as Playback goes to press, Montreal-based software company Discreet Logic is readying its 1999 first quarter results with a warning to shareholders already in place: revenues are expected at $25 million to $27 million and earnings between 3 cents and 8 cents a share, or lower than the market had forecast.

In making the announcement, Discreet president Richard Szalwinski said the company attributes the performance to slow sales in Europe, delayed spending due to market angst in North America, changes in the sales organization (including the departure of sales and marketing vp Paul Amlani) and confusion around Digital tv issues.

Discreet isn’t the only tech and special effects company singing this particular ditty now, nor will it be in the foreseeable future. For the companies charged with providing the magic in film, tv and commercials, almost anything is achievable on the screen. But perhaps the biggest challenge these companies face now is enduring in business to be able to create and market the next level of digital technology for producers.

Over the past two years, many of the companies that develop the image-creation products used by producers and post shops have undertaken new technology initiatives, new alliances and major regrouping plans to address the changing facts of digital life in the market.

Now, they must incorporate these changes into their corporate structure alongside looming media delivery issues like hdtv and larger market instability, which has meant, according to some players, that the growth of the business has slowed while waiting for the next generation of tools to take hold.

‘I think the growth rate is leveling off for what you might call the first wave of technologies in nonlinear editing and effects and compositing,’ says William Miller, chairman and ceo of Tewskbury, Massachusetts-based Avid Technology.

‘We’re getting ready now for the next generation of technologies. We haven’t yet scratched the surface of what the digital technologies can do,’ says Miller.

‘We are preparing now to introduce a wave of technologies that will mean all-digital nonlinear tv production, that will take over the broadcast news environment, reach into corporate, government and education environments where they have never been before as well as the music production process.’

Avid consolidates

At the beginning of October, Avid, like Discreet, a major public player in digital media content creation and editing, sent out an early warning to investors that quarterly results would not reach expected levels.

A few weeks later Avid released its results for the third quarter of 1998, beating the forecast revenue figures (and causing a surge in Avid stock) but still reporting results it called ‘disappointing’ considering revenues at $116.2 million for the third quarter of 1998 versus $116.5 million for the same period in 1997.

Miller says the results did not reflect anticipated growth, which he attributes to changes resulting from the addition of Montreal-based software maker Softimage to the company (an acquisition from Microsoft), a newly formed alliance with Wilsonville, Oregon-based video and networking systems player Tektronix, and delayed buying decisions while customers paused over a raft of new products set to be released in the fourth quarter.

He also cites a slowdown in the Asian market – which had been growing rapidly and was expected to fuel future growth for the company – as a factor in the modest growth reported. But he expresses confidence about Avid’s course for future growth.

Miller forecasts more partnerships within the industry. ‘I think the industry will continue to align in one way or another and consolidate, because I think everyone is coming to recognize that the next wave of success in this business will depend on being able to effectively integrate products into a real nonlinear production environment, and to do that you either have to have the technology capabilities inside the company or make alliances with people who have them.’

Discreet strong on

new media, editing

As for Discreet, although Szalwinski acknowledges cycles in the production industry, reflecting activity from film companies as well as advertisers and special effects houses he challenges the idea that the tech market is taking a downturn.

‘I think there are different sections of the marketplace that go through different types of cycles, but I don’t think in general there is slow growth,’ says Szalwinski. ‘Companies really need to position themselves correctly for the shifts in the different markets.’

Szalwinski points to growth in the new media area, a sector the company had reoriented itself toward to expand from the high-end effects market it had traditionally dominated.

Szalwinski says with a 60% to 70% share of the high-end market, the growth in that area is smaller, while in the new media and editing sectors, Discreet is beating a 15% to 20% industry growth rate because of new product offerings in those markets.

On the Advanced Systems side, Discreet’s high-end systems are providing a pathway to users looking toward eventual hdtv applications.

Szalwinski says the transition to dtv and hdtv is providing a challenge now but will represent a long-term opportunity.

‘Customers have not sorted out the standards and the budgets regarding hdtv, so there’s a bit of a hesitation now. That’s going to lead to a spike in a certain period of time which we hope to take advantage of,’ he says.

A gap in stock valuation has put somewhat of a question mark over the proposed deal for San Rafael, California-based Autodesk to purchase Discreet, scheduled to close in December.

Says Szalwinski: ‘Both companies have to go the shareholders. It’s hard to predict these things.’

Joe Vejvoda, an analyst at Toronto’s Levesque Beaubien Geoffrion, says he expects the deal to go through.

‘Both sides are pretty adamant that the deal is worth doing,’ he says.

Vejvoda says there is a slowdown in this part of the industry as customers put off buying decisions and points to Discreet’s dominance in the high-end sector.

‘Basically, when someone buys a piece of Discreet Logic software for the high end they are buying a guarantee to keep up to date with the latest and greatest, and all the major players are already there. So you need to grow a large new contract somewhere. The transition for them is going to be hdtv, but until the hardware side gets resolved, the software is not going to sell.’

Alias|Wavefront

on schedule

Although Warren Pratt, president of Toronto-based, sgi-owned Alias|Wavefront, points to a slow growth rate on the entertainment side of the tool business, he says a|w (which does not release financial results independently from sgi) is ‘meeting its objectives.’

a|w has been through a major cycle of development and marketing for its Maya software package, which it continues to build.

‘We are perhaps in a different technology phase than some of the other players in that we have just brought significant new technology to the marketplace and are adding modules as well as enhancing the base functionality,’ say Pratt.

a|w is planning a release of Maya Cloth this quarter, two more releases of the base product in the next year, and plans to turn some new particle paint technology into a product in the next few months.

‘Given that the market itself isn’t growing rapidly our approach now is to gain share,’ says Pratt.

He says the company is pursuing that goal aggressively, pointing to new technology releases, price reductions in the 25% to 40% range, and a push in its training efforts.

Pratt says his own forecast is that it will be perhaps another year before the industry growth rate increases and says the company is open to the possibility of a partnership.

‘We continue to talk with other major players in the industry about opportunities where we might be able to serve the customer base better by working more closely, but we don’t have anything to announce at this point.’

Side Effects on

an up-curve

Toronto’s Side Effects Software is ahead of the curve in terms of launching a major new product, in this case its Houdini animation software, which has been a strong performer for the company.

Side Effects president Kim Davidson points to the cyclical nature of the entertainment sector, but says the company has retained a strong balance sheet as a private, focused company.

‘In some ways I think we are fairly focused on the high end and we also have a very efficient toolset, which is what production companies need when they are squeezed.’

The company has been growing its operation, recently opening an office in Santa Monica with plans to move some of its team to San Francisco before the end of the year.

Davidson himself owns a production concern, Catapult, which together with Cambium has created an animated series Monster By Mistake.

Catapult has no legal connection with Side Effects, and although his is an arm’s-length involvement in production, Davidson says the strategy of software companies becoming involved in production (or vice versa) may be become more common.

Producers need

stand-up solutions

From the standpoint of a producer, tools have to stand up to a an ever increasing range of demands.

Scott Dyer is head of Nelvana’s 3D department, overseeing production on its 3D series Rollie Polie Ollie. Dyer says it’s a complicated time for those using these tools in production.

For a large producer with long production cycles, Dyer says there are existing problems with lack of integration between software packages as well as a dearth of options for project management on a large scale. ‘We’d like to see the market mature a bit more,’ says Dyer.

‘There are some truly amazing tools out there which do breathtaking things, but putting it into play in a production like ours is difficult; the tools don’t always perform as well under scheduling and budget pressures as they do in a demo.’

Dyer also points to the challenges presented by a range of new delivery media including hdtv and the Web.

‘The modern studio has to be prepared to deliver the same brand, the same product on any one of these media,’ says Dyer. ‘It certainly changes how one approaches buying hardware. It makes the decisions a little harder.’