LodgeNet Entertainment Corporation

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LodgeNet Entertainment Corporation

3900 West Innovation Street
Sioux Falls, South Dakota 57107
U.S.A.
(605) 988-1000
(888) 563-4363
Fax: (605) 988-1532
Web site: http://www.lodgenet.com

Public Company
Incorporated :1983 as Satellite Movie Company
Employees :739
Sales :$166.4 million (1998)
Stock Exchanges :NASDAQ
Ticker Symbol :LNET
NA1C :513220 Cable Program Distribution Operators; 513210 Pay Television Networks; 33429 Other Communications Equipment Manufacturing

LodgeNet Entertainment Corporation is a leading entertainment company providing network-based video games, movies-on-demand, cable television programming, and other services to more than 4,000 hotels worldwide. The company also provides Super Nintendo video games and PRIMESTAR satellite television to corporate-managed hotel chains and individually owned franchise properties, including Budgetel Inns, Delta Hotels and Resorts, Doubletree, Embassy Suites, Harrah’s Casino Hotels, Hilton, Holiday Inn, Inter-Continental, ITT Sheraton, La Quinta Inns, Marriott, Outrigger, Prince, Radisson, Red Roof Inns, The Ritz-Carlton Company, Starwood Hotels & Resorts, and Westin.

The company pursues its strategic goals in the lodging industry through the design, assembly, installation, and servicing of two types of guest room entertainment and information systems. “Guest Pay” systems are those that deliver on-demand movies, games, and information services to the guest on a pay-per-view or pay-per-use basis, generating recurring revenue for the company. “Free-to-Guest” services involve satellite-delivered programming such as HBO and CNN, using PRIMESTAR compressed digital technology. LodgeNet connects consumers with content using a proprietary broadband local-area network (b-LAN) system architecture. The company designs, builds, programs, and operates these systems.

Satellite Movie Company: 1980-91

The company was founded in 1980 by Tim C. Flynn as Satellite Movie Company. The company’s initial business was providing satellite television systems to hotels and motels, including satellite earth stations, master antennae, and on-property signal distribution systems, plus programming and related marketing support materials. Programming sources included such services as ESPN, Cable News Network, Showtime, The Movie Channel, and national superstations WTBS and WGN.

Satellite Movie Company, which was originally incorporated in South Dakota in February 1983, began offering pay-per-view (PPV) movie systems to the lodging industry in 1986. The company’s initial PPV offering was a scheduled system, offering newer movies than those available on cable, broadcast at preset times over the guest room television system.

LodgeNet Entertainment Corporation, 1991-96

In September 1991 the company adopted the name LodgeNet Entertainment Corporation to reflect the evolution of its services from satellite-based programming to a broader network distribution model. This move anticipated the introduction of the LodgeNet Guest Scheduled video-on-demand service in 1992, the company’s initial interactive service. A significant advancement in guest room entertainment services, the Guest Scheduled video-on-demand system generated more movie buys and revenue because it responded instantly to the guest’s order rather than forced the guest to wait for the movies’ next scheduled broadcast. It also was capable of offering a much larger movie selection than a scheduled system, which expanded revenue by increasing the chance that a guest would find an appealing title to view. Finally, the enabling technology behind Guest Scheduled—two-way digital communication between each guest room and LodgeNet—also opened the door to additional interactive services.

In March 1993 the company, in a joint venture with NTN Communications of Carlsbad, California, began testing of the hotel room interactive television in approximately 5,000 guest rooms over a period of five months. The full capability was demonstrated in late 1993 with the introduction by LodgeNet of network-based Super Nintendo Entertainment System video games for the guest room, which proved to be exceedingly popular with hotels and guests and, by mid-1999, was installed in more than 530,000 LodgeNet guest rooms. Subsequently, LodgeNet introduced additional interactive services, including Guest Satisfaction Survey, the HotelGuide interactive hotel directory, HotelTour interactive property tour, Room Service Menu Display, Internet Site Promotion, and Video Check-Out with Guest Room Printers.

The company incorporated in Delaware during 1993 via a merger as a successor to Satellite Movie Company. In October of that year the company went public, offering some 4.5 million shares in its initial public offering and bringing in $56.48 million in proceeds, which were used to redeem outstanding preferred stock, reduce bank debt, and provide working capital.

In 1994 LodgeNet partnered with Sony Corporation, which made a series of Trinitron televisions compatible with LodgeNet’s interactive systems. Meanwhile, competitors Spec-tradyne and COMSAT Video Enterprises were not idle. Dallas-based Spectradyne formed an alliance with Ross Perot’s former company, Electronic Data Systems (EDS), for using compressed digital video to program scheduled movies to hotel rooms, calling their offering “SpectraVision”; and Bethesda, Maryland-based COMSAT Video Enterprises, a subsidiary of COMSAT Corp., allied with Silicon Graphics and Bell Atlantic to target two segments of the lodging business: traditional satellite programming combining channels free to the guest with for-pay movies and live special events and On Command Video, a paid entertainment and information system. Smaller competitors also were offering movies in hotel rooms. Peoria, Illinois-based SVI Systems offered movies with its Instant Entertainment or Super Video Cinema programs, but its technology relied on portable videocassette players rather than highspeed, high-tech telecommunications equipment.

Early in 1995, Santa Clara, California-based 4th Network began working on an interactive shopping and guest services system. Total revenue for LodgeNet in 1995 reached $63.2 million.

In January 1996 LodgeNet forged an agreement with PRIMESTAR Partners L.P., making LodgeNet the exclusive provider of PRIMESTAR products and services to the lodging industry. PRIMESTAR agreed to provide LodgeNet with access to its digital satellite technology, and the Philadelphia-based company featured more than 1.6 million sites installed throughout the United States. PRIMESTAR by LodgeNet (PbL) was formed as a division of LodgeNet to handle the alliance and, almost immediately, hotel owners and operators seized upon the programming, customer service, and low per-room cost offered by PbL. By the end of 1998 PRIMESTAR by LodgeNet was serving nearly 380,000 rooms with Free-To-Guest programming.

Also that month, the company formed ResNet Communications Inc. to extend its b-LAN system architecture and operational expertise into the multiple dwelling unit (MDU; apart-ment/condo/townhouse) market. In October, TCI Satellite MDU, Inc., an affiliate of Tele-Communications Inc. (TCI), agreed to invest up to $40 million in ResNet in exchange for up to a 36.99 percent interest in ResNet and agreed to provide ResNet with long-term access to the digital DBS signals provided by TCI Satellite for the MDU market on a nationwide basis via the PRIMESTAR satellite signal. Approximately $5.4 million in cash was paid to LodgeNet, with the remainder of the $34.6 million to be provided in the form of available financing.

By April 1996 the company had more than 200,000 hotel rooms set up to play Super Nintendo Entertainment System games via interactive network. Total revenue for the year reached $97.72 million, with a net loss of $3.25 million.

1997 and Beyond

Prior to 1997, the company focused its marketing efforts on the 150- to 300-room and the more than 300-room segments of the hotel market, which represented about 26 percent and 12 percent of the lodging industry’s 3.5 million rooms, respectively. In 1997 the company, in an effort to target an area of the industry not as saturated with competitors, began to market to the less than 150-room market.

June 1997 found the company announcing a strategic alliance with SkyMall Inc. to deliver a video version of the latter company’s in-flight airline catalog. The service allowed hotel guests to browse and shop from an interactive video catalog in their room. Because of LodgeNet’s position as number two in the industry, a new interactive addition for the year was the presence of advertising “banners” on the video screens in the hotel rooms, similar to Internet-based ad banners, which provided a significant new revenue source for the company.

Company Perspectives

LodgeNet will be the leading distributor of interactive, multimedia entertainment and information services to the lodging industry. Our intent will be to provide these services using our advanced, cost-effective b-LAN and Internet technologies. Distribution of these services will take place in North American and selected international markets where it is both economically and technically feasible. We will succeed by providing innovative, demand-driven services in these selected markets. We will differentiate ourselves through excellence in system design, content marketing, and customer and technical support.

International sales efforts for the company expanded in 1997, with LodgeNet signing agreements with Panama-based Five Star Entertainment Inc. to bring, via the latter company, LodgeNet’s services to Central America. Five Star began installing systems in Panama and began looking into the markets of Belize, Costa Rica, Guatemala, El Salvador, Honduras, and Nicaragua. In addition, the company inked deals with TCI Net Vision for the Venezuelan market, Roombar S.A. in the Dominican Republic, and InfoAsia for the Indonesian, Philippine, Thai, Singaporan, and Malaysian markets.

The company added approximately 100,000 rooms to its guest pay base in 1997, bringing the total to 511,000, as well as 126,000 new Nintendo rooms. The company’s core lodging business was bolstered in 1997 by contract renewals and such new clients as Carefree Resorts and Prime Hospitality, as well as the addition of several high-profile ownership/management companies to its corporate roster. The company’s Canadian branch did well also, installing interactive systems in more than 125 hotel properties throughout that country, including Delta Hotels and Resorts, ITT Sheraton Canada, Centennial Hotels, Coast Hotels Limited, Westmont Hospitality Group, and Canadian Niagara Hotels Inc., as well as numerous independent properties. However, while total revenue that year reached $135.7 million, a 38.9 percent growth over the previous year, net losses continued to mount, reaching $25.41 million for the year.

In 1998 a number of changes occurred. May found the company moving to its new headquarters location on West Innovation Street in Sioux Falls, South Dakota. In July the company promoted Scott C. Petersen from executive vice-president and chief operating officer to president and chief executive officer, replacing Flynn, who moved up to become chairman of the board. By this time, LodgeNet was the second largest provider of interactive entertainment and information services to the lodging industry.

In June the company acquired Connect Group Corporation in a stock swap. The acquisition gave the company the ability to deliver a comprehensive solution to cost-effectively enable plug-and-play high-speed Internet access for hotel guest rooms and meeting spaces as well as the technology to allow guests with laptop computers to connect to the Internet from their rooms at more than 50 times the speed of conventional modems and bypass the hotel’s PBX system.

In November 1998 the company completed the merger of its subsidiary ResNet with Interactive Cable Systems Inc. and Shared Technologies Communications Corporation, to form Global Interactive Communications Corporation, a company designed to provide video, voice, and Internet services to the MDU market. At start-up, the new company (owned 30 percent by LodgeNet) had in excess of 650 properties, 125,000 passings, and 55,000 subscribers in 28 states from coast to coast. The new Richardson, Texas-based company also featured customer service and field operations in Tampa, Florida, and construction and warehousing activities in Sioux Falls, South Dakota.

Also in 1998, LodgeNet signed agreements with the Red Roof chain and Carefree Resorts. The company added approximately 84,000 rooms to its guest pay base in 1998, bringing the total to 596,806. Still, while revenue continued to climb, net losses mounted as well, with the company bringing in a total $146.48 million, while losing $39.91 million in 1998.

In March 1999 AT&T—the world’s premier provider of voice and data communications and the nation’s largest direct Internet service provider—and LodgeNet entered an agreement to provide high-speed Internet access to hotels across the country. With the world’s largest, most powerful long distance network and the largest wireless network in North America, AT&T would supply high-speed Internet access to guest rooms equipped with OnLine by LodgeNet. The service also would supply the hotels themselves with connectivity to their meeting rooms, back offices, and public areas. Wingate Inns International Inc. announced in January that it would be the first hotel chain to deploy LodgeNet’s services with Internet connectivity to some 23,000 rooms nationwide that year. By this time, partners in PRIMESTAR included TS AT, Time Warner Entertainment, Comcast Corporation, Cox Communications, Me-diaOne, and GE Americom.

The company’s primary focus at the end of the 20th century was on the two million guest rooms in North America located at hotels, motels, and resorts containing 100 or more rooms. By mid-1999 LodgeNet served some 700,000 rooms at more than 4,500 lodging properties in the United States, Canada, Japan, South Korea, Brazil, Panama, Venezuela, and Peru. As the lodging industry propelled itself into the 21st century, LodgeNet, a specialized communications company, would continue to invest in its internal resources and pursue complementary partnerships to ensure hoteliers the technology and programming that guests demanded.