February 25, 1996

Digital Reality Strikes Movieland

HOLLYWOOD, Calif. -- In the movie business, it still helps -- more than people here care to admit -- to be seen driving up to the right restaurant in the right car and greeting a powerful agent.

But more and more, it helps to know your way around the new movie back lot -- a computer work station.

Ever since the computer-generated dinosaurs proved the moneymaking power of digital movie making, Hollywood has had a bad case of the digital bug. Directors gleefully talk the patois of gigabytes and computer rendering.

The problem is, investors got the bug even worse. The promise of transforming the film industry into a fully computerized factory for all sorts of entertainment products led the shares of several companies sharply higher several years ago. Remember, that was before the obsession with the Internet.

Today, the shares of some of those companies -- Silicon Graphics, which dominates the work station end of the digital studio, Avid Technology and Discreet Logic -- are limping. Stock in Silicon Graphics once traded at about 28 times its earnings, and it has now fallen back to about 17.

(The company said late Friday that it would make a major announcement Monday morning, and there was speculation that it was going to acquire Cray Research.)

Expectations for these companies, it seems, are merely sliding back into line with reality. After all, if there is one thing that has not changed in Hollywood, it is the industry's ability to sell hype.

The digital studio is coming, and it is producing billions of dollars for the companies that make the hardware and software on which digital talking pigs and the like are created. The process is just taking longer than many people had expected.

The digitization of the entertainment business is changing the way people here think. James Cameron, the director of the heavily computerized movie "Terminator II" and an owner of Digital Domain, a hot special-effects shop, delivered a lyrical talk here last week in which he jumped from poetic visions to blunt talk of "harvesting" new products from the company's digitized film library.

The occasion for Cameron's talk was the announcement that Cox Enterprises, a big media company, was joining Digital Domain's other big shareholder, IBM, as an investor in this digital studio. "There has been a ton of hype about this," said Scott Ross, Digital Domain's president.

Wall Street analysts are more sober on the prospects of this business, but still find them promising, especially when the digital studio is seen as an adjunct to the range of entertainment products, from animated shows based on movies to computer games and CD-ROMs.

Silicon Graphics, for instance, now receives about 20 percent of its revenue from the entertainment industry, up from 5 percent two years ago.

"The thing many people don't realize is that the digital studio is not just a work station and some software where you make some special effects," said Rick Selvage, general manager of IBM's media and entertainment business. The data have to be stored, managed, retrieved and distributed.

"Some studios get it better than others, Selvage added, "but eventually they'll all do this."

Laura Conigliaro, an analyst at Prudential Securities, said: "It's like anything that's complex, pioneering and new -- there are problems. But in the long run, it's very promising."

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