Film Legend Changes Its Colors : Movie industry: Technicolor Inc. has moved profitably from color processing to videotape production. As that market softens, it seeks new ways to grow.

Technicolor is a name that calls to mind the glory days of Hollywood. The company was founded in 1915 and is credited with pioneering color motion picture film-processing technology. The Technicolor logo has been emblazoned on such classics as “Gone With the Wind,” “Ben Hur” and “Lawrence of Arabia.”

But behind the venerable name is a company that remains a mystery outside the tightknit Hollywood community. Technicolor Inc.’s North Hollywood headquarters and film-processing facility--the largest of its kind in the world--are carefully guarded from outsiders’ eyes. Although the company is best known for its film services, videotape is now Technicolor’s most important business. In its current fiscal year, two-thirds of Technicolor’s projected revenues of $725 million will come from converting feature films onto videocassettes.

Technicolor entered the video business in 1981, and it is now one of the world’s two biggest producers of videocassettes--in a virtual dead heat with archrival Rank Organisation PLC of Britain in video production, as well as film processing.

Technicolor’s impressive growth in video has helped justify the hefty $780 million paid to buy Technicolor in 1988 by Carlton Communications PLC, the British film and television services concern. Carlton acquired Technicolor from Revlon Chairman Ronald O. Perelman.

Analysts say the acquisition can now be regarded as a success, in large part because Technicolor has propped up Carlton’s recession-plagued equipment-and-facilities rental businesses. “Technicolor has probably been one of their best businesses over the past couple of years,” said Hamish Dickson, an analyst at Hoare, Govett Ltd. in London.

Although Carlton doesn’t break out Technicolor’s results, Dickson estimated that Technicolor this year will account for 55% to 60% of Carlton’s profits. In its fiscal year ended Sept. 30, 1991, Carlton reported the U.S. equivalent of $57 million in net income on sales of $943 million, according to Value Line.

Still, when Carlton entered the picture, Technicolor had been through several changes in management and trouble was brewing. With a limited number of features made each year, film processing was viewed as a stagnant business, and video growth had begun leveling off. Attempts by Technicolor to diversify into such businesses as one-hour photo labs and videocassette recorders failed miserably.

In recent years Technicolor also lost two big film-processing clients, MCA Inc. and Paramount Pictures Corp., who reportedly left because they were paying substantially higher prices than rival studios. It also lost a major video customer, CBS-Fox Video.

“Through the ‘70s and ‘80s, I think they sometimes felt the studios needed them more than they needed the studios,” said Rob Hummel, director of production at Walt Disney Co.’s theme park division and a former Technicolor executive.

Such problems could hardly have escaped notice at Carlton, and in May, 1991, Carlton ousted Technicolor Chairman Arthur N. Ryan--a holdover from the Perelman era--and hired as chief executive Thomas E. Epley, then chairman of the moving firm Bekins Co.

Epley took a crash course in Technicolor’s operations and concluded that for many years the company had not invested “the amount of time, management resources and effort into . . . planning for a changing environment.”

Epley cleaned house. He booted out two-thirds of Technicolor’s top management, brought in executives from a wide range of industries and handpicked a few Technicolor veterans to head key divisions.

The early returns on Epley are decidedly positive. Last week, Sony Pictures Entertainment renewed its film-processing contract with Technicolor. The contract is a coup for Technicolor, and keeps Columbia Pictures Entertainment and TriStar Pictures studios in its fold alongside Technicolor’s biggest customers, Disney and Time Warner Inc.’s Warner Bros.

Technicolor has also outlasted many competitors who didn’t survive the industry’s price wars of the past several years. Former rival Metrocolor is defunct. Deluxe Laboratories was acquired by Rank.

Technicolor and Rank are the only big players remaining. “We are fiercely competitive,” said James Daly, managing director of Rank’s film and television division. “Anything we lose, they gain.”

Its long history of advancing color film technology still earns Technicolor respect in the entertainment industry. Technicolor was the biggest name in the business back in the days of “Gone With the Wind,” when color movies were made with three pieces of film, each containing one primary color. The three strips were filmed simultaneously and later combined to create a full-color image. By the 1950s, the modern process of shooting movies on a single piece of color film emerged.

Today, Technicolor has 2,700 employees worldwide. At processing plants in North Hollywood, New York, London and Rome, it develops film while movies are in production, working closely with directors and cinematographers to achieve the desired images. Technicolor produces the final print, and then the reels of film that go out to theaters.

Recent films processed at Technicolor include “Batman Returns,” “Patriot Games” and “Beauty and the Beast.”

The company also produces more than 150 million video cassettes a year for most of the studios at plants in Newbury Park, Michigan, London and the Netherlands. Another plant is planned in Italy, and the Newbury Park operation will soon move to a larger facility in Camarillo.

Despite the good reviews for Technicolor’s new management, the company isn’t ready for a Hollywood-style happy ending just yet.

While the company’s size gives it purchasing clout and operating efficiencies, cutting deals that are sweet for the studios could squeeze profit margins, analyst Dickson warned.

Technicolor has also made some risky investments in independent production companies. Under Perelman, Technicolor acquired a stake in New World Entertainment Inc. before the troubled production company was broken up and sold. Last year Carlton invested in Carolco Pictures Inc., which is now struggling to avoid bankruptcy.

Those bad investments didn’t stop Technicolor from recently acquiring a stake in another independent producer, Republic Pictures Corp. Carlton also recently invested in the newly formed Savoy Pictures Entertainment. Epley defended the investments, saying they were carefully selected and would help Technicolor “establish a network and create business opportunities.”

Dickson put it another way: “It’s dredging the bottom of the barrel to get contracts.”

In another ominous sign, Carlton stated in its fiscal 1991 annual report that 34% of its sales decline was due to slower videocassette sales, although the division’s profit margin increased because of cost cutting and the elimination of less profitable contracts. Video sales--which were hurt by the loss of CBS/Fox--have bounced back this year. But observers warn that Technicolor can’t afford to ignore new technologies such as high-definition television and the electronic delivery of films to theaters.

Epley said he is looking for ways to keep Technicolor growing, including expanding in Europe and entering into a joint venture in Russia.

He also said that within the next several years, Technicolor would have a third business segment. He declined to elaborate, but noted that another Carlton company, Quantel, has developed a process to transfer film to a digital format that can be used with HDTV or other technologies. Epley also said he’s exploring acquisitions in such areas as optical discs, which can store images in much the same manner as videotapes and are more durable.

But Epley doesn’t believe that film and video will become obsolete anytime soon, and he said that Technicolor’s focus will be on improving its film and video services. He also argued that film processing remains a growing business because films are being released to more theaters simultaneously, and therefore more prints are needed.

Video will grow as more consumers buy their own tapes instead of renting, he said.

Right or wrong, it’s clear that Epley is determined to restore an image of Technicolor that had lost some of its former luster. Shortly after Epley came aboard, Hummel ran into a roadblock getting a Disney request filled. Hummel sent a letter complaining and immediately received a call from Epley, who apologized, granted the request and invited Hummel to lunch.

Hummel recalled Epley saying: “That’s not the way this place runs now.”

Technicolor Inc.Chronology *1915: Technicolor is founded by Dr. Herbert T. Kalmus, a graduate of the Massachusetts Institute of Technology who was intrigued by early research into color photography.

*1917: The first Technicolor feature film, “The Gulf Between,” is processed in Technicolor’s laboratory in a railway car. Over the next several decades, the company pioneers advances in motion picture film technology and becomes the leading film processor for the entertainment industry.

*1939: “Gone With the Wind,” processed by Technicolor, is released. The movie becomes one of the first big grossing color feature films.

*1960: Kalmus retires and is replaced as chairman by Patrick J. Frawley Jr., former chairman of Schick Safety Razor Co.

*1970: A group including Morton Kamerman and Guy M. Bjorkman, former partners in the cosmetics firm Germaine Monteil, wrest control of Technicolor from Frawley. Kamerman becomes Technicolor’s chairman and chief executive.

*1981: Technicolor enters the videocassette duplication business.

*1983: MacAndrews & Forbes Group, a company controlled by Revlon Group Inc. Chairman Ronald O. Perelman, acquires Technicolor’s stock for $125 million. Perelman then fires Kamerman and replaces him with Technicolor’s president, Arthur Ryan.

*1988: British film and television services concern Carlton Communications PLC acquires Technicolor for $780 million, doubling Carlton’s revenues.

*1991: Carlton replaces Ryan with Bekins Co. Chairman Thomas E. Epley, now Technicolor chief executive.