From Laserdiscs to Concert DVDs

CHATSWORTH —  When the bottom fell out of the laserdisc market, it dealt a swift and staggering blow to Image Entertainment, which at one time was the largest manufacturer and distributor of laserdiscs, controlling more than 60% of the market.

But over the last three years, the company has pursued a monumental change in strategy and has repositioned itself not only as an aggressive, if less prominent, manufacturer and distributor of digital videodiscs but has become noted for its unique line of concert DVDs.

“We were victims of the technological advancements that were happening,” said Jeff Framer, the company’s chief financial officer. “But we survived it. I really think we should be perceived as two companies. The first company, which manufactured and distributed laserdiscs, did a good job and then had all of its revenues taken away.”

The second company, Framer said, is the one on the rebound, having created three revenue-building divisions--none of which deals with laserdiscs--that have halted the hemorrhaging that first befell Image in the 1995-96 fiscal year.

Yet investors remain wary. Image’s stock has traded below $5 for most of the year, with a 52-week high of $7.38.

In the first quarter that ended June 30, revenue rose 31.6% to $23.7 million, from $18 million for the like quarter last year. Net income rose to $1.3 million, compared with a loss of $714,000 for the like quarter last year.

At its height, Image’s domination of the laserdisc market--a market that never reached mass proportions, with the disc players in only 2 million homes--had pushed its annual revenue to $95 million in 1996. The company had a good thing going: It had become a big player in a small arena.

“Everybody’s attention was on the VHS market, so ultimately we were able to draw up agreements with most of the studios for exclusive rights to their films in the laserdisc market,” Framer said.

At that time, Image handled everything, from manufacturing the discs (subcontracted in Japan) to designing the packaging and distributing them to retail outlets. But the laserdisc market was far from perfect: The cost to manufacture each disc was $8 (and could jump to $14 if the movie was longer than two hours, requiring two discs), which in turn drove the higher prices to consumers--anywhere from $40 up to $130 per unit or more. By comparison, it costs $2 to manufacture DVDs (with the average retail price about $25).

“Because of those high prices, retailers always remained cautious about laserdiscs,” said Richard Giss, a retail analyst with DeLoitte & Touche. “And thus it never caught on with consumers . . . it never became a must-have item.”

But the true death knell for laserdiscs was the advent of the DVD, a technology that--after a slow start--reached mass-market proportions in a very short period.

“The real key is that you’ve got to have both the content providers and the hardware manufacturers in sync,” Giss said. “And it has to be readily available and affordable. The price has come down so quickly in the DVD market, it has ensured the format’s success.”

Framer is the first to agree. He contends that DVD is probably one of the fastest-growing electronic formats in history, with about 8 million households already equipped. The Consumer Electronics Assn. reports that 2.7 million DVD players were bought during the first six months of this year alone, more than double the amount sold by this time last year. As for DVD sales, the CEA reports 4 million were sold in 1999 and more than 3.2 million had been sold as of the end of July.

Thus it wasn’t difficult for Image Entertainment to see where its future lay--the difficult part was getting there. With its fortunes quickly dwindling--annual revenues fell to $86 million in 1997, then to $76 million in 1998--and retailers ordering fewer and fewer laserdiscs, Image executives first looked through all of their current contracts with the studios. Some contracts gave Image all optical disc rights including future ones, thus allowing the company rights to manufacture the product in a DVD format.

“But the vast majority of our contracts were for laserdiscs only,” Framer said. “And we knew it would be difficult to license hits from the studios . . . as most of the studios were looking to do that in-house.”

So Image President and Chief Executive Martin W. Greenwald went on a mission to license as much programming as possible. The company started its DVD division in 1997 with 50 titles from Universal’s back catalog and 12 titles from Orion, including “Dances With Wolves” and “Silence of the Lambs.”

They began to concentrate on licensing more eclectic titles, such as the films of Charlie Chaplin or the old “Twilight Zone” TV series.

Along the way, in the face of an increasingly competitive market for the newer movie titles, Image executives developed a new philosophy. They decided to get involved in the production end in order to create unique special-interest programming to supplement the company’s DVD library.

“Our specialty has become concert and music programming,” Framer said. “We’ve built a niche for ourselves by actually providing the financing for one-time special-event concerts that are filmed for our DVD and home video library.”

Among the concert DVDs that Image has backed are “Eagles: Hell Freezes Over,” a chart-topper in music DVD sales; “Sheryl Crow: Rockin’ the Globe Live” and “Peter Frampton Live in Detroit.” The company also recently struck a deal with Black Entertainment Television to co-produce a series of one-night concerts with such stars as Chaka Khan, Jeffrey Osborne and Lou Rawls, with Image retaining home video rights.

In addition to distribution of the music concert DVDs, Image continues to act as a nonexclusive distributor of programming on DVD, providing a one-stop place for independent film production houses to use for DVD distribution of their movies. This makes up 40% of the company’s business but is also the least profitable.

To further build its distribution avenues, Image bought the DVD and laserdisc software distribution division of Ken Crane’s Magnavox City in January 1999, and more recently opened an e-commerce site, DVDPlanet.com.

The company has also been building a network of partnerships with international distributors. “We were never able to license rights internationally when we were doing laserdiscs,” Framer said. “But now we’ve proven we can effectively market and sell titles overseas.”

The products Image sells abroad mostly are its concert DVDs.

“They are considered ‘A-product’ overseas,” he said.

Yet in the U.S., Framer said Image ranks around ninth among DVD distributors, with the major studios heading that list.

“Of the approximate 6,000 DVD titles currently out, we have 1,200 of them,” he said. “Which isn’t to say we have 20% of the market. Many of our titles are the smaller-performing titles. Big business for us is if we can sell 50,000 units.” For comparison, Warner Bros.’ “The Matrix” has sold 3 million DVDs.

Costs to change gears have been high, Framer said, including the upfront fees for these concerts, with returns from DVD and broadcast rights not coming back to the company for four to eight months or longer. There also have been the costs associated with a buildup of employees. The company had about 95 employees in 1996; it currently has 190, some of them brought in through the company’s acquisitions.

“In a period when our laserdisc sales were declining, we were trying to grow a DVD business,” Framer said. “It was walking a tightrope, but ultimately we’ve succeeded. We’re in a position where cash is now flowing very positively.”