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DataPlay slashes one-half of staff
Industry experts say Boulder company's future is cloudy

By Matt Branaugh, Camera Business Writer
July 27, 2002

In DataPlay Inc.'s short, four-year history, it's promised to change the way people listen to music, read books and store photos. It snagged $120 million in venture capital to do it. It received local and national acclaim along the way.

But the company slashed half of its 240 workers worldwide Friday, including more than half of the 140 workers at its Boulder headquarters, suggesting that its revolutionary dream is struggling.

The privately held company told the Daily Camera in April that it was pursuing another $50 million in private funding. It didn't come through, and that's why the cuts occurred, said Todd Oseth, a senior vice president at DataPlay.

The decision better positions DataPlay for the future, he said.

Industry followers aren't so sure, though, with one saying the company's technology may be too little, too late and too expensive.

"It appears they're losing ground," said Mary Craig, a principal analyst following the market for Gartner Dataquest. "If they do not deliver on the promise — shelves full of DataPlay devices in lots of stores, with plenty of content to satisfy people at satisfactory price points by year's end — I would then be bold enough to say their chances of being successful in 2003 will be slim."

Oseth disagreed.

"Our future's not changing," he said. "It probably brings the ability to become cash flow-positive and break-even sooner by making these cuts."

All of the company's divisions were hit, although no executives were cut. Limited severance packages were given, Oseth said, and outplacement services were recommended to affected workers, but DataPlay can't afford to pay for them.

DataPlay created a technology buzz in 1998 when founder Steve Volk introduced the concept of digital discs about the size of a half-dollar that could store up to 500 megabytes of content — the equivalent of five music albums, hundreds of digital photos or a collection of novels. Manufacturers could customize a DataPlay-made engine into a music player, a digital camera or other miniature device to access that content.

Venture capitalists jumped on board. Local and national media publications, including the Wall Street Journal and USA Today, took notice. Awards followed.

Big-name music labels BMG, EMI and Universal Music signed on, as well as manufacturers Samsung and Toshiba.

But a technological glitch hit last fall, delaying DataPlay engines six months. And then legal hankering between musicians, agents and lawyers over content usage postponed album launches.

Cindy Wolf, an analyst with high-tech research firm In-Stat/MDR, said the industry has been promised a DataPlay product for 18 months now. Meanwhile, Apple's iPod came out and popularized the union between hard disk drives and portable music players. CD burners caught fire. And Flash-based players — pioneers in portable music — increased to 128 megabytes of storage.

"(DataPlay) just kind of lost their space in the market," she said. "Maybe — and who knows — if they had come to market last fall with the devices that supported the discs, as well as the discs, they may have had a better chance."

The funding deficiency caused the cuts, not the delays, Oseth insisted, adding investors want to see "break-even on the horizon," before giving more money. A smaller-sized deal may soon close, he said.

Next week, the company expects to see music players with its engines on store shelves, priced around $369. Music albums — priced at $15 a pop by the music companies — won't come out until the end of next month, with 50 to 100 artists available by Christmas, Oseth said. Blank discs used for recording will cost about $10 apiece.

DataPlay continues operating with the expectation consumers will love the technology, buy it later this year and even more so next year. Access to more interactive content, including direct Web links and ways to buy additional music from an artist on the existing disc, will justify the prices, he said.

A deal announced earlier this week, in which BMG's country music label will release some artists using the format, further validates DataPlay's progress, he added.

But Craig's not convinced, especially since competing technologies are already at or below DataPlay's prices.

"We think the price points are way too high," she said. "We think the idea is great. But they aren't delivering."

In-Stat's Wolf said this year's big audio breakthrough — a hybrid player meshing a CD player with an MP3 — is wildly popular and typically costs between $70 and $150.

Still, Wolf said there's always a chance DataPlay's format will win consumers' affections.

"I don't think (DataPlay's future) is cut-and-dried," she said. "New ideas sometimes go over and sometimes don't. That's just the way the business works."

Financial struggles and layoffs aren't new to DataPlay's creator. Volk saw his Longmont-based PrairieTek, a disk drive maker that once employed 500 people, file for bankruptcy and shutter in 1991.

Seven years later, his 300-employee Intgral Peripherals — another computer disk drive business — lost its venture capital funding from struggling Asian investors and filed for Chapter 11. Mobile Storage later acquired that company.

Volk, who was named Ernst & Young's 2001 Entrepreneur of the Year, was first scheduled for an interview with the Daily Camera on Friday morning but canceled. He wasn't available for further comment until next week, Oseth said
http://www2.dailycamera.com/bdc/business/article/0,1713,BDC_2400_1290614,00.html
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