Firms Putting Local Ads on Movies Falter : Cassettes: A struggling company says a lawsuit by Paramount had its effect, even though a judge ruled against the studio. Another firm countersues.

What appeared to the a booming business last fall--putting local ads on videotapes of hit movies--apparently has gone bust.

Two companies, Video Broadcasting Systems of Wichita, Kan., and Video Air Time, of Midland, Tex., were at the forefront of this local-ad movement. Both, though, are virtually out of business.

What these video-ad sales firms did was make deals with video store owners to put commercials for local businesses on the blank tape at the beginning of rental movies. Since video companies like Paramount sell rental copies to video retailers, in theory the retailers are free to do what they want with the tapes--including selling commercial space on them. Video retailers and the video-ad sales firms split the money paid by advertisers, while companies like Paramount and CBS-Fox got nothing.

Last fall, Paramount filed a suit in a Kansas federal court against Video Broadcasting, mainly charging trademark infringement and the false creation of the image that Paramount approved these ads. Paramount wanted a ban on the local ads but the judge denied it. That should have meant clear sailing for companies like Video Broadcasting and Video Air Time to sell their local ads.

But, Allen Frasier of Video Air Time explained, Paramount’s intimidation tactics frightened away both advertisers and video retailers.

Without any advertisers, said William Fry, attorney for VBS and also a former co-owner, VBS is just “limping along.” Last week VBS filed a countersuit against Paramount, charging violation of antitrust laws and malicious interference with the company’s contracts with advertisers, seeking $105 million in damages.

Paramount’s responded to all this with a prepared statement made through a spokesperson: “Except for VBS, the other original defendants have agreed to stop these practices. As we said all along, we choose what is placed on videocassettes very carefully. We brought this action originally to protect the quality and integrity of our product as it is sold or rented to consumers. We don’t want them confused. We believe the court will dismiss VBS’ frivolous claim.”

Putting ads on cassettes released by other companies is now almost impossible too, Fry said. These other companies have used tactics like cutting down on the amount of blank tape space at the beginning of movies and imprinting the company logo on all the tape preceding a movie--so that adding a commercial would constitute trademark infringement.

Paramount particularly objected to the tone and inferior quality of the ads and the fact that commercials were inappropriately matched to its movies, like a bar ad preceding the teen movie, “Pretty in Pink.” Ads have been placed on Paramount videos such as “Indiana Jones and the Last Crusade,” “Flashdance,” “Crocodile Dundee II” and “Star Trek IV.”

All video manufacturers deplore the local video-ad business but only Paramount took legal action. Video companies weren’t that concerned about lost revenues from local advertising but they feared renters might think they approved such ads.

Also, these local ads conflict with the national ads that video manufacturers have already added to certain titles. But video companies, afraid of alienating renters, have put very few ads on movies. Paramount, for instance, has only put ads on six of its titles. The companies were afraid that rampant local commercials would ultimately turn off renters and damage the whole rental business.

Kansas has been the battleground for the video-ad conflict. But Texas’ Video Air Time has indirectly suffered too. Video Air Time’s president Allen Frasier, who said he once considered merging with Video Broadcasting, admitted that his company is largely out of the video-ad business. Though he blamed Paramount for Video Broadcasting’s decline, Frasier said Paramount didn’t do as much damage to his business as the depressed Texas economy.

“The advertisers don’t have much money in this part of the country,” Frasier said. “We had to compete with cheap radio ads and cheap TV spots. Even if we could put all the local ads on videotapes we wanted to, we wouldn’t have much business.”