By BRETT SPORICH Staff Reporter

Battered by the downward spiral in its stock price resulting from a failed merger attempt, the management at Image Entertainment is making moves to grow the business so it can be a stand-alone company.

Image wants to move from B-movies to the A-list. The company also has its sights on significant future revenue from online streaming of videos.

Founder and Chief Executive Martin Greenwald recently told investors that the Chatsworth-based company has hired a crack team of film acquisitions and marketing veterans and is boosting its video digital delivery business in an effort to prove that there is more value to Image than its movie library.

Image has seen its stock price plummet from a high of $4.50 last October when it was announced that BTP Acquisition Co. would pay $4.40 a share for the movie supplier. After delays that Image blamed on BTP's financing problems, Image's stock sunk to a low of about $1.25 a share last week, slightly higher than the company's $1 a share book value. Image wants $4.2 million in damages from BTP, while BTP is demanding $1.5 million over the failed deal.

BTP is controlled by film financier and producer David Bergstein, who owns ThinkFilm and U.K.-based Capitol Entertainment and has limited movie distribution agreements with Image. BTP has not addressed Image's allegation of failed financing.

Image has long been known for its 3,000 DVD-title library of catalog content, a term used for older films and television fare or direct-to-video products. Its catalog includes older films such as "The Last Emperor," TV series including Discovery Channel's "Dirty Jobs" and countless direct-to-video releases.

By shifting its focus from catalog content to acquiring new theatrical releases with name stars, Image hopes to boost revenue and its cachet among DVD retailers, cable video-on-demand and online distributors such as NetFlix, Cox Cable, CinemaNow and MovieLink.

"Moving forward, we are aggressively pursuing the acquisition and exclusive distribution of high-quality, cast-driven feature films," Greenwald told investors last week.

BTP was the second company that tried to merge with Image.

In 2006, Lions Gate Entertainment Group became Image's second largest shareholder with an 18.5 percent stake in the company. The Santa Monica-based film company tried to replace Image's board as part of a hostile takeover, but Image averted the attack by demanding more than $4 a share. That led to Lions Gate's defeat. Once Lions Gate caught wind of BTP's offer to purchase Image it dumped its entire 3.9 million share stake in the company.

New movies

Image recently hired industry veterans Bill Bromiley to head the company's worldwide content acquisitions, Steven DeMille to head marketing, Steve Saltman to head the broadcast division and J. Beck as part of the acquisition team.

The team has increased negotiating clout for new releases among top-line production companies and is a signal to the industry that Image is serious about its plans.

The new team was responsible for the recently acquired rights for the distribution of such successful theatrical releases such as Sidney Lumet's "Before the Devil Knows You're Dead," a crime thriller starring Philip Seymour Hoffman and Marisa Tomei; and "My Sexiest Year," a comedy starring Frankie Muniz and Harvey Keitel, among several other titles.

On the digital distribution front, Image boosted revenue for the quarter ended Dec. 31 by 54 percent, to $519,000. The amount is a small part of the company's quarterly revenue of $27.3 million for the same period.

However, Image executives expect digital distribution revenue to grow.

Having been involved in digital distribution of video and audio content for more than three years, Image has a leg up on competitors of similar size, said Burgess Wilson, who oversees digital distribution for Image's Egami Media subsidiary.

The company has amassed more than 2,000 movie titles and 250 musical artists with more than 4,500 songs now available for digital streaming and downloading.

Image's digital distribution of content is viewed as a new revenue stream that can augment the company's DVD sales, not just cannibalize them.

"At some point it is inevitable that digital delivery will take off and become a significant money maker," Wilson said. "But for the foreseeable future it represents an incremental revenue stream."

The company is only now aggressively seeking digital distribution rights to major theatrical releases and should soon have 90 percent of its new content available for online distribution, Wilson said.

Image supplies online television and feature films to Web retailers such as CinemaNow, MovieLink and NetFlix, among others at the forefront of the online movie rental and download markets.

Real money

Wilson believes online streaming of rental movies with ad-supported streaming of movie and television content will be major revenue producers, more so than digital downloads.

The challenge for Image will be acquiring the digital distribution rights to television shows and movies that consumers want to see, rather than the company's catalog product.

CinemaNow Chief Executive Curtis Marvis compares the evolution of online movie and television viewing to the development of cable.

"Cable TV didn't start out with the Gardening Channel," Marvis said. "You first had HBO and Cinemax and then, with the popularity of the format you began to see the niche channels. The same thing is going to happen with online distribution."

But that could take some time, most industry observers believe.

Industry analysts say that widespread adoption of online movie and television viewing will take at least three to five years, when technology will provide ways to view movies sent from the Internet to living room television screens.

Hewlett Packard Co. and Apple TV have introduced such technology but it is still clunky and expensive.

"We're forecasting that it will take at least five years to reach $1 billion in annual gross revenue for the entire digital distribution market, be it streaming or downloading, said Tom Adams, industry analyst with Adams Media Research in Carmel, which covers the home entertainment market.

That compares with an estimated $24 billion in annual gross revenue generated from the sale and rental of DVDs during 2007, down from the market's peak of about $28 billion in 2005.

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