer game developer in Champaign, Ill. About five of
SubLogic's 12 employees moved to Eugene and now work at Dynamix, said Barbara Dawson, a
spokeswoman Sierra's headquarters in Bellevue.
Consolidation is a growing trend in the $1 billion computer game market, Freedman said. The industry is
becoming more and more top heavy, with the top 20 game publishers accounting for about 50 percent of
the business, she estimated.
Consumers are demanding increasingly sophisticated games, and that sophistication comes at a price. "Ten
years ago, one programer and one artist could launch a computer game in a garage somewhere," Dersham
said. "Now, it takes about 35 people and $1 million to $5 million." A perfect match?
When Sierra bought Dynamix seven years ago, they seemed a perfect match. The financial advantages
gained by merging the two computer-game developers were obvious. But the advantages of CUC's purchase
of Sierra and Davidson are less apparent.
The computer game makers could benefit from CUC's extensive marketing and distribution network and its
fat East Coast checkbook. CUC didn't take on debt buying Sierra and Davidson. It simply issued stock to
cover the $1.9 billion expense, according to filings with the federal Securities and Exchange Commission.
CUC generated profits of $163 million on revenues of $1.4 billion in the fiscal year ended January '96.
CUC operates a number of discount membership shopping services, with a theoretical inventory of
250,000 items. The company can offer steep discounts because its overhead is so low. CUC sells direct
from manufacturers, incurring no warehouse costs. It charges annual membership fees of $8 to $150, which
generate the bulk of its annual revenues.
The clubs appeal to time-strapped bargain seekers who prefer to shop via telephone or computer. Currently,
most of CUC's customers' transactions occur over toll-free phone lines, but the company is fast making
inroads on the Internet.
Interactive shopping was the vision that compelled Walter Forbes, CUC's chief executive officer, to
co-found Comp-U-Card America in 1973, an electronic home shopping network for PC owners. The
service was ahead of its time, so Forbes shifted his focus to discount club memberships. CUC went public
in 1983 with 100,000 members. Today, CUC competes with deep discounters such as Circuit City, Kmart
and Wal-Mart and with the Home Shopping Network.
The conglomerate's financial strength inspires confidence among some investment analysts.
"We believe CUC represents one of the best long-term ways to invest in the Internet," Keith Benjamin, an
analyst at the investment firm of Robertson Stephens & Co. in San Francisco, wrote in a recent research
report. Benjamin estimated that CUC's Internet business generated about $90 million in sales in November
and he forecast Internet sales of more than $400 million in the calendar year 1996.
CUC's "vision is to create a branded Web site," said George Sutton, an analyst with Rauscher Pierce
Refsnes, an investment firm in Dallas, Texas. "They'll put a lot into advertising to get you to that site. It
could be pretty powerful with the amount they spend on advertising."
CUC spends more than $400 million a year on marketing, Hamilton said. For example, it recently
launched a $1 million campaign to publicize Sierra On-Line. The company ran 14-page ads in six major
technology publications showcasing Sierra's holiday line-up of games. CUC also offers special consumer
contests. Owners of Trophy Bass 2, Sierra's latest sports fishing computer game, have a chance to win an
all-expense-paid fishing trip with one of the nation's top bass fishing professionals. The trip is valued at
$2,500.
In addition, CUC invests heavily in creating marketing partnerships. In 1995, it teamed up with
Hospitality Franchise System, the world's largest hotel reservation franchising firm, which handles
reservations for Days Inn, Howard Johnson, Super 8 and other hotels. When consumers call the system to
arrange a hotel stay, they're offered $10 to $20 savings on the booking. If consumers agree to the offer,
they are transferred to an operator with CUC's travel club, Travelers Advantage. CUC reports good results
from this targeted marketing strategy.
Still, CUC's purchase of Sierra and Davidson creates such strange bedfellows that it begs the question of
whether such a union will last. Might CUC decide some day that the computer game makers are too far
afield from its core business and put them up for sale?
"In the world of virtual corporations, I'd say anything is possible," Dersham said. "We have a core group
who knows how to do the job (make games) and do it well, and that puts us in a more secure position than
most."
Hamilton, of CUC, said the Internet marketplace is changing so rapidly that CUC will need the game
makers' expertise to stay ahead. Behind the scenes
Some lesser-known factors also contributed to the deal. Rather than contracting with Sierra and Davidson,
CUC bought them outright for competitive reasons, Hamilton said. "We don't believe in having joint
ventures or hiring out talent," she said.
The firm spends millions on advertising, researching new markets and maintaining a data base of members.
"We wouldn't want to share that information (with outside partners) only to have the market hit three years
from now, and have all that important marketing information that they (the partners) could use themselves
or sell to someone else," Hamilton said.
Contacts -- or who Sierra's executives knew -- also played a role in the acquisition.
CUC chief executive Forbes has served on Sierra's board for the past six years, said Dawson, the Sierra
spokeswoman.
"He saw in Ken Williams (Sierra's CEO) a real visionary, someone who could go out and build his
business."
Williams will be responsible for overseeing the development of CUC's consumer-services Internet site.
Research and development will occur at Sierra's headquarters in Bellevue and at CUC sites in Stamford and
Houston, Hamilton, the CUC spokeswoman said.
For Dynamix, that means continuing to do what it has done for years: introducing innovative games and
pumping out new versions of such standards as Trophy Bass and 3-D Ultra Pinball.
(c) 1997, The Register-Guard, Eugene, Ore. Distributed by Knight-Ridder/Tribune Business News.
SIER,
[01-02-97 at 12:00 EST, Copyright 1997, Knight-Ridder/Tribune Business News]
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