Hotel Movie Firms Expect Upgrades to Turn to Profits

Whether it is the historical epic “Gladiator” starring Russell Crowe, or “Dreamquest,” featuring porn star Jenna Jameson, travelers spend $500 million annually on hotel pay-per-view entertainment--porn, major studio films and even video games.

And although this industry’s most profitable product is sex films, the business has some very unsexy characteristics--mainly big losses and surprisingly archaic technology. In an era when 15 million homes get television from satellites, the typical traveler watches a pay-per-view film that is running on a videocassette player.

But that’s changing. The two main players in the industry, On Command Corp. of Denver and LodgeNet Entertainment Corp. of Sioux Falls, S.D., are perennial money losers. But much of their current losses result from heavy investments in technology as they replace older entertainment systems that offer only a fraction of the services possible in a digital age, analysts say.

On Command lost $39 million last year and $29.4 million in the previous year. LodgeNet posted a $20.6-million loss last year and nearly $3 million in 1999.

Executives at the two companies compare their business to cable television, where huge front-end expenditures are required to wire communities. But after the money is spent, cable systems can become cash cows. The in-room entertainment companies figure much of the same economics apply to their business. It’s just reduced to smaller communities: hotels.

That’s why LodgeNet emphasized a 12% gain in a key cash-flow measure rather than its $6.8-million loss when it reported first-quarter financial results last week. Despite its losses, LodgeNet looks to be in the black within two or three years, said Bailey Dalton, who follows the industry for C.E. Unterberg, Towbin in New York. She expects On Command to face a rougher road because it is strapped for cash.

Nonetheless, On Command’s partners are some of the biggest chains in the business, including Marriott, Sheraton and Hyatt. Beverly Hills-based Hilton Hotels Corp., which operates the Hilton, Embassy Suites and Red Lion chains, is a major investor in LodgeNet.

Both companies have been caught in Wall Street’s downdraft early this year. On Command shares closed at $7.09 on Monday on Nasdaq, off 46 cents, and down 67% in the last year. LodgeNet shares have fared better, losing 32% of their value in the last year. They closed off 40 cents at $15.90 on Monday on Nasdaq.

The two entertainment providers don’t disclose how sales divide between mainstream fare and adult videos, but industry analysts say porn represents at least half their business, or about $250 million annually. Hotels see 10% to 15% of that, about $15 for each of the 2 million rooms wired into the systems of either On Command or LodgeNet, analysts say.

The biggest customers are “road warriors, people on the road a third of the year and they are bored,” said Gary Rohr, president of Stonebridge Cos., an Aurora, Colo., owner of 32 hotel properties totaling 3,000 rooms.

The porn movies, as well as feature films and video games, account for a tiny slice of hotel profits, Rohr said. He called the movies “amenities” that are far more important to guests than the hotels’ bottom line.

Only one in 10 guests pays to view a movie of any type, Dalton said.

But when a traveler orders a movie today, it comes to the room via a network of video players. LodgeNet owns 150,000 videotape players and employs a staff of 250 to keep them running, said Peter F. Klebanoff, a company vice president. Their duties include driving from hotel to hotel and loading new tapes, which have been copied from master prints, into machines as the movie lineup changes.

The typical 200-room hotel has a video room with 30 to 40 tape decks connected to guest rooms through an in-house network. A large hotel might have double that number of decks and offer as many as 40 movie titles. When a visitor orders a movie, the television signals the deck holding the correct tape in the video room to switch on.

“The objective is to have a sufficient number of titles for the guests and to have enough copies in the decks to supply peak demand,” Klebanoff said.

Deciding how many players to load with “Gladiator” and how many with “Porn Star Yearbook Y2K” is a balancing act. If more guests order “Gladiator” than there are tapes, someone gets blocked out. LodgeNet employs a full-time statistician and additional consultants who try to match tape supply with demand to maximize sales.

Both LodgeNet and On Command are moving to computer-based, digital systems that will offer more services and different types of selections. The new systems will be less expensive to maintain and keep guests from being shut out of a movie at their preferred time. On Command expects to have about 350,000 of its 1 million rooms on the digital system by year’s end.

Movies can be downloaded to the computer via high-speed lines and satellite links. Within a few years, the systems will surpass what most consumers can get from their in-home pay-TV services. Hotel guests will be able to fast-forward, pause and rewind, making viewing more convenient.

And that’s one of the goals of the new system, to coax more hotel guests to make purchases, said Jerry Kern, On Command’s chief executive.

Digital systems can offer music, sports and fitness programming, Internet connections, original programming and reruns of hit TV shows such as “The Sopranos” or “Sex in the City,” Kern said.

Although adult movies are the most controversial segment of the business, they also keep it alive.

“Adult content is the stepchild of our business,” Klebanoff said. “But it would be hard to run the business without it. That’s an economic reality.”

That’s because sex films are both popular and profitable. Conventional movie studios collect about 50% of the typical $10 charge for a movie purchased by a hotel guest. The hotel keeps $1 to $1.50. That leaves just more than a third of the fee--about $3.50 per film--for delivery services such as LodgeNet or On Command.

For a porn flick, only 20% to 25% goes to the studio. The hotel gets its regular cut. That leaves about 60%, or about $6 per film, for the distributors.

Hotel operator Rohr figures his company pockets about 10% of the pay-per-view fee after expenses. Hotels constantly write off a percentage of the purchases for guests who dispute their bills. Moreover, hotels also absorb the credit card fees, typically 2% of the fee.

Vivid Entertainment Inc. of Sherman Oaks, the adult film company that provides more content for hotels than any other single provider of any type, often sells the rights to its movies for a flat fee rather than a percentage of the profit, said Bill Asher, Vivid’s president.

Though hotels account for less than 2% of Vivid’s revenue, they are an important marketing tool.

“They give you exposure,” Asher said.

A traveler, for example, might see a movie with a porn star such as Jameson or Kobe Tai and decide to rent movies with the same stars for his home, or purchase more of their movies on his next business trip.

Not surprisingly, anti-pornography and religious groups have objected to the business of selling porn movies in hotel rooms, but it hasn’t had much of an effect.

Omni Hotels, a 40-property hotel chain based in Irving, Texas, eliminated sex films from its in-room entertainment menu last year. Walt Disney Co. doesn’t offer adult films at the 35 hotels and 37,000 rooms in its resorts.

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What’s On

On Command and LodgeNet Entertainment, the two leading providers of in-room entertainment, cite “American Beauty” and “The Sixth Sense” as the most requested movies* by hotel guests for 2000. Other frequently watched titles include:

Gladiator (DreamWorks Pictures and Universal Studios)

American Pie (Universal Pictures)

The World Is Not Enough (MGM)

Erin Brockovich (Universal Pictures)

Eyes Wide Shut (Warner Bros.)

Mission: Impossible 2 (Paramount Pictures)

Double Jeopardy (Paramount Pictures)

The Green Mile (Warner Bros.)

The Whole Nine Yards (Warner Bros.)

The Perfect Storm (Warner Bros.)

Deuce Bigalow: Male Gigolo (Buena Vista Pictures)

*Does not include adult titles

Sources: LodgeNet, On Command