Small Businesses : Starting and Staying in the Small Hotel Movie Field : Capistrano Beach Firm Is Seeking Rooms With a Pay-to-View

The idea came to Charlie Smith one evening a few years back while he and his wife Susie were vacationing in Northern California.

As is their habit, the first thing the Smiths did after checking into a small hotel was to switch on the television set to see if it worked. It didn’t.

Wouldn’t it be nice, Smith recalls wondering, to check into a hotel, turn on the TV and have a choice of good movies instead of boring local programs and bad reception.

If other travelers felt the same, the Orange County real estate developer surmised, maybe there was money to be made in the hotel movie business.

When Smith returned from vacation, he immediately phoned his son James in Texas. “I told Jimmy that I had a neat idea,” said the silver-haired builder, whose projects include the Dana Bluffs town houses in Capistrano Beach.

Smith’s neat idea is now a company called Hotel Movie Theatre, a Capo Beach-based operation that provides pay-movie systems to the hotel and motel industry. Smith, 61, is chairman of the company; his 37-year-old son is president.

The fledgling company believes that it can succeed by focusing on a relatively untapped segment of the lodging industry: small hotels with fewer than 200 rooms.

To be sure, Smith’s idea for in-room hotel movies was hardly original. About 15 years earlier, a Richardson, Tex., company named Spectradyne had a similar notion.

Industry’s Largest Player

Spectradyne has since built a $77-million-a-year company around the idea that business travelers and vacationers like to watch movies in their rooms. By far the industry’s largest player, Spectradyne’s Spectravision service is installed in 500,000 rooms in 1,500 hotels in the United States and Canada.

Spectravision is available in more than 50% of the hotels with more than 600 rooms in the two countries, including many Hilton, Hyatt Regency, Marriott and Westin locations. It also is installed in more than 50% of hotels with 300 to 600 rooms.

“The typical viewer is a traveling businessman who has little else to do at night other than sit in a room and watch a movie,” said Robert E. Williams, a technology analyst with Eppler, Guerin & Turner, a Dallas securities firm.

Although pay-movie services typically offer a variety of features, the majority of movies selected are adult-oriented features.

The number of hotel rooms with pay-for-view movie systems has been growing about 20% a year, but some analysts say growth is likely to slow in coming years.

A Pool of Rooms

“The number of hotel rooms is not growing very rapidly,” said Charles G. Crane, a vice president at Prudential-Bache Securities in New York. “But there is a pool of rooms that are potential customers. There’s plenty of growth for a small company, but it is a finite universe.”

Hotels typically pay nothing to have an in-room movie system installed, but they generally receive a slice of the sales, often about 10%. Pay-movie companies foot the bill for installing the systems as a way to generate sales.

Comparing Hotel Movie Theatre to Spectradyne is a little like comparing a one-screen movie house to a 16-screen theater. Founded in late 1985, Hotel Movie Theatre has installed pay-movie systems in 4,300 rooms in 38 hotels and motels in California, Oregon, Washington and Nevada and plans to add another 1,000 rooms by the end of the year.

Still, the company is convinced that it can thrive by targeting the small-hotel market.

“Every major hotel in the country has some kind of pay-to-view movies,” said James Smith. “But at the next level (down), not many have these systems. The Spectradynes . . . are not going after the people we’re going after.”

Logical Expansion

Spectradyne officials view the situation differently. They say the company’s next logical expansion will be into smaller hotels.

“It is not unusual today for us to be in smaller properties, some as small as 125 rooms,” said John Pillow, Spectradyne’s division sales manager. “We will continue to move into smaller markets.”

Analysts said Spectradyne and other pay-movie companies must reduce the costs of delivering their service to earn a profit in smaller hotels. Viewing rates generally average between 10% and 15% of occupied rooms, so smaller hotels produce less revenue.

“One of the reasons Spectradyne didn’t serve smaller hotels is that it has been uneconomical to do so,” said Williams, the Eppler, Guerin analyst. He said Spectradyne is one of several companies currently developing less costly equipment.

Another uncertainty for Hotel Movie Theatre is whether it can obtain recent releases as quickly as its competitors.

“Spectradyne is so big and is able to offer a significant revenue stream to the movie studios,” said Prudential-Bache’s Crane. “They have been able to get their hands on theatrical release products sooner than the home video market. That window is very significant.”

Spectradyne was recently acquired for nearly $500 million by an investment group that includes Dallas investors Tom Hicks and Robert Haas, Fort Worth billionaire Robert Bass, American Express Co. and Equitable Life Insurance.

But Hotel Movie Theatre officials are undeterred by the prospect of competition from an industry giant.

“Even if they (Spectradyne) were to aggressively get into smaller markets, there’s a ton of hotels out there,” James Smith said. “I’m more concerned about getting quality locations.”

Richard Gipe, a Costa Mesa investment banker, is another observer who sees bright prospects for Hotel Movie Theatre.

Gipe heads an investor group that has announced plans to merge a Nevada-based company, the Danbury Group, with Hotel Movie Theatre. The Danbury Group is a so-called blind pool--a limited partnership formed for the purpose of acquiring an unspecified company.

“I think we’ve got a good little company here,” said Gipe, who is also president of QPA Securities, an Irvine investment firm.

The Danbury Group raised $100,000 through a recent initial public offering and has issued warrants that, if exercised, would enable it to raise up to $4 million more. The money would be used to expand Hotel Movie Theatre.

Capital Is Important

So far, Hotel Movie Theatre has relied on about $2 million in financing from Charles Smith and about 25 private investors in Orange and San Diego counties.

The availability of capital is important in the pay-movie business because most companies, including Hotel Movie Theatre, elect to absorb the installation expenses. Hotel Movie Theatre estimates that it costs $20,000 to $40,000 to equip a typical small hotel with 125 to 175 rooms.

“It’s a pretty expensive operation,” Charles Smith said.

Hotel Movie Theatre pays the hotels 10% of the proceeds from each movie viewed by a guest--or 59.5 cents for a $5.95 movie. As much as 50% of the revenues received by Home Movie Theatre go to the studios from which it licenses its movies.

As things stand now, the Smiths say they have more business than they can handle.

“The demand for in-room entertainment is far greater than we can fill,” James Smith said. “The lodging industry is really only beginning to realize the need.”