Was Spectravision Too Farsighted?

Back in 1992, top executives at SpectraVision Inc. peered into the future and didn't like what they saw. Although the company, then known as SPI Holding Inc., had pioneered pay-per-view movies in hotel rooms, it was saddled with aging video technology in a slow-growth market.

But rather than fight fierce price wars, then-Chief Executive Albert D. Jerome decided to leapfrog rivals with a sophisticated satellite-based system. With partner Electronic Data Systems Corp. providing digital technology, Jerome banked on high-quality pictures and more programming flexibility to jumpstart sales and earnings. But the company, based in Richardson, Tex., and controlled by billionaire Marvin Davis, underestimated the difficulties of building its new system. And now, instead of being toasted as a technology leader, SpectraVision is struggling to survive. Analyst Sally Overstreet of Jefferies & Co. estimates that it lost $75 million last year on sales of $145 million, after losing $46 million in 1993. With $18 million in interest due in December, analysts say SpectraVision will have to restructure its $500 million debt. Its Class B stock has plunged to 5/16 from a high of 147/8 in late 1993. Concedes Gary G. Weik, named CEO after Jerome's September ouster: "This is a company that tried to do too much to fast."

SpectraVision has been down this road before. The heavy debt--left by successive leveraged buyouts involving billionaire Robert M. Bass in 1987 and Davis in 1989--sent it into bankruptcy briefly in 1992. Although Davis then cut his stock holdings from 100% to 32%, he controls about 74% of voting rights. Davis, who remains a director, expresses confidence in current management.

SpectraVision's latest downturn began when installing the satellite system proved far tougher than foreseen. Initially, SpectraVision and EDS had trouble getting the new hardware and software to work together. Other technical snafus added to downtime. The result: Revenues shrank as costs soared.

Still, the 48-year-old Weik, the former head of Houston-based cable operator KBLCOM Inc., remains steadfast. "We have the right technology," he insists. "We have the right strategy." SpectraVision has now linked about 1,300 hotels in the U.S. and Canada, with some 400,000 rooms, to the satellite network and will complete installation in 300 more hotels this year, at a total cost of more than $20 million. It has also begun rolling out the next phase, a digital video-on-demand system. "We're probably 18 months ahead of any other competitive product," boasts J. Keane Taylor, president of the visual communications group at EDS.

Perhaps, but SpectraVision has little to show for its efforts. By replacing its old system, in which every hotel had videoplayers, with the ability to receive programming by satellite, it claims it has cut distribution and maintenance costs while offering greater variety. Yet hotels appear unimpressed. Since 1991, SpectraVision's installed base has fallen by 16%, to about 634,000 rooms. In early 1993, for example, it lost a contract with Hilton Hotels Corp. to provide movies to 43 hotels. Hilton opted for rival On Command Video Corp. On Command's better deal--offering Hilton free TVs and a greater share of movie revenues--was the main reason for the switch.

BEYOND MOVIES. Others have also been quick to move in. Tim C. Flynn, CEO of LodgeNet Entertainment Corp. in Sioux Falls, S.D., says his company has grown 36% over the past year, to 185,000 rooms served, largely at SpectraVision's expense. He contends that LodgeNet's videotape-based system can provide more movies at a lower cost than SpectraVision. "What they're doing does not add any value in the room," he scoffs.

Weik concedes that rivals' systems can do the basic job of providing pay-per-movies just as well and at a lower cost. But he argues that SpectraVision's payoff will come as the digital system allows it to diversify into new services--such as videoconferencing, interactive training programs, live events, and targeted advertising. Eventually, he argues, SpectraVision will move beyond hotels to serve military bases and hospitals. "We didn't build the digital network just to deliver movies," he says. Even if rivals eventually go digital, he claims SpectraVision will be ahead of the pack in learning to create programs and services for the info highway.

But first Weik must shore up operations and reduce debt. Although he insists there's no fire sale, he is trying to unload stakes in SpectraVision's operations in Hong Kong, Australia, and Canada in deals that should bring $50 million. After dealing with that dose of reality, Weik can dream his digital future.

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