(FORTUNE Magazine) – THE COMPACT DISK was one of the great success stories of the 1980s, revolutionizing the recorded-music business in less than five years. Now something similar is happening in the personal computer industry: After years of anticipation, the CD-ROM -- which stands for compact disk-read-only memory -- is becoming an essential piece of business software and making its way into the home as well. Corporate managers are using the shiny silver platters to store voluminous reports and manuals. Publishers are creating ''multimedia'' CD-ROM disks that combine reference works like encyclopedias with music, photographs, and flashy video. And software companies are writing CD-ROM games that are way cooler than anything available on a floppy disk. A CD-ROM disk looks just like a Madonna or Luciano Pavarotti CD, yet it offers not only sound but also words and pictures, both still and moving images. CD-ROMs can hold a wealth of information -- reams of text, stacks of photos, sheaves of illustrations, and dozens of video clips. A laser-based optical disk drive reads the digitized data the same way a CD player does (floppy disks, by contrast, are read by magnetic drives). The big advantage of a CD-ROM over other forms of data storage is that it holds gargantuan amounts -- up to 660 megabytes per disk, equal to 350,000 typewritten pages or 330 floppy disks. The big disadvantage of CD-ROM is that it's a ''read-only'' medium. That is, unlike a floppy, after the information is ''burned'' onto the disk you can't erase it, change it, or add to it. But you can copy CD-ROM files and transfer them to your PC's hard drive, where the words, sounds, and pictures can be woven into, say, traditional word-processing or spreadsheet programs. Ever since CD-ROM technology was introduced in 1985, computer experts have predicted that it would change the world of PCs. After all, there's no better way to package and distribute large amounts of information. A single optical disk can hold a whole year's worth of inventory reports for a FORTUNE 500 company. Or a snazzy live-action detective game with over 90 minutes of sound and video. But businesses and consumers were slow to accept CD-ROMs. The optical drives needed to read the disks were expensive at first -- in the $1,000 to $3,000 range -- and much more sluggish than floppy drives. There were also problems with compatibility. When the first CD-ROM products hit the market, you couldn't be sure that one manufacturer's drive would play another manufacturer's disk. Over the past year, though, most of these obstacles have been eliminated. The average retail price of CD-ROM drives has dropped to $400 and should fall to $300 by the end of this year. The drives have gotten speedier: Now you can get data from a CD-ROM disk just as quickly as you can from most floppy disks. And last summer the Multimedia PC Marketing Council -- a collection of some of the largest hardware and software makers -- set a standard for connecting CD-ROM drives to IBM-compatible PCs. That eased customers' fears about incompatibility. Any CD-ROM program that conforms to the Multimedia PC standard can play on hardware that bears the MPC logo. Two companies led the effort to set the standard: Tandy, one of the first PC manufacturers to put a CD-ROM drive into its machines, and software giant Microsoft, which wanted to ensure that CD-ROM programs could run on its MS-DOS and Windows operating systems. Hardware buyers responded enthusiastically. They bought 660,000 CD-ROM drives worldwide last year, a 32% jump over 1990. This year the number is expected to climb nearly 40%, to around 915,000. The vast majority of the drives are built by Japanese manufacturers; Sony, co-inventor of the compact disk, has a 40% market share. Says Alan Sund, CD-ROM marketing manager for Sony's U.S. subsidiary: ''We've reached critical mass. There are enough CD-ROM drives out there now to make the market profitable.'' Marc Miller, head of NEC Technologies' optical business, comes to the same conclusion: ''This is the year of CD-ROM.'' MOST CD-ROM USERS buy the drives separately and hook them up to their computers. Owners of IBM-compatible machines must also install an audio circuitboard that allows the computer to play the music and sound bites encoded on a CD-ROM disk. NEC, maker of the fastest CD-ROM drive currently on the market, sells a $1,379 kit that will turn an ordinary desktop PC into a multimedia powerhouse. But you can upgrade your computer adequately for less than half that amount if you buy the drive, sound board, and speakers a la carte. Putting it all together is not too difficult -- the toughest part is unscrewing the metal casing of the PC and installing the sound board in an expansion slot. The CD-ROM drive hooks up to the computer just as a printer does; it usually comes with a connecting cable and installation software that must be loaded into the computer's hard drive. Some CD-ROM programs also require Windows software, but most will work fine on MS-DOS. Just slip the disk into the drive, type in the appropriate setup command, and you're up and running. Virtually every company in the computer industry is weighing in with its own entry in the CD-ROM market. IBM has put a CD-ROM drive into one of its high- end PCs, the $6,000 Ultimedia, and has started a joint venture with the National Geographic Society to produce educational CD-ROM software. Apple has said it will introduce a low-end Macintosh (list price under $1,000) with a CD-ROM drive by Christmas. Philips, the other co-inventor of the CD, has a $549 CD-ROM upgrade kit for home computer users; it competes with similar kits from Sony (the Laser Library) and NEC (the CD Gallery). And that's not even counting CD-I, CDTV, CD-ROM XA, and Photo CD (for a glossary of these and other terms, see box, page 72). The business market for CD-ROM is better established and less confusing than the consumer market. Big manufacturers and service companies have already found profitable uses for CD-ROM drives and disks. About a year and a half ago, American Airlines began offering a CD-ROM-based hotel directory to all travel agencies hooked up to the airline's Sabre computer reservation system. The Jaguar Electronic Hotel Directory, as it's known, allows travel agents to call up pictures of hotels -- the outside view, photos of the lobby and the pool, and so on -- from a CD-ROM disk and display them on their terminals. If a customer wants to stay at a hotel in Dallas with a health club and an Italian restaurant off the lobby, the travel agent can search the disk to see which meet those criteria. The disk also contains maps of all major metropolitan areas, so the agent can quickly identify, say, the Marriott closest to the airport.

American teamed up with the Reed Travel Group, the country's largest publisher of hotel guides, to produce the CD-ROM disks, which are updated quarterly. So far, 1,850 travel agencies have signed up. American and Reed make money from Jaguar in two different ways: They charge agencies for the CD- ROM equipment, and hotels pay to be featured prominently on the disk. The more pictures the hotel wants, the higher the fee. Says Terry Jones, vice president of American's Sabre division: ''Besides giving travel agents a new productivity tool, the CD-ROM system has broadened the scope of our business. Now we're in the information and advertising business.'' Companies tend to adopt CD-ROM systems when they need to move around vast quantities of data. Ford Motor, for example, offers two kinds of CD-ROM disks to its North American dealers, one bursting with technical information for servicing Ford cars and the other containing a complete parts catalogue going back to the 1980 model year. For Ford, mailing the CD-ROM disks to its dealers is much less costly than mailing a paper version or trying to download the information from a mainframe computer. Says Len Tedesco, a manager at Ford's parts and service division: ''Sending all this stuff over a telephone line would be ridiculous. It would take more than a week just to download it to all our dealers.'' Ford updates its disks once a month; the CD-ROM data can't be written over, so the company creates an entirely new disk from scratch using a ''write-once'' laser device. Write-once machines, like CD-ROM disk drives, have become much less expensive over the past few years, dropping from $50,000 to under $6,000. CD-ROM systems can cut the costs of a company's internal communications in other ways. Until last year, Eastman Kodak's 50 European offices got their inventory reports from a mainframe computer at company headquarters in Rochester, New York. Every time the European managers wanted to analyze their inventories, they had to process the data on the mainframe and then download . the reports on their own printers -- at a cost of $1.3 million a year. In January 1991, Kodak began recording monthly inventory data on CD-ROM disks, which are then shipped across the Atlantic by overnight mail. In addition to the inventory data, the disks contain software that makes it easy to plot, graph, and analyze the numbers. The annual cost of distributing the reports fell to $250,000, saving Kodak over $1 million a year. That's already a tenfold return on its one-time $100,000 investment in the CD-ROM hardware. Kodak, Ford, and American Airlines all hired system integrators to customize CD-ROM software to fit each company's needs. But businesses can also buy CD- ROM programs directly from software publishers, which generally sell their products by mail or telephone. For New York lawyers there's LawDesk, a $3,000 CD-ROM disk that holds 36 years of state case law. For accountants, there's RIA OnPoint, a disk with all IRS regulations (a new disk comes out every month; a year's subscription costs $1,274). Collection agencies and police departments can use a pair of CD-ROM disks from PhoneDisc USA that contain every single residential telephone listing in the U.S. ($1,850). And for desktop publishers, there are disks with extensive libraries of clip art and stock photos, nearly all of them priced under $400. So CD-ROM technology is rapidly finding niches in the corporate world. But will the CD-ROM drive ever become a general-purpose business machine, installed in the personal computer in everyone's office? There are 1.3 million CD-ROM drives in the U.S., and although that number is growing fast it's still tiny compared with the 70 million or so PCs out there. Conclusion: Unless they're swamped by overwhelming amounts of data, most businesses don't yet have a compelling need for CD-ROM. They're still waiting for a general-purpose CD-ROM program so irresistible that it justifies the cost of the drives. CD- ROM enthusiasts speak reverently of such a program as the ''Killer Application'' -- Killer App for short. Microsoft, which has pushed CD-ROM technology since the mid-Eighties, wants to be the first to write the Killer App. Microsoft's plan is to create CD-ROM versions of its own best-selling programs, with the goal of enhancing their usefulness. For example, the company will soon release a CD-ROM disk that combines Microsoft Word, its popular word-processing program, with Bookshelf for Windows, an on-line library that includes an encyclopedia, an atlas, and five other reference works. The disk will be priced at $595, just $100 more than the basic Word software alone. Users will be able to electronically cut and paste quotations and definitions into their own documents. ''Now you can plagiarize to your heart's content,'' says Chris Peters, general manager of the Word business unit. The disk will include some neat sound bites: It will pronounce every word in the American Heritage Dictionary and play the national anthem of every country in the world. And it will have writers, public speakers, and poets -- like Robert Frost and T. S. Eliot -- reciting their own words. Lotus Development is taking a similar tack. The Cambridge, Massachusetts, software company will soon release a CD-ROM version of Lotus 1-2-3 that includes a multimedia training guide for first-time users of the popular spreadsheet program. Called Multimedia SmartHelp, the disk contains dozens of colorful animations that literally talk the user through the steps necessary to create a spreadsheet. Steve Barlow, multimedia product manager for Lotus, says the SmartHelp disk could save customers thousands of dollars in training expense -- and it won't cost any more than the floppy version of 1-2-3. Says Barlow: ''We're putting the family jewels -- Lotus 1-2-3 -- on CD-ROM, and that sends a real message to the whole industry. Now there's a compelling application to get corporate users to buy CD-ROM drives.'' Even if no Killer App emerges, CD-ROM technology could become ubiquitous anyway through a proliferation of ''Baby Apps'' -- specialized CD-ROM products that appeal to different markets. Patty Chang, an analyst at Dataquest, a market research firm in San Jose, California, estimates that commercially available CD-ROM titles jumped from 900 in 1990 to 2,000 last year and will rise to 3,000 by the end of this year. So far, the CD-ROM software industry has been dominated by small entrepreneurial firms rather than giants like Microsoft and Lotus. Consider, for example, DeLorme Mapping, a company in Freeport, Maine, that publishes detailed back-road atlases used by hunters and fishermen, among others. Late last year, DeLorme introduced Street Atlas USA, a $169 CD-ROM disk that holds street-level maps of every square mile of the U.S. The disk shows not only major thoroughfares but also side streets, dirt roads, and alleyways. Type in a town, or a zip code or a telephone exchange (the area code plus the first three numbers), and up pops a map. The software has 15 levels of detail, allowing the user to zero in on any part of the country by moving from state map to city map to neighborhood map. DeLorme has sold 10,000 disks so far, a respectable showing for a CD-ROM title. Trucking firms and florists buy the disk so they can map out delivery routes. Or consider MicroPatent, a company in New Haven, Connecticut, that reproduces on CD-ROM disks every patent issued in the U.S. and Europe. (The boxes in these pages show screens from this and two other exemplary CD-ROM programs.) MicroPatent's disks are used by the R&D staffs at Schering-Plough, the pharmaceutical giant, and Hoechst Celanese, the chemical manufacturer. The disks replace outdated microfilm records, which can't be searched by computer. Searching the disks is cheaper than using on-line information services, which charge up to $360 an hour. Says Peter Tracy, president of MicroPatent: ''When you use an on-line service, you know the clock is ticking. But when you use CD-ROM, you're free to explore.'' THE SAME holds true for CD-ROM games and educational programs: These interactive disks are made for exploring. A good example is the CD-ROM program called Sherlock Holmes, Consulting Detective, which has had great word-of- mouth from both computer hackers and Sherlock Holmes buffs since it was released six months ago. The disk, which has a list price of $70, begins with a blast of Victorian-sounding music and an animation sequence showing a book opening. The title page offers three different murder mysteries to choose from. Pick any one and Sherlock Holmes himself -- or rather, a Shakespearean actor playing Sherlock Holmes -- appears in a video clip with another actor as the often dense Dr. Watson. The video plays right on your PC monitor -- it's not quite television or movie quality, but it's pretty good. The object of the game is to solve each murder mystery with as few clues as possible; even the easiest of the three cases takes several hours. The object of the game's creator, a small Wheeling, Illinois, software company called ICOM Simulations, was to show the entertainment capabilities of CD-ROM. ICOM spent over $1 million to make Sherlock Holmes -- as much as the production cost of a typical TV sitcom episode. ICOM has sold over 120,000 copies of Sherlock, making it one of the best-selling CD-ROM disks of all time. Two sequels are in the works. Says Dennis Defensor, ICOM's president: ''We're creating the technology that will allow the computer industry and Hollywood to merge.'' The prospect of putting movies on CD-ROM disks is a tantalizing one. The technology would allow viewers to interact with their favorite flicks. Armchair directors could change the sequence of scenes or choose from an assortment of climactic endings. But several technical hurdles need to be overcome before you can slip Casablanca into your computer. The video clips now available on CD-ROM run at 15 frames per second, half the speed of television video, so they look jerky and unrealistic. True full-motion video -- the Holy Grail of the CD-ROM world -- will require breakthroughs in both hardware and software. An affordable system is probably several years away. The multimedia capabilities of CD-ROM also make it ideal for children, who might be more tempted to crack open an encyclopedia if it contains videos of space shuttle launches and the sound of lions roaring. Compton's New Media and Grolier have already come out with CD-ROM encyclopedias, while the IBM- National Geographic joint venture has released kid-targeted disks about mammals and the Presidents of the U.S. One of the best educational titles for young children is Just Grandma and Me, a beautifully animated CD-ROM program ($50) from Broderbund, a Novato, California, software company. There's also educational CD-ROM software for adults, like Multimedia Beethoven: The Ninth Symphony. UCLA music professor Robert Winter wrote the $80 program for Voyager Co., a small software firm in Santa Monica, California. The country's largest book publishers are warily eyeing the CD-ROM market, looking for opportunities to transfer their titles to the computer screen. Warner New Media, a division of Time Warner Inc. (the parent of FORTUNE's publisher), has produced several CD-ROM titles with text and graphics lifted from the pages of Time, Sports Illustrated, and several Time-Life books. Stan Cornyn, CEO of Warner New Media, says one of the obstacles to selling CD-ROM titles is that there's no easy way to demonstrate the product to large numbers of people. Says he: ''An audio CD can be exposed on Top 40 radio, but there's no equivalent for CD-ROM.'' So far, Warner New Media's best-selling title is Desert Storm, a multimedia record of the Persian Gulf war released six weeks after the guns stopped firing (list price: $50). Before you rush out to buy any of these disks, a word of caution: Despite the agreement on standards, the consumer market for CD-ROM is still fraught ) with confusion and incompatibility. Many CD-ROM upgrade kits being sold in computer stores can't play some of the programs described above. Some drives were rushed to market before the standards were set. Some disks, like Desert Storm and Just Grandma and Me, were originally written for Macintosh computers, and versions for IBM compatibles aren't out yet. Adding to the confusion is a welter of CD-based entertainment systems that connect directly to television sets, eliminating the need for a home computer. These systems include CD-Interactive from Philips, CDTV from Commodore, and Turbo Grafx from NEC. Each has its own standard. A disk from one system won't play on the others, and none of the systems can play CD-ROM disks. That's why these systems have not been a rousing commercial success; the software you can play on them is limited and boring. Sega and Nintendo, the 800-pound gorillas of the videogame market, plan to introduce their own CD-based entertainment systems later this year or early next. Putting videogames on CDs will allow the two companies to add live- action footage and other nifty features to their popular titles. Interaction will be as easy as with games on cartridges, using the same controller. But industry analysts say that it will be some time before videogamers warm up to the idea. The people engaged in marketing CD-ROM -- both hardware and software -- are still just finding their way, testing the waters with a variety of products. Although the bells-and-whistles multimedia programs get all the hype and glory, for now the usefulness of CD-ROM technology is better demonstrated by the relatively mundane business software -- the reference tools, phone lists, maps, and training guides. Says Robert Katzive, vice president of Disk/Trend, a market research firm in Mountain View, California: ''Sometimes the emphasis on the whiz-bang stuff can get in the way. You don't need lots of multi-media to make a good parts catalogue.'' Consumers may buy CD-ROM for its flashy sound and graphics, but businesses will buy it because it helps managers and employees do their jobs better.