AFTER LAST YEAR'S SLUMP, INDICATORS POINT TO A GREAT SUMMER FOR VIDEO : MOVIE INDUSTRY FAST FORWARDS TO SUCCESS ON THE SMALL SCREEN.

Byline: Dave McNary Daily News Staff Writer

The death of the home video business, Hollywood's most reliable profit source for the past decade, is no longer imminent.

Though it carries a far lower profile than the theatrical business, home video reaches 50,000 outlets and generates three times as much revenue, not to mention the $15 billion or so it generates overseas. That revenue has become the salvation of studios coping with soaring production costs.

So naturally alarms went off last year when the business hit an iceberg of customer resistance.

The Blockbuster chain - its nation-leading 6,000 stores built on the back of videocassettes - was mired in red ink. Rivals were closing stores. The overall industry muddled through an unprecedented slowdown, winding up with the first year-to-year decline - a whopping 6.5 percent - since videocassette recorders appeared two decades ago.

``There were a lot of people on Wall Street that were giving the death knell to the industry last year because things like video-on-demand would kill it,'' said Marvin Roffman of Philadelphia-based Roffman Miller Associates. ``But it's probably not going to die for a long time. Home video is still a very viable business.''

1997's decline broke down to a 3 percent fall in rental revenues and a 10 percent slide in sales of tape. The decline in sell-through was due partly to major retailers like Wal-Mart using heavy discounts on tapes. Speculation emerged that VCRs eventually would go the way of eight-track tapes.

But analysts believe those fears were overstated. And the industry has responded effectively with old-fashioned gimmicks like price cuts, more advertising and a focus on hit titles. ``The growing popularity of pay-per-view, game machines and the Internet all come out of a finite number of entertainment hours, so home video has had to step up this year,'' said Thomas Adams, president of Adams Media Research.

Added Barbara McNamara, an analyst with Alexander & Associates: ``The $20 billion this industry takes in every year in the domestic market is not going away overnight. The industry seems to have recovered from its problems and is in a state of upswing.''

Revenue sharing 

Rentals are up 4 percent so far this year, according to Alexander & Associates. Sales of tapes have slipped 2.5 percent but should wind up rising this year because ``Titanic'' will hit store shelves in September.

McNamara said the biggest problem last year was a relatively simple one: 1997 titles were not as interesting as those in 1996. That situation worsened when the studios back-loaded the schedule for the holiday shopping season, meaning long stretches of time for customers without any new product resembling a hit.

``A lot of the problems were from poor product flow, and they've managed to avoid that this year,'' McNamara said.

Solid performers thus far include ``As Good As It Gets,'' ``Mouse Hunt,'' ``Red Corner,'' ``The Rainmaker,'' ``Flubber'' and ``Face/Off''; besides ``Titanic,'' prospects look good for ``Good Will Hunting,'' ``Lost in Space,'' ``The X-Files,'' ``Godzilla'' and the direct-to-video sequel to Disney's ``The Lion King.''

Last year's disastrous performance led to a massive rearrangement in how retailers are doing business with studios and wholesalers. Stores used to pay about $60 for a rental title, then kept all the rental revenue; now, the retailer gets a huge discount on buying multiple copies of new videos in exchange for part of rental revenues.

Wholesale specialist Rentrak Corp. pioneered the revenue-sharing idea through the Hollywood Video and Wherehouse chains. And Blockbuster, after months of pleading with studios to cut prices for rental tapes, began making similar deals with studios late last year.

Analysts have reported that Blockbuster's deal with Disney calls for the studio to receive $7 or $8 per tape up front plus 40 percent of rental revenues for the first 26 weeks the tape is on shelves.

In a similar move, 20th Century Fox recently started an ``easy lease'' program, under which retailers can obtain additional copies of a popular title at a discount and then ship them back to the studio rather than trying to sell the used tapes.

The arrangement has allowed major chains to focus on ``copy depth,'' so a store might now stock as many as 120 copies of a single movie rather than the 40 or 50 it would have a year ago.

The new financing deals also mean studios, for the first time, are spending significant money on promotion of rental titles, rather than just leaving that task to the chains.

``Studios that are doing aggressive marketing for rentals have been doing very well,'' said Patricia Wyatt, president of Fox Home Entertainment.

``We're seeing very encouraging signs of rental transactions being up from last year,'' said David Bishop, president of MGM Home Entertainment. ``The key benefit in revenue-sharing is that for the first time in our history our economic results are aligned with retailers. So you'll see a lot more advertising after the release date.''

Jeffrey Eves, president of the Video Software Dealers Association trade group, said the changes are the most profound in the two-decade history of the video business, turning it into much more of a partnership with studios.

``There's a plethora of new programs to put more copies into stores, and that means the customer complaint about not finding what they want is becoming a thing of the past,'' he said. ``It's been a real shot in the arm.''

Industry blockbuster

Nowhere has the strategy worked better than at Blockbuster, which had been widely viewed as being on life support a year ago after Viacom took a $203 million charge for excess inventory and store closures.

Viacom paid $8.4 billion for Blockbuster in 1994 with the idea that the chain would generate the cash needed for Viacom's other operations like Paramount Studios and MTV. Instead, competition from cable and bargain-basement retailers cut profits and problems accelerated when former Wal-Mart executive Bill Fields decided to turn Blockbuster stores into ``neighborhood entertainment centers'' with books and T-shirts rather than focusing on video rentals.

By last summer, Blockbuster was performing so poorly that one analyst said it had ``zero value'' within Viacom stock.

``We were seriously worried about Blockbuster,'' said Michael Karaffa, New Line's executive vice president of home video. ``I'm not saying that as Blockbuster goes, so goes the industry. But there was a lot of concern. And now, they've really turned the business on its ear.''

Blockbuster, run for the past year by former Taco Bell executive John Antioco, has proclaimed its problems are over and that it can increase market share from 25 percent all the way to 40 percent.

On the rebound

Roffman, whose firm owns Viacom shares, agrees with that enthusiasm and notes that Blockbuster's first-quarter cash flow was up 6 percent while revenues rose 13 percent. Those trends should continue, he said, adding, ``They have addressed what was their major problem - that customers could not find new films on a Friday or Saturday.''

Blockbuster's resurgence isn't good news for everyone else. ``This is a mature industry, so what's going to happen is that Blockbuster is going to take away market share from everyone else,'' Roffman said. ``To survive in this business, you've got to have great management, be the low-cost producer and have imagination.''

Smaller retailers are angry, arguing that the studios and the major chains are not offering them the same terms. The Independent Video Retailers Group already has concluded that stores within three miles of a Blockbuster have seen revenues fall 11 percent this year and has announced it might file a lawsuit alleging unfair pricing in the revenue-sharing deals.

But Blockbuster's recent success will have a profound impact on the rest of the business. ``With Blockbuster doing it, everyone else has to do it,'' Adams said.

Mark Tusher, who operates three Alamo Video stores in Ventura County, believes Blockbuster's strategy is unfortunate for the industry over the long term because it is redefining in customers' minds how a video store should be stocked. It's also taking away customer choices by overstocking the most popular titles at the expense of lesser-known titles.

``If you have 120 copies of `Tomorrow Never Dies' in a store, it'll be dead in a week because there's no way that you have that many people who want to see the movie,'' he said. ``I can't afford to have that many, and I don't need that many anyhow.''

Tusher believes the chains are overlooking the importance of stocking a wide selection of never-before-seen product. ``Most people do not have a specific title in mind when they come to a video store,'' he said. ``What they're interested in is value, convenience, selection and service. You only get the complaint about lack of a hit product once in a great while.''

Business has been solid at Tusher's stores this year, up 8 percent over a year ago, which he attributes to savvy buying of entertaining titles that didn't stay long in theaters such as ``Fallen'' and ``Switchback.''

MGM's Bishop believes the small fry in the business need to be looked after, too. ``We're in an environment that's changing very quickly so we have to be very cautious, particularly with secondary titles,'' he said. ``The goal is to lift the business as a whole and not just shift it from one side to another.''

For the rest of the year, the outlook has brightened considerably with the recent announcement by Paramount that it would release ``Titanic'' in video stores Sept. 1. ``The business is going to explode with `Titanic,' '' Adams said.

REVENUES

The home video business expects growth after last year's decline. Revenues:

VIDEO RENTALS

1993: $ 11.2 billion

1994: $ 11.94 billion

1995: $ 10.9 billion

1996: $ 11.45 billion

1997: $ 11.2 billion

1998: $ 11.65 billion (x)

VIDEO SALES

1993: $ 6.68 billion

1994: $ 8.54 billion

1995: $ 9.7 billion

1996: $ 10.38 billion

1997: $ 9.3 billion

1998: $ 9.1 billion (x)

(x) 1998 projections are based on year-to-date performance.

CAPTION(S):

7 Photos, Chart

PHOTO (1--Color) ``Titanic''

(2--Color) ``Good Will Hunting''

(3--Color) ``Great Expectations''

(4--Color) ``Barney's Great Adventure''

(5--Color) ``Dark City''

(6--Color) ``Lost in Space''

(7--Color) ``Wag the Dog''

CHART: REVENUES (See Text)