Company Is the Very Image of Flexibility

Image Entertainment Chief Executive Marty Greenwald says he saw it coming. As far back as two years ago, his Chatsworth-based company, the largest licensee and distributor of laserdiscs in North America, began preparing for the day when a new format would emerge to titillate videophiles.

But Greenwald didn’t predict that as digital videodisc rolled out, sales of laserdiscs would drop 40% almost immediately.

“We knew there was going to be a fall-off, but we didn’t know how substantial it would be,” said Greenwald, reflecting on the last year. “Who could have forecast that?”

Until the CD-sized DVD appeared on the horizon, releasing movies on the album-sized laserdiscs had been a steady $300-million-a-year business, providing Hollywood studios with an opportunity to repackage their movies to a market of more than 2 million dedicated fans. But last year, sales of laserdisc players dropped by 65%.

“To the question, ‘Is laserdisc dead?’ The answer is no, but the clock is ticking,” said Mark Elson, general manager of Dave’s Video-the Laser Place.

Image has always been the industry’s most vocal cheerleader for laserdisc, the format that helped spawn the growing home theater business. Image steadfastly thumbed its nose at videotape and other formats deemed inferior. In 1995, 100% of Image’s $90 million in revenue stemmed from sales of movies on laserdisc.

Although it still touts the dedicated base of laserdisc users, Image is in the midst of a complete transformation. It has embraced the enemy--signing a flurry of DVD deals, including distribution agreements with Playboy Home Video, Universal Studios Home Video and others.

It has also developed exclusive licenses for movies and music using DTS, the multichannel audio format backed by Steven Spielberg.

Diversification is a “survival thing,” Greenwald said. “The question is, can we reinvent ourselves?”

Greenwald, a stock broker, investment banker and real estate developer, formed Image in the early ‘80s with Stu Segall, best known these days as the producer of such syndicated fare as “Silk Stalkings.” They originally focused on producing low-budget movies, primarily “soft-X” and R-rated exploitation product. (Segall is still a board member of Image but is not involved in day-to-day operations.)

Laserdisc began rolling into the market about the same time, promising technophiles picture and audio quality far superior to videotape. Image was one of the first to license and release titles on the fledgling format.

In 1987, soon after several large video suppliers, including Vestron and New World, signed deals to offer their titles on laserdisc through Image, businessman John Kluge began investing in the company. Kluge now owns 40% of Image’s shares.

Within a few years, Walt Disney Co., 20th Century Fox and New Line Cinema also agreed to license their titles to Image. In addition to lucrative fees, Image offered the studios options to buy Image stock in exchange for the output arrangements. Eventually most of the major studios used Image to release laserdiscs.

Image approached the market with single-minded determination, prodding the studios to release special editions and pushing the titles into new stores.

But laserdisc sales never soared. Part of the problem was simply mechanical--laserdisc was never developed as a recordable format. In addition, many hardware manufacturers stopped making machines, leaving Pioneer Electronics, which controls most of the patents, as the format’s lone major hardware backer.

Among other problems, the cost of producing laserdiscs stayed high, about $8 a disc (compared with about $3 for DVD), and retail prices hovered at $35 and up.

“Prices never got down to be in competition with VHS,” said John Thrasher, vice president of video sales for Tower Records/Video. “It turned out to be an affluent customer who was only interested in action blockbuster films.”

The laserdisc market peaked in 1994, when it generated $345 million in sales. But by 1996, when it looked like long-running industry disputes over DVD might be settled, laserdisc sales had already dropped to $270 million.

The Consumer Electronics Manufacturers Assn. predicts only 27,000 laserdisc players will be sold in 1998, compared with 287,000 in 1993. Some new titles are already selling more on DVD than laserdisc.

DVD can hold more information, produce digital sounds and picture quality and work in DVD-ROM computer drives. Laserdisc offers only analog video and limited storage. DVD players also play CDs.

Last year, Tower, always a big supporter of the format, drastically reduced its purchases of laserdiscs and slashed prices as much as 35% on older titles.

“The big titles still sell well,” Thrasher said. “It’s the back catalog that nobody is interested in--not at current prices.”

For Image, sliding laserdisc sales were not the only problem.

Its biggest customer, Musicland--teetering on the edge of bankruptcy--frantically cut back on orders and renegotiated trade terms with of all its vendors, leaving an IOU with Image for $2.7 million.

Image’s second-biggest customer, Alliance Entertainment Corp., filed for bankruptcy, following in the footsteps of another big client, Camelot Music.

Image reported operating losses of $102,000 for the six-month period ended September 1997, contrasted with a $1.4-million profit in the same period of 1996.

To help raise cash, Image sold off $3 million of the Musicland and Camelot Music debt to a third party at a discounted price. It was also helped by a $5-million convertible loan from an entity controlled by Kluge, which was primarily used to reorganize the company’s debt.

But the biggest boost to its bottom line came from the usurper--DVD. Thanks to 26 exclusive DVD releases, ranging from Playboy titles to “The Terminator,” Image posted a $1.1-million profit for the quarter ended Dec. 31. DVD accounted for about 18% of net sales for the quarter.

Continuing its quest for new licensing deals, Image recently signed a deal with GRB Entertainment, giving it the videotape, laserdisc and DVD rights to dozens of special-interest titles.

Image should also benefit this year from the increased roll-out by several major hardware companies of players and receivers with DTS decoders. Image already has more than 100 titles with DTS, including “The Lost World,” “Apollo 13” and top music titles from such artists as Eric Clapton and The Eagles.

In December, Image, confident in its growing new markets, began construction of a new 76,000-square-foot distribution facility on a parcel the company owns near McCarran International Airport in Las Vegas.

“For us to come out of [the last two years] and make money and be healthy, we must have done something right,” Greenwald said.

There are even signs that it may be too soon to ring the death bells for laserdisc, Image’s old meal ticket.

Pioneer Electronics reports that sales of its combination laserdisc-DVD players have been brisk.

The November release of “The Star Wars Trilogy: Special Edition” boxed set, priced well above $100, generated more than $4 million in sales for Image, making it the highest single revenue producer in company history.

As long as the studios release movies, many laserdisc supporters believe that when the smoke clears, a loyal following of laserdisc buyers will remain.

“There are still 10,000 titles available on laserdisc, in addition to 2 million people who may not be eager to junk their laserdisc collections,” said Judy Anderson, executive director of the Optical Video Disc Assn., formerly the Laser Disc Assn.

But Image, once the prophet of laserdisc, is vowing to stick to its new diversification strategy. In its upcoming fiscal year, Greenwald expects only 50% of the company’s revenue to come from laserdisc, with DVD, DTS and VHS products accounting for the rest.

“We were elitists,” Greenwald said. “Now we recognize it would be a terrible mistake to consider ourselves a one-trick pony.”