Founder of TVN at Helm : Television: Analysts say the pay-per-view business needs a partner as new technologies emerge to help enlarge its potential market.

After MCA Inc. and Paramount Pictures last month sold their stake in TVN Entertainment to him, TVN’s founding partner Stuart Z. Levin declared jubilantly that he had regained control of the satellite broadcasting company in Burbank.

“I’m comfortable now that I’m back in control,” said the stylish 44-year-old Brooklyn native.

But the unexpected breakup of TVN’s partnership also raised a big question: How will TVN, which analysts believe is losing money at a clip, survive without the big studios?

Indeed, MCA and Paramount were TVN’s biggest investors. In March, 1991, the studios provided TVN with an undisclosed sum of cash enabling Levin to launch his multichannel programming. TVN broadcasts pay-per-view movies, concerts and sporting events to satellite dish owners in rural areas where no cable TV is available. In exchange, the studios gained controlling interest in TVN.

“He clearly needed Paramount and MCA,” said Bob Scherman, publisher of Satellite Business News, a trade publication in Washington, D.C., that serves the home satellite television industry. TVN’s biggest expense is for using 11 channels on AT&T;’s Telstar 303 satellite, Scherman said, and “they’re not generating enough to pay for these transponders.”

Levin declined to talk about the terms of his buyout or TVN’s finances. But Levin suggested that he was in discussion with potential investors. “Right now we’re fine,” said Levin, who is the company’s chief executive officer. “I managed before I had them (MCA and Paramount) and I’ll manage now.’

Analysts think that the studios received little, if anything, for their money. More likely, they simply walked away from the investment because they were “getting minimal benefits,” said Jeff Logdson, who follows Paramount for the Los Angeles investment firm Seidler Armdec. MCA and Paramount declined comment.

Still TVN has potential, said Tom Adams, a media analyst with Paul Kagan & Associates in Carmel, Calif. But he says the company needs a partner to help the fledgling operation as new technologies take hold, which may help enlarge TVN’s potential market.

TVN became fully operational in May, 1991. Since then, it has enlisted about 120,000 satellite dish owners as subscribers. There are about 3.5 million existing satellite dishes, but only about 500,000 are equipped with the latest descrambling device, called VideoCipher II Plus, needed to receive TVN.

TVN subscribers can order a movie by dialing a toll-free number or by simply flicking a switch on a remote-control unit. Each TVN movie costs $3.99. And the movies--this month’s selections include “Frankie & Johnny” and “The Commitments”--change monthly.

Each customer, Levin says, orders at least two movies a month--which analysts say is double the rate of the most successful of pay-per-view cable programmers. Based on that figure, TVN would gross about $12 million a year--but part of that would go to the studios in royalties for movies, which TVN rents from Paramount, MCA and other companies.

A big reason for TVN’s strong buy rate is that subscribers can choose from among 10 movies, each of which runs nonstop on TVN’s 10 channels. By contrast, cable networks typically operate no more than a couple of pay-per-view channels.

Levin learned about satellites in the early 1980s while producing television shows broadcast on satellite, and by putting dishes on apartment buildings. It took Levin seven years to get TVN off the ground, partly because he had to wait for AT&T; to develop the technology for consumers to order movies by phone. TVN’s investors include Dr. Robert Levine--Mary Tyler Moore’s husband--and Uniden Corp., a Japanese satellite company that committed $6 million to Levin’s venture.

TVN’s potential market are the 15 million homes in rural America that don’t have cable. Although there are video stores out there, they don’t offer the movie selections that stores in the cities do. “TVN’s convenience factor is very high,” Levin said.

But so far, TVN has not made a big dent in the market; its reach is hindered partly because of satellite dish pirates who steal the broadcasts, and other technical factors outside TVN’s control. With only 500,000 potential customers at the moment, TVN has “got a limited universe,” said Adams.

So Levin is hoping that new technology will expand his potential market. Esther Rodriguez, vice president of marketing at San Diego-based General Instrument Corp., which makes scrambling and descrambling devices for the satellite television industry, said all of the new 25,000 or so satellite dishes sold monthly are equipped with VC II Plus. General Instrument also is now upgrading satellite owners with the older device to VC II Plus, and that is expected to open up TVN’s market by another 300,000 potential customers.

TVN could get a further boost when programmers such as HBO, Showtime and CNN switch over to VC II Plus. When that conversion is done by next year, dishes that have been illegally receiving programming will suddenly find the skies dark. And Rodriguez believes that many of these dish owners that have pirating programs, whom she estimated to number about 600,000, will be forced to buy VC II Plus.

Levin believes that all of this will enlarge TVN’s potential market to two million homes by the end of 1993.

Still, it is not clear how many dish owners will spend the several hundred dollars for VC II Plus, which they will need if they want to receive HBO, TVN or the other special signals. And while this new generation descrambling system has seen no security break yet, it remains susceptible to piracy.

TVN will also have to persuade consumers that it is worth spending $19.95 for the hook-up costs and $3.99 for each movie. Currently, TVN gets its movies from the studios several months before they are released to premium movie channels on cable, but about a month after they appear at video rental stores.

TVN will also probably face more competitors. In Arizona, People’s Choice-TV now offers seven pay-per-view movie channels via wireless cable. Although it has only 8,000 subscribers, who pay $3.90 for each pay-per-view movie, a company representative said, “We’re answering the needs of rural America.”

Then there are emerging competitors in satellite broadcasting. Skypix Corp., a company in the Seattle area, said it plans this summer to roll out a digital-compressed system that will enable it to broadcast 80 channels of programming via satellite.

Unlike TVN, which is broadcast over the C electromagnetic frequency band, Skypix’s system would transmit over the Ku band. The one advantage that Skypix may have is that Ku transmissions can be received with a much smaller dish that costs several hundred dollars, compared with the typical dish that retails for about $2,500.

Levin contends that it’s unlikely that Ku band dishes will replace those designed for C-band any time soon. While C-band dishes can receive Ku band as well, he said, Ku band dishes can’t get programming on C-band.

TVN also plans in the future to use digital compression and high-definition television technologies to broadcast many more channels and provide a clearer picture.

Analysts agree that TVN has a clear jump on competitors, having been first to hit the marketplace.

“They’ve got good buy rates, and they’ve done a lot of learning,” Adams said of TVN. “But the big picture is whether they can lay their hands on some money.

“This a crucial point for TVN to start over again financially,” he said. “If they can sort this out, their business can grow from here.”