LOS ANGELES — Effects of overcapacity, readily available equipment financing and a soft economy are driving a wave of consolidation and retrenchment through the optical-media industry.
Observers tend to believe the cyclical problems will abate in a year or so.
Replicators of compact-disc and digital-versatile-disc formats tend to have short outlooks because of rapid changes in the entertainment market, said Sarah Carroll, managing director of Understanding & Solutions Ltd. in Dunstable, England. She and others were interviewed at Replitech North America, held Feb. 20-22 in Los Angeles.
"As the business kicks off, they tend to overinvest, [and] typically, overcapacity arises," Carroll said. She observed that the market decline began around October.
The allure of the movie industry can draw investors from outside optical media, she said.
"We've got big new entrants," such as Panasonic Disc Services Corp. of Torrance, Calif., and others including Maxwell Productions LLC of Scottsdale, Ariz.
"The market is growing strongly, but there are always too many players who want a piece of the action," Carroll said. "We're likely to see some replicators putting the for-sale sign up or scaling down activities. It's already happening."
Sergei Bozin, president of CD Profile International Inc., a consulting firm in Malibu, Calif., sees major challenges.
Bozin expects that out of about 150 U.S. sites, there will be another dozen closures this year.
"The next year will be the most crucial for survival of replication facilities," he said.
Bozin reflected on the process. "There was fast expansion without any thought. When DVD went up fast, it did not provide enough volume for everybody, and at the same time, we have problems on the CD business, which came down much faster than expected."
Bozin recalled the decision that helped the industry recover from a 1987 downturn.
"The big five music companies decided to release all their catalogs on CDs," he said. "The question: Is there any magic cure coming this year to save the industry?"
Equipment makers have noticed changes in the market.
"Worldwide, the optical market is cooling down," said Peter Hillenbrand, assistant to the managing director of Krauss-Maffei Kunststofftechnik GmbH in Munich, Germany. "We are seeing a difficult year and also next year."
In mid-2000, Krauss-Maffei began seeing order slippage with smaller increases for CD machines than previously.
"Even in DVD, there is overcapacity installed vs. demand in the market," Hillenbrand said.
"We believe it is going to be slow for the first half year and that there will be some improvement in quarter three," said Werner Christinger, president of Netstal Machinery Inc. in Devens, Mass.
Last year, Netstal sold about 800 of its Swiss-made 66-ton Discjet optical media presses, including 150 in North America. This year sales will drop, he predicted.
Despite the industry's ups and downs, there is a growing market, said Karl-Heinz Schoppe, president of sales and operations with machine maker eMould GmbH of Wurselen, Germany. "We will find the optical-media market is more diversified than it was before."
Niches include business cards, smart cards and DataPlay Inc.'s microdiscs.
"All these new developments have the potential to grow in larger numbers than DVD is forecast for," Schoppe said.
Here are some recent changes:
Cinram International Inc. of Toronto said Feb. 6 it would close its Anaheim, Calif., operation, sell the pricey Orange County real estate and move equipment to Huntsville, Ala., and Richmond, Ind. A year ago, the Anaheim plant employed 185.
"New orders are being transferred to other sites," Lewis Ritchie, executive vice president of finance and administration, said in a telephone interview.
In December, Cinram said it would restructure and record a special pretax earnings charge of about C$48 million (US$32 million) in 2000's fourth quarter. Recently, Cinram added 800,000 square feet to the Huntsville plant's 300,000 square feet in a ramp-up to supply News Corp.'s Fox Entertainment unit.
In January, Sony Disc Manufacturing announced it would close a Carrollton, Ga., audiocassette, printing and CD manufacturing plant by March 31. The site employed about 360, down from more than 850 in June. The division of Sony Corp.'s music entertainment unit blamed the closing on the "continued declining sales of cassettes as a music format."
Ricoh Co. Ltd. decided recently to stop making recordable and rewritable CDs at its disc media and system center in Tustin, Calif., and sell the equipment. The center also supplies CD-R/RW drives and software products.
E. David Willette and Americ Disc acquired Allied Digital Technologies Corp.'s assets for $25 million through a U.S. Bankruptcy Court sale in Wilmington, Del., in December. Allied filed for protection from creditors under Chapter 11 of the U.S. Bankruptcy Code in October.
Willette operates the video, recordable CD and branch locations as Allied Vaughn in Minneapolis. Willette sold his duplication firm to Allied Digital in early 1999 at a much higher price. Americ Disc of Drummondville, Quebec, obtained CD replication lines. Transcontinental Group of Montreal and Averton, France-based Moulage Plastique de l'Ouest jointly own Americ Disc.
Last year's upbeat economy prompted some replicators to count on potential work, Bozin said.
"I was talking with a lot of manufacturers believing they would be the ones to get a part of this pie," he said. But supply exceeded demand.
"The business subsided, and the companies expanded," Bozin said. "The overcapacity all of a sudden became a reality of our life."
