Simon, an analyst at Goldman, Sachs & Co., he says that videocassette revenues, which didn't exist five years ago, hit $625 million in 1983.

POTENTIAL OF NEW MARKETS

True, consumers spent $3.7 billion at the box office in the U.S. last year, compared with total revenues from pay television and home video of $1.07 billion. But videocassette recorder growth is still spiraling up in this country (some nine million units are currently in U.S. households); cable penetration is expected to reach 52% by the end of 1988, up from 39% now; and the studios are just beginning to tap overseas home-video and pay-television markets.

With all their potential, the new markets have brought their share of problems, too. The Justice Department has twice barred major studios from entering the paytelevisions market directly, and studios have never been satisfied with the prices paid by the biggest pay-television subscriber service, Time Inc.'s Home Box Office. Another battle in Washington could have a big effect on the future of the homevideo business: Studios are lobbying for repeal of the First Sale Doctrine in copyright law that prevents studios from collecting revenues from retailers tape rentals. The studios have adopted varying strategies to handle the new markets. Some have entered into joint ventures. For example, Twentieth Century-Fox Film and CBS Inc. together formed CBS/Fox, which with 20% of the market has become the largest home-video supplier. In addition to distributing Fox movies, CBS/Fox also licenses titles from United Artists, ABC Video Enterprises and Viacom. Likewise, Columbia Pictures Industries Inc. has joined forces with RCA Corp. in home video. MGM/UA Entertainment Group Inc. last year spun off its pay-television and home-video operations into a new company owned 20% by public shareholders. Walt Disney Productions has formed a telecommunications unit to manage the Disney Channel, a pay-television service, and Disney Home Video.

But many in the industry cite Paramount as the most innovative and aggressive of the studios in its approach to the new markets. The three-year-old Paramount Video group, ran by executives with experience in the television rather than the movie business, manages the studios' home-video business via 40 national distributors supplying the nation's 10,000 video retailers. Paramount Video also negotiates sales to pay television and is moving into new areas such as the production of original programs for video-cassettes and the licensing of programs made outside the studio.

In home video, for example, while it has only about half the titles of CBS/Fox, Paramount has a nearly equal market share. Mel Harris, who heads Paramount Video and is its chief stratregist, says the unit's success "flows back to the success of (Paramount's) motion pictures-it all started with "Saturday Night Fever."

Paramount maintains that the theatrical and home markets are increasingly dependent on each other. "Home video and pay TV don't take away from the theatrical market-if anything they've helped rejuvenate an interest in movie watching" by keeping the public interested in movies longer, says Robert Klingensmith, Paramount Video's head of marketing. Three to six months after theatrical release, movies are released for home video, and another three to six months later for pay television.

Paramount has been campaigning actively-and with increasing success-to persuade theater owners to get a piece of the home-video market by selling videocassettes alongside the popcorn and candy. The San Francisco-based theater chain Syufy Enterprises Inc., after meeting with Paramount executives, decided to start renting and selling videocassettes in the lobbies of five of its West Coast theaters to coincide with the May 15 opening of Paramount's "Indiana Jones and The Temple of Doom," the sequel to "Raiders of the Lost Ark."

TREND TOWARD PRICE CUTS

Mr. Klingensmith predicts that because "Raiders" cassettes have kept interest high, the sequel "will do more business." (To make sure of that, Paramount includes on every "Raiders" cassette a 45-second trailer hyping "Indiana Jones.")

Paramount also stated the trend toward big price cuts to spur sales of videocassettes. Studios had typically priced cassettes as high as $79.95 to $89.95, thereby encouraging retailers to rent rather than sell tapes. But late last year, Paramount, eager to persuade consumers to buy, began offering such hits as "An Officer and a Gentleman," "48 Hours," "Flashdance," and "Raiders of the Lost Ark" at $39.95. The strategy appears to be working. Mr. Harris notes that sales of "Raiders" at $39.95 are nearing one million units or $40 million at retail, of which $25 million goes to the studio. Columbia Pictures, by contrast, sold only about 100,000 units of

"Tootsie" at $79.95, grossing $5 million. With overseas sales and disk sales, that total might reach $7 million.

Warner Home Video, the Warner Communications Inc. home-video unit, initially said it would sell tapes of David Geffen's "Risky Business" at $79.95, but Mr. Geffen, for whom Warner distributed the movie, insisted the price be cut to $39.95. "I wanted the tape to sell at a price that kids could afford to buy it," Mr. Geffen explains. It worked; "Risky Business" has already sold more than 100,000 units and is still climbing.

Other studios say they have resisted big price cuts because few cassettes can generate volume high enough to make a profit at lower prices. But Paramount's Mr. Harris argues that low prices will eventually prevail. "There's no question that longer term this is the way the business has to be conducted," he says, noting that it costs less than $10 to make a tape, "and consumers won't pay $80 for that."

But pricing strategy aside, Paramount and others haven't been able to stop the rental market favored by many retailers, consumers and smaller independent homevideo companies. Mr. Simon of Goldman Sachs says that unless the copyright law's First Sale Doctrine is repealed, the growth of home video could be sharply curtailed regardless of price cuts. (If the doctrine is repealed, studios say they would cut prices on all tapes for sale, while selling a separate inventory of tapes for rental only.)

Meanwhile, after years of turmoil, the pay-television market has settled into what studios view as a fairly manageable business. In the past few months, the fights between the studios and HBO have been resolved by signing long-term, nonexclusive contracts under which HBO agrees to buy movies for a negotiated price that depends on box-office receipts and the number of HBO subscribers. (The number of subscribers to HBO and a sister service, Cinemax, currently total about 16.2 million.)

In pay television, Paramount has taken an opposite tack from other studios. Late last year, it signed a five-year, exclusive agreement to supply all its movies to HBO's rival, Showtime/The Movie Channel, which has less than half the total of HBO subscribers. Although Mr. Harris won't divulge terms of that contract, it reportedly is worth as much as $500 million to Paramount over its life, and "the bigger Showtime gets, the more money we get," he says.

Some studios criticize Paramount for that deal, but Mr. Harris contends the agreement could help strengthen Showtime against HBO. Also, he says, consumers who don't get Showtime are more likely to buy Paramount movies in videocassette form.

Paramount, other studios and independents are for the first time producing shows especially for home video and pay television instead of just recycling theatrical movies in those markets. (In some cases, that means using unreleased or repackaged shows from studios' television-production divisions.)

At Paramount, the video group is also charged with studying additional new markets such as direct broadcasting and pay per view. For example, Paramount soon plans to market its "Terms of Endearment" to approximately 800,000 homes equipped with converters to receive pay-per-view events. Although that market is still relatively tiny-"Flashdance" brought in only about $250,000 in pay-per-view revenues-it is yet another way for Paramount to get more money from its movie product. Explains Mr. Harris, Paramount Video's chief: "We're interested in offering the consumer convenience and taking the most money we can out of his pocket and putting it into ours."

[From the Las Vegas Review-Journal, May 2, 1984]

PANEL: VIDEO RECORDERS THREATEN PAY TV

The most significant development in the world of television is the growth in sales of video cassette recorders, but that technology poses more of a threat to pay TV services than to over-the-air broadcasters, a panel of experts agreed Tuesday.

"The VCR is quite likely to have a more fundamental effect on the ways people use television . . . than any of the other technologies," Paul Bortz, an industry analyst with the Denver consulting firm of Browne, Bortz and Coddington, told the National Association of Broadcasters meeting in Las Vegas. "And more and more they're being used to watch (rental) movies. I see them as a threat to premium TV." "How would you like to be in the business of owning movie theaters?" agreed William Lilley, a top executive with CBS.

Bortz and Lilley joined two other media experts Tuesday in trying to provide broadcasters at the NAB's annual convention an outlook on "The Future of the New Technologies."

And in sharp contrast to the predictions of recent years, there was general agreement that cable television doesn't pose as much of a threat to over-the-air broadcasting as many feared.

While cable and its pay channels such as HBO and Showtime have drawn away theatrical films, variety entertainment shows and some sports from conventional broadcasting, the networks have responded with more emphasis on made-for-TV movies and mini-series, Lilley said.

"We are both doing quite well in the marketplace, thank you," added Thomas E. Wheeler, who Tuesday became the first president of the National Cable Television Association to ever participate in a NAB convention.

Daily TV viewship continues to rise, Wheeler noted-now past an average 7 hours a day-and viewers seem to be using cable to augment the programs offered by the networks rather than simply replacing them.

And if cable and broadcast television have reached an uneasy truce in their war for viewers, it is cable that is now facing a wave of new competition led by the acceptance of VCR's, added Bortz.

At least 12 percent of all American households already have a VCR, eliminating the need for a consumer to subscribe to many cable pay TV channels, Bortz explained.

[From the New York Times, May 7, 1984]

HOLLYWOOD THRIVING ON Video-CasseTTE BOOM

(BY ALJEAN HARMETZ)

HOLLYWOOD, May 6.-The video cassette, long underrated by Hollywood as a means of distributing movies to the public and feared as a potential drain on movietheater attendance, is now becoming an important money-maker for film studios. In 1978, video cassettes did not exist as a source of revenue for Hollywood. By 1982, however, a typical movie earned 8 percent of its revenues from cassettes and disks, according to Wertheim & Company, a New York investment banking house, and last year the figure jumped to 13 percent.

A few months ago, United States and Canadian video-cassette rights to the movie "Silkwood" were sold for about $1.5 million. That record was soon broken when similar rights to "Santa Claus-The Movie" sold for $2.6 million. The rights to "Santa Claus," which will star Dudley Moore as Santa Claus's principal elf, were sold several weeks ago, although the movie has yet to begin production. By comparison, Andre Blay, chairman of Embassy Home Video, said, an average of $400,000 was paid for such rights in 1982 and about $500,000 last year.

Eighteen months ago, the video cassette, which can both tape television programs off the air for later viewing and play recorded movies, was only one of three new entertainment technologies fighting for the interests of consumers.

Now, however, it has not only triumphed over the videodisk-a system that cannot tape television programs off the air-but is challenging pay-cable television as a way of showing movies at home. Knowledgeable Hollywood executives say that paycable movie channels, such as Home Box Office-despite their head start-may lose out in the long run to the video cassette.

As with any new technology, however, especially one that has grown so suddenly and dramatically, the video cassette has brought conflicting responses. Jack Valenti, president of the Motion Picture Association of America, is still wary of the effects of the video-cassette recorder. "It will devastate the post-theatrical market," he said, referring to the sale of movies to television networks.

By contrast, the nation's theater owners, while originally apprehensive that home video would mean the demise of their theaters, now appear less fearful of the new technology. Indeed, video cassettes are being sold in a number of theaters.

A worry that remains for theater owners is that the interval between a film's release in theaters and on cassettes may be reduced.

"The video cassette is just starting to have an impact," said Joel Resnick, president of the National Association of Theater Owners. "If cassettes were released the same day movies opened in theaters it would be disastrous." Currently, many movies are released on cassettes from four to six months after they open in theaters.

Many film industry executives say they are optimistic about the money to be made from video cassettes, not least because Hollywood producers can charge their own prices.

In contrast, the producers have to negotiate prices when selling to cable-television networks. As their licensing fee, pay-cable channels pay the producers from 20 cents to 50 cents for each subscriber, an amount which movie makers believe is far too low.

According to Rich Frank, president of Paramount's Television Group, the wholesale price for a $39.95 video cassette of "Raiders of the Lost Ark" is $25, Paramount's cost "all in, for the tape, reproduction, packaging, wrapping and shipping," he said, is $12.

"I have to pay the creative participants out of the $13 that is left, but our profit is obviously more than 50 cents," Mr. Frank said.

"It's difficult to complain about a business that is growing so rapidly," said Embassy's Mr. Blay. "Today, there's a chance to hit a home run and make a $5 million or $10 million profit from a single video cassette."

In 1983, 4.1 million video-cassette recorders were sold in the United States. During the first three months of 1984, video-cassette recorders sold at an annual rate of 8 million, according to Mr. Valenti.

RCA DISCONTINUES VIDEODISK

"By the end of 1984, there will be 17 million or 18 million machines in American homes, three times more than the highest estimate people were making two years ago," Mr. Valenti said. "I predicted 40 million cassette recorders by 1990. Now I think there will be perhaps 60 million."

The apparent reason for the cassette recorder's triumph over the videodisk is its versatility.

After losing $575 million, RCA last month discontinued its CED, or Capacitance Electronic Disk, player. A more sophisticated disk player, by Pioneer, the LaserDisc, is still on the market and is considered viable as an educational tool. However, at $800 it is thought to be too expensive for mass consumption. The video-cassette recorder has dropped markedly in price in recent months. Some machines can be had for $299.

In its competition with pay cable, the video cassette has the advantage of convenience. Cassettes, which can be bought or rented, permit the owners to watch movies at the time of their choosing rather than when scheduled by a cable company. In addition, movies are available on cassettes six months before they are allowed to be shown on pay cable.

"I guess we shouldn't be surprised by the success of à la carte video," said Nicholas Santrizos, president of Thorn EMI Home Video. “Americans have always wanted freedom of choice."

A recent survey by the A.C. Nielsen Company showed that the use of prerecorded video cassettes has grown markedly among owners of video-cassette recorders, although the machines are still used most often to tape television programs for viewing at a later time.

The survey showed that 70 percent of video-cassette recorder owners rent films on cassettes and 24 percent buy them. This is a major increase over results of a 1982 Nielsen survey in which fewer than half of the respondents had rented and only 18 percent had bought a film cassette.

Partly because of the competition from video cassettes, pay-cable networks have already begun to reduce their dependence on films and to add more original programming, such as the recent opulent mini-series on HBO, "The Far Pavilions." Even so, the growth of pay cable has slowed dramatically.

HBO TO ENTER CASSETTE MARKET

In a recent speech, Frank Biondi, chairman of HBO, the largest pay-cable channel, said that pay cable has hit "a roadblock" and is "out of its period of most rapid growth." HBO, which has 13 million subscribers, recently announced that it intended to enter the video-cassette market.

"I'm concerned about the competition from video cassettes," said Mike Weinblatt, president of Showtime/The Move Channel, the second largest pay-cable network. "But I don't have as much gloom and doom as other pay-cable people do. We still have six or eight major cities to be wired. I'm cautious, but I still expect some decent growth.'

Although, some in Hollywood remain uneasy about the video cassette, Mr. Valenti said the film industry never sought to ban the cassette. Instead, it sought to get "just compensation" through a tax on the machines and blank tapes.

Sidney J. Sheinberg, president of MCA Inc. and an architect of a lawsuit filed against Sony Corporation by Universal Studios and Walt Disney Productions in 1976, said: "We never opposed the video cassette as a playback device. Our opposition was only against recording off the air." The suit contended that movies were in effect being stolen by people who taped them from television broadcasts.

TOUGH TO GET COMPENSATION

The Supreme Court decided last January that home taping for later viewing did not violate existing copyright laws. Hollywood has now taken its fight to Congress, but Mr. Valenti was pessimistic. “It will very tough to get compensation," he said, "because of the Supreme Court decision and because Congressmen don't like to vote for something to which there is opposition in their home districts."

Film producers get income either from distributing their own video cassettes to wholesalers or from licensing their movies to outside parties who make video cassettes from them, as in the cases of "Silkwood" and "Santa Claus." Paramount, which distributes its own cassettes, has sold more than 600,000 copies of "Raiders of the Lost Ark" for a considerably less than average price of $39.95 each.

Movie producers have not gone into the business of renting cassettes, which is where most of the revenues are, and they make no additional money when retailers rent the cassettes they have purchased from distributors. According to The Fairfield Group, a video consulting company, there was 150 million cassette rental transactions last year. Mr. Valenti said that eight million cassettes were sold in 1983. The success of the video cassette-particularly as a rental item-will mean a certain amount of turmoil in 1984 for the nation's 12,000 video stores.

DROP IN RENTAL PRICES

Competition among stores, including entry into the field by record stores, has meant steep drops in rental prices. In the Los Angeles area, for example, many cassettes-among them "Sudden Impact" and "Trading Places," in recent weeks the most popular rental cassettes according to Billboard magazine-can be rented for $1 a night. In New York City, prices range from $2.50 to $6 a night.

The video stores will soon face additional competition from discount chain stores and supermarkets. By the end of 1984, cassettes will be available for rental and sale in chain stores and supermarkets. Supermarkets across the country, including the 750-store Hughes chain in California, are already experimenting with cassettes.

According to Thom Hunzicker of Family Home Video in America, a four-month test in 10 Vons supermarkets in Southern California was so successful that the chain will be putting cassette centers into 43 other stores.

Although the entrance of the massmarket merchandisers caused many independent game stores and computer outlets to go bankrupt a year ago, many film industry analysts of not believe the nation's video stores will be similarly affected.

"The K Marts of the world will only sell the Top 40 and some children's cassettes to blue-collar families with children," said Mr. Blay of Embassy.

Arthur Morowitz, president of the 11-store Video Shack chain in New York, said: "Customers choose a video store first for convenience of location and second for size of selection. Price considerations are third. The Supreme Court decision was extremely helpful in spreading the work about video. I don't think the American public held back from buying machines because they thought they'd be committing a crime, but once the decision came it was a kind of approval."

HOLLYWOOD dissatisfied WITH HBO

Cable television still provides Hollywood more revenues than do video cassettes. According to industry publications, in 1983, home video accounted for 13 percent of Hollywood's revenues, pay cable 24 percent, and theatrical film rentals 63 percent. Three years ago, theatrical rentals accounted for 69 percent.

Even though pay cable has so far provided more total revenues than cassettes, Hollywood has not been satisfied with its relationship with HBO. The network has had little competition and, as a result, has offered what many film producers consider low fees.

Paramount's recent arrangement to sell its films exclusively to Show-Time/The Movie Channel is considered by industry analysts to be a deliberate attempt to keep HBO from monopolizing pay cable. Because Paramount has had a lion's share of