Waiting for Profit : Electronics: America’s richest man is among investors in Chatsworth- based Image Entertainment. The laser disc distributor may be turning the corner.
A decade ago, when Martin Greenwald started Image Entertainment Inc., a Chatsworth laser disc distributor, “people literally laughed at us,” he said.
Today, Image’s investors--which include America’s richest man, John W. Kluge, who owns 39% of Image’s stock--aren’t laughing, but they are still waiting for Image to turn a profit. Greenwald, an ex-stockbroker and former porno film distributor, said their waiting is now over.
Of course, Greenwald has said that before. Last year he predicted that Image--estimated by analysts to control 39% of the nascent laser disc market--would turn profitable in its fiscal year that ended last March 31.
It didn’t happen. Hampered by a lack of financing and a nationwide recession that dampened consumer spending, Image lost $609,306 in fiscal 1991 on $48.2 million in revenue.
The losses have continued into fiscal 1992, with Image’s first-half losses totaling $681,748 on revenue of $22.5 million.
Image’s struggles are linked to the slow growth of the laser disc market. A laser disc is essentially a dinner-plate-sized compact disc that contains visual and audio information. Proponents of laser discs, which retail for about $30 to $40, argue that the discs offer far crisper sound and sharper pictures than videotape.
Yet sales of laser discs this year are expected to total just 5% of the competing videocassette market. And video still offers some advantages over laser discs, which must be flipped in the middle of a recording and don’t allow consumers to record.
Despite its slow start, some industry observers contend that laser disc technology is coming of age, and that Image is poised to benefit. Paul Marsh, a Los Angeles-based analyst at Kemper Securities Group Inc., Image’s investment banker, issued a report last month that projected a $1.2-million fiscal 1992 profit for Image. Marsh’s report also fueled speculation that a major movie studio such as Walt Disney Co. or Paramount Communications might invest in Image.
Greenwald, 49, Image chairman, said the outlook for the company has also improved recently because it has cut costs, reducing its staff from 110 to 92; completed a capital expenditure program that included building a $1-million editing facility, and recently raised $20 million through the sale of notes.
What’s more, Greenwald said, “Fantasia” laser discs hit store shelves in late October, and have produced more than $9 million in sales for Image so far--making it the biggest selling laser disc to date. “Dances With Wolves” and “Silence of the Lambs” debuted in November and are also posting strong sales.
Investors apparently have taken notice. After falling as low as $3.38 a share in August, Image’s stock has rebounded, closing Monday at $9.875 a share. That means investors now believe that Image is worth more than $100 million--quite a hefty market value for a company that has yet to report a profit.
“We are very conscious of the fact that we have a stock that’s selling at a $100-million market capitalization and we’ve never shown earnings,” Greenwald said. “That’s something you worry about when you go to sleep at night.”
But, he said, “We’ve now done all the things we need to do to build a company. If I fail now, it’s because I screwed up.”
Jon Hickman, a senior portfolio manager at Wells Fargo & Co., is one investor who is betting that Greenwald won’t fail. Hickman, who manages a stock fund that invests in Image, believes that laser disc sales will escalate as prices of the players continue to decline. The players now retail for $300 to $700, contrasted with $1,500 just a few years ago.
Another positive sign for Image, Hickman said, is that hardware manufacturers such as Pioneer Electronic Corp. of Japan are combining compact disc and laser disc functions in one unit. When consumers buy new CD players, he believes, they’ll decide to spend a few extra dollars to get the laser disc component.
The Electronic Industries Assn. predicts that worldwide unit sales of laser disc players will jump 49% this year to 250,000. And analyst Marsh estimates that disc sales will rise from $170 million in 1991 to $737 million in 1995.
That’s still a speck contrasted with the $3.5-billion videocassette market. But Marsh notes that the laser disc distribution business is controlled by just two companies--Image and Pioneer. “You don’t need a mass market for Image to thrive,” he said.
In fact, if the laser disc market stays relatively small, that could actually be good for Image, Marsh said. As long as sales remain limited and Image and Pioneer--which pay studios such as Walt Disney Co. and Warner Bros. licensing fees to distribute their films on laser disc--are cost-efficient, studios will have little incentive to do their own distribution, he said.
That’s no small concern for Image, which is the subject of unending comparisons with Vestron Inc., a videocassette distributor that filed for bankruptcy protection after the major studios decided to distribute videos themselves.
Greenwald claims another advantage. Unlike Vestron, which was essentially a broker between studios and companies that physically distribute videotapes, Image is the distributor. And the studios can’t simply duplicate their video distribution channels for laser discs, he argued, because some of Image’s biggest customers, such as consumer electronics retailer Ken Crane, don’t sell videocassettes.
There’s another scenario that’s been the subject of industry talk lately, and that’s the possibility that a film studio might acquire a stake in Image as a way to ride the expected growth of the laser disc market. Greenwald wouldn’t say if he’s discussed the idea with a studio, but he acknowledged that the concept “makes a lot of sense” and he would consider a “strategic relationship.”
Aligning himself with a major studio would certainly be an interesting turn for the onetime porno film distributor. Although Greenwald said he’s not ashamed of his past, he concedes that “it’s a segment of my life I would just as soon forget.” He said he hasn’t been actively involved in porno distribution for several years, and last year sold the remainder of his X-rated inventory to a Santa Monica company.
That, apparently, is good enough for Metromedia Co. Chairman Kluge, whose personal net worth was estimated by Forbes Magazine at about $5.9 billion. In addition to his stake in Image, Kluge and his partner Stuart Subotnick loaned Image $4.2 million last year. The loan, plus interest, has been repaid, Greenwald said.
“They’ve never been active participants,” Greenwald said. “But I don’t think this company would be what it is today without Stu’s and John’s involvement.”
