Egghead Software was a US retail store that sold computer software from 1984 to 2001. It declared bankruptcy 25 years ago this week, on August 18, 2001, after an attempted reinvention as a dotcom selling online failed. Why did Egghead Software fail? In this blog post, we examine what happened to Egghead Software and why.
Egghead Software’s beginnings
Egghead Software started in Bellevue, Washington in 1984 and moved eastward. Its founder, Victor D. Alhadeff, had a background in oil and gas. But when Alhadeff’s old company went out of business in 1983, he needed a new idea. That came from shopping for software. At the store he visited, the staff spoke in jargon, so his idea was to open a consumer-friendly retail software store. With $50,000 of his own money and $1 million from investors, including Microsoft co-founder Paul Allen, the stores carried as many as 1,300 titles.
Egghead’s growth was fairly rapid, because they sold software and accessories at what could sometimes be a very steep discount. For example, when Microsoft released MS-DOS version 5, it retailed for $100. Egghead sold it for $40. But a typical discount was closer to 40 percent.
Egghead Software’s IPO and rapid expansion
In June 1988, Egghead held a successful IPO, raising $24 million. At its peak, Egghead had around 200 stores throughout the United States. By 1980s standards, that was a pretty large chain, but if you didn’t live in a large metro area, you may have never seen one.
My introduction to them was sometime around 1988, when I received a catalog from them out of the blue. It included, among other things, promotions on all the latest Sierra games. That catalog may have been where I found out the Sierra game Leisure Suit Larry existed. It was certainly the first time I saw a screenshot.
I still don’t know why they sent me that catalog in the mail, however. My family had a computer, but we didn’t have a PC. So even though Egghead had a St. Louis-area location that was in the same plaza as some other things we frequented, I don’t think I went in there more than once or twice. Babbage’s or Software Etc. were my stores of choice, even if they didn’t discount as heavily as Egghead did. The other chains carried Commodore and Amiga software, and Egghead didn’t. I can see why Egghead concentrated on the PC market, but I wasn’t one of those 60 million who bought a PC in the ’80s.
Egghead’s profits were uneven, especially due to its efforts to expand and saturate the market before others could. This meant occasionally closing a couple dozen stores, only to open new ones after profitability returned.
Why Egghead Software failed
So why did Egghead Software fail? The problem for Egghead was that even though sales of PCs took off during the early 1990s and continued accelerating, their customer base didn’t grow at the same rate.
I don’t think I went there at all in the 1990s, even though I bought a PC in 1994.
Even that one weekend in 1995, when I helped a friend build a computer, and we got to the very end and needed one last part, and we hit every single computer or electronics store along the old Route 66 heading west from St. Louis, we didn’t quite make it to Egghead. The last store before we reached Egghead was Best Buy. That’s the closest I got to going to Egghead in the 90s until I heard that store was closing. Does that sound like a common story?
I wish I had made it to Egghead at some point in the 90s, because I’m not sure what I missed. But at the time, it didn’t look like I was missing much. An Egghead storefront was 2,000 ft. It was similar in size to a Gamestop location. If you’re not familiar with Gamestop, think of the strip mall closest to you, imagine the smallest store in that plaza, and that’s the size of an Egghead location.
The consumer electronics superstore
During the 1980s and 90s, consumer electronics superstores were opening up throughout the United States. There were dozens of these chains, some of them regional. All of them had aspirations of going national the way Best Buy is today. All of them also followed Egghead’s model of trying to saturate the market.
These stores carried a limited selection of computers, and a limited selection of software, but they priced aggressively, and most of them had a guarantee to at least meet anyone else’s price, and in some cases, they would beat someone else’s price by enough percentage to make it worth your while. Egghead had a difficult time competing with that. They could also offer a popular title at a loss, in hopes that by getting you in the store, you would find something else you wanted. But Egghead only had 2,000 square feet of merchandise to tempt you with. The smallest superstores like Tipton or Silo had a minimum of 10,000 square feet. With 5 times as much space, the business model was more effective.
By the mid 90s, Best Buy and Circuit City had many of their smaller competitors on the ropes. So they went in for the kill, opening even larger stores, 30,000 to 40,000 square feet in size. With that much square footage inside, their software section alone could be 2,000 square feet or more. And they could dedicate another 2,000 square feet or more to a larger selection of computers and a full line of accessories.
And if that wasn’t enough, computer-only superstores like CompUSA and Computer City going national would have been. Those stores weren’t as good as Fry’s or Micro Center, but unlike those two, they were nationwide, or nearly so.
Egghead could compete when they carried offbeat stuff the superstores didn’t. But once the superstores had more locations and were beating them on both selection and price, Egghead had to try something different.
Transitioning to online sales
There was more to Egghead than just the retail stores. They also sold direct to businesses, using the same business model that CDW or SHI or Zones use today. Egghead sold off that line of business in a futile effort to survive. They also experimented with a larger store format, closer to 10,000 square feet, starting in 1995.
But it was too little, too late. In January 1998, they moved to entirely online sales, closing all their storefronts. Then, in November 1999, they merged with Onsale, an early Internet auction website that had competed with Ebay. Sales and traffic were brisk but profits were elusive, losing $50 million in 1998 and $34 million in 1999. And then in December 2000 Egghead suffered a notorious data breach involving 3.5 million credit card numbers.
In 2001, everyone still assumed it was easy to make money selling stuff on the Internet, but few companies had figured out how to do it yet. Even Amazon.com wasn’t profitable at that point. Part of the problem was there weren’t quite enough people online yet.
And even though Egghead had name recognition, it was easier for a new company to attract new capital than an existing company, and a fresh new startup wouldn’t have any debt from earlier ventures. By the summer of 2001, Egghead’s time had run out. A deal to sell its online assets to Fry’s Electronics as part of the bankruptcy proceedings fell through, and Amazon ended up buying the domain name and related assets.
Egghead Software’s legacy
Today, if you buy a random lot of floppy disks, it’s not unusual to find some Egghead branded disks in the mix. You might also find some Egghead receipts in the paperwork if you buy a computer out of an estate sale, and the original owner’s folder of paperwork happens to be somewhere in the computer room.
Speaking of estate sales, here’s a pro tip: Most of my best finds came from houses close to where old Egghead Software locations and similar stores used to be. Knowing where stores like Egghead Software operated in your city can give you a leg up in finding cool old computer gear from estates.
In the end, Egghead was a good idea, it just wasn’t necessarily the best timing. But even though the superstores have raised prices and started cutting back on stores, don’t expect this business model to make a comeback. With so much software distribution being digital now, the idea of a retail chain selling software seems quaint.
Speaking of online software sales, Egghead was an early player in that game too. But starting up in that space now would be difficult. The operating system vendors, Apple and Google and Microsoft, injected themselves there and control a large percentage of that market now. For games, Steam dominates that market. What happened to Egghead Software just goes to show that being first with a great idea doesn’t ensure survival.
David Farquhar is a computer security professional, entrepreneur, and author. He has written professionally about computers since 1991, so he was writing about retro computers when they were still new. He has been working in IT professionally since 1994 and has specialized in vulnerability management since 2013. He holds Security+ and CISSP certifications. Today he blogs five times a week, mostly about retro computers and retro gaming covering the time period from 1975 to 2000.
I miss Egghead. Still think of it when I drive by the location that was across the freeway from Northgate. Just like I think of the great Ballard Computer that used to sprawl across a few buildings in Ballard. And then there was the Amiga store I went to when I was at UW… ahhhh that was a fun time. 🙂