Taking a risk with the disk

As investors flock to companies developing CD-Rom software, Patrick Tooher warns that the technology could be short-lived

LAST WEEK'S 22 per cent first-day premium on shares in Inner Workings, a developer of interactive software for CD-Rom-based home entertainment, vividly confirmed that multimedia companies have succeeded mobile phones and biotechnology as the latest concept to capture the imagination of the speculative investor.

But do not believe all the hi-tech hype. These companies currently publish their software in a format that could be the late 1990s equivalent of Betamax - the video cassette format that failed.

Their software is on CD-Roms - compact disks with read-only memory, which look like audio CDs but are played on computers to generate text, graphics, sound and moving video pictures that can be used interactively. That sounds advanced, but so did Betamax.

These worries are not yet troubling the market. The MultiMedia Corporation, for example, hopes to emulate Inner Workings' impressive performance last week on the Alternative Investment Market, the new junior exchange for small companies. Shares in MultiMedia, a management buyout from the BBC, start trading on AIM in a fortnight's time at 45p, valuing the company at just under pounds 13m - slightly more than Inner Workings.

Unlike many technology-based new issues, both companies appear to be on verge of making some serious money. Inner Workings' prospectus envisages sales jumping from pounds 246,000 in the year to March 1995 to pounds 1.6m in 1997, when profits of pounds 500,000 could be made.

MMC is more coy about making forecasts, but should see a maiden profit this year after selling more than 500,000 copies of its 3D-Atlas in the Apple Macintosh format. A Windows version for PCs has just been launched.

By seeking a Stock Exchange listing, both companies are hoping to match the success of the highly rated reference book and CD-Rom publisher Dorling Kindersley, in which the software giant Microsoft has a 19 per cent stake.

What is driving the market - and investors' interest - is the rapid expansion in the number of machines with CD-Rom drives in the home. Sales of CD- Rom drives, many of which are built into personal computers (PCs), are now outstripping those of televisions on a worldwide basis, while this year every desktop computer shipped will have an in-built CD-Rom drive. Industry experts reckon that over the next five years the global installed base of machines with CD-Rom readers will increase to more than 400 million, compared with an estimated 28 million machines this year in the US, the most advanced market. Growth in Europe could be even more spectacular, albeit from a low base. As the number of comput- ers grows, so should the appetite to play something on them. The market for PC-based CD-Rom software is expected to be worth up to pounds 280m in 1995, rising to possibly pounds 1.57bn by 2000.

But before reaching for the phone to instruct a broker to buy any multimedia stock that moves, potential investors would do well to pick up a copy of Being Digital, the latest work by the cult technology writer Nicholas Negroponte. He questions how truly interactive CD-Rom technology really is.

So far, CD-Rom titles have used oceans of text, many simple graphics and some sound, but only snatches of motion video. That is because unlike text, which is highly economical, videos use up billions of "bits" of a CD-Rom's storage capacity.

Today's CD-Rom has a capacity of 5 billion bits on one side of the disk, but advances in digital compression should increase this to 50 billion bits in the next couple of years, vastly improving picture quality.

The figure sounds huge considering an issue of the Wall Street Journal has about 10 million bits. But Mr Negroponte points out that 5 billion is not so large when it represents only one hour of compressed video.

He argues that the longer- term future of multimedia will not be based on "that 50-cent piece of plastic, 5 billion or 50 billion bits, but will be built out of the growing base of on-line systems that are effectively limitless in their capacity". In particular, he is thinking of the Internet, the global computer network that already has 30 million users.

In Mr Negroponte's view, CD-Roms are singularly unsuited to a world where weightless bits of information hurtle at the speed of light down the digital superhighway. He sees CD-Roms as no more than atoms, physical material - like this newspaper - in real packages that have weight and size and have to be manually delivered by land, sea and air.

Louis Rossetto, founder of Wired magazine, goes even further, suggesting that CD-Roms will be the "Beta of the Nineties", a reference to the now- defunct Betamax video standard. That may be going a bit far, but CD-Rom technology risks becoming mature - even obsolete - before its full potential is realised.

Howard Shore, of Shore Capital, brokers to the MultiMedia issue, says that the growth in CD-Rom use should give the company at least five years' breathing space: "CD-Roms are set for pretty explosive growth between now and the end of the century." In any case, the company's skills are in packaging and adapting material for multimedia use, and it could adapt to using on-line delivery instead of CD-Rom.

But sending multimedia down phone lines may involve copyright and technical issues that such companies as MultiMedia are not yet set up to handle. That is the health warning these stocks should carry.