Laser Disc Distributing Firm’s Picture Brightens : Entertainment: Chatsworth-based Image is poised to benefit from the coming-of-age of laser disc technology.

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--including America’s richest man, John W. Kluge, who a holds 39% stake--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 wait is now over.

And in an auspicious sign for the company, Walt Disney Co. last week said it reached an exclusive, four-year agreement with Image to distribute its films on laser disc. As part of the deal, Disney also obtained a warrant to purchase up to 10% of Image.

Bill Mechanic, president of Disney’s International Theatrical Distribution and Worldwide Video unit, said the investment in Image “reflects their skills at leading the laser business and is also a strong indication of our mutual role in the format’s future.”

Image’s struggles to date have been linked to the slow growth of the laser disc market. A laser disc is essentially a dinner plate-sized compact disc that contains visual as well as audio information. Proponents of laser discs, which retail for $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 their own.

Image, which analysts estimate controls 39% of the laser disc market, has also been hampered by a lack of financing and a nationwide recession that has dampened consumer spending. Image lost $609,306 in fiscal 1991 on $48.2 million in revenue. For the first half of fiscal 1992, it reported losses totaling $681,748 on revenue of $22.5 million.

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, last month issued a report that projected a $1.2-million fiscal 1992 profit for Image.

Greenwald, 49, said Image’s outlook has also improved recently because it has cut costs, 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, Disney’s “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. “Dances With Wolves” and “Silence of the Lambs” debuted in November and are also posting strong sales.

Image’s improved prospects, coupled with rumors that a studio such as Disney would invest in the laser disc company, have helped drive Image’s stock price up in recent months. After falling as low as $3.375 a share in August, Image’s stock has rebounded, closing Friday at $11.125 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 betting 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 retail for $300 to $700, compared to $1,500 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 will opt 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 compared to the $3.5-billion videocassette market. But Marsh noted 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 be good for Image, Marsh said. As long as sales remain limited, studios such as Disney 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 to 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.

Aligning himself with a major studio is certainly an interesting turn for the one-time porno film distributor. Although Greenwald said he’s “not ashamed” of his past, he admitted 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 remaining remnants of his X-rated inventory to a Santa Monica company.

That apparently is good enough for Kluge, the chairman of Metromedia Co. who Forbes magazine recently estimated has a net worth of 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.”