For years, Erol's Inc. was a company locked in fast forward.

From humble beginnings as a television repair shop, Erol's grew to become virtually synonymous with videocassette rental in the Washington area. Adding dozens of new stores a year, the Springfield-based firm became the largest video rental company in the nation. Its founder and chairman, Erol Onaran, was a real-live American success story, a Turkish immigrant who arrived in the United States with $16 in his pocket, as legend has it, and became a millionaire.

But these days Erol's seems stuck on pause. Revenue has been flat for the past three years, hundreds of employees have been laid off and several top executives -- including, most recently, the company's president -- have quit, most of them either to join competitors or because they became fed up with working for the autocratic Onaran.

After years of dominating the Washington market, Erol's has been attacked in its own back yard by a tough new competitor, Blockbuster Entertainment Corp., which is opening new stores here almost weekly and two years ago blew by Erol's to become the nation's largest video rental company, with 1,400 stores at last count to Erol's 207. Another competitor, West Coast Video, has bumped Erol's into third place nationally and also has invaded the Washington area.

Frantically trying to stay competitive, Erol's has slashed bloated overhead expenses, spruced up its merchandising to better compete with the glitzy Blockbuster stores and experimented with new product offerings and marketing gimmicks. Borrowing a tactic from Blockbuster, the company also has announced an ambitious plan to franchise its stores around the nation, a strategy that company officials predicted could double Erol's size to 400 stores within two years. Onaran, whose family owns Erol's, also is considering selling company stock to the public for the first time.

But many video industry executives and analysts wonder if Erol's moves are too little, too late, particularly because the video industry is going flat as fewer consumers buy new videocassette machines. There is speculation in the tight-knit, gossipy video industry that Erol's may become a victim of an industrywide consolidation.

"The outward signs would suggest that the situation is getting difficult. They've had two rounds of layoffs, and things aren't going good when you do that," said Gary M. Jacobson, a video industry analyst at Kidder, Peabody & Co. in New York. "If you look at what Erol's was in the marketplace, they controlled it, and they've clearly lost the clout they once had."

Other observers, however, were more upbeat about the company.

"I think Erol's has a very good future ahead of it," said Frank Moldstad, editor of Video Store magazine. "I think it's done some soul-searching that's paid off."

Onaran himself, not surprisingly, was similarly optimistic. "It's harder than before, but still it's okay," Onaran said. "We're still expanding, we're still opening stores."

By almost all accounts, Blockbuster's arrival in the Washington market in early 1989 was a watershed for Erol's. Until then, Erol's was the 800-pound gorilla in the local video business, the scourge of independent video store owners who lost scads of customers to the stores with the bright yellow plastic video bags and wide selection of movies.

There seemed to be an Erol's on every corner -- with 108 local stores, Erol's has about as many locations in the Washington area as McDonald's -- and the stores always seemed to be crowded, especially on weekend evenings. Overall, Erol's rented about 35 million tapes a year.

But when Blockbuster showed up, the rules of the game changed dramatically for Erol's.

"They have a foundation, a lot of fans, a lot of following, but I would imagine that a company like Blockbuster comes into a market, it has an effect," said Steven Apple, editor of Video Insider magazine, a trade publication.

"It's safe to say that Blockbuster has been very damaging to Erol's since it came into the marketplace," Jacobson said.

Powered by an aggressive franchising program, Blockbuster, based in Fort Lauderdale, Fla., has come from nowhere in just a few years to become the nation's largest video chain. Four new locations open in the time it takes a customer to enjoy one of Blockbuster's three-day rentals.

Blockbuster has grown by franchising a proven concept of big, well-stocked stores in top locations, all backed by national advertising. Its frenetic store-opening pace has been evident in the Washington area, where in just 18 months it has grown from one store to between 25 and 29 -- the growth is so fast that company officials differ on the number.

Erol's began tinkering with its operations as soon as Blockbuster arrived. Membership fees were eliminated, stores were reconfigured to allow videos to be displayed face out, rather than like library books, and the chain recently switched to a Blockbuster-like system that requires customers to pay in advance for videos, making it easier to return them.

The company also allows customers to turn in videos at any Erol's store for a 50-cent fee, a service that most in the industry believe is a luxurious money-loser.

Onaran insisted the merchandising changes were the results of refinement and customer demand, rather than competitive pressure from Blockbuster.

Indeed, he claimed his business has not been significantly affected by Blockbuster; while the opening of a Blockbuster store near an Erol's cuts into business at first, he said, many customers return. "We took {more of} our own business, by opening our stores nearer each other, than they did," he said.

Still, Erol's stopped growing about the same time that Blockbuster arrived. Video Store magazine estimated that Erol's revenue peaked at $161.7 million in 1988 and slipped to $159.9 million last year.

Sales went down another $20 million or $30 million in the company's recently ended fiscal year, said Onaran, with virtually all of the drop attributable to the company's closing of its television and VCR sales operation. Erol's rental revenue was flat in the latest year, as the pace of new store openings slowed to a crawl.

Some of this is attributable to the general slowdown in the video industry, a slowdown belied by Blockbuster's rapid growth.

But most observers said that Erol's has been hurt more significantly by Blockbuster than Onaran is letting on, and they said the company's recent moves appeared to be a response to the competition.

"To me it's pretty obvious that we woke up a sleeping giant," said Barry Zale, whose company, Capital Entertainment of Dallas, owns the Blockbuster franchise for Northern Virginia and most of Montgomery County. "I think he's responding to our entry in the market by doing what he thinks is best. Whether or not that's going to prove to bear {fruit}, I don't know."

Faced with drastically slowed growth, Erol's began cutting fat, reducing its employment by almost one-third. The company has 2,700 employees, down from 3,600 at the peak, according to Onaran, although in an interview last year he said the company had 4,000 workers.

"We were assuming that we were going to grow 30 {percent} or 40 percent a year. ... Things didn't work out that way," Onaran said. "We had too many layers of people we had to go through, too much waste."

Because of the cutbacks, the once-bustling executive suite in Erol's headquarters in an industrial park in Springfield is quiet.

Onaran's office, decorated with awards, Erol's sales flyers and movie posters -- one, an obvious reflection of his roots, promotes a long-forgotten flick called "Istanbul" -- is surrounded by empty desks and darkened offices.

For all the layoffs, perhaps the most significant exodus from the headquarters building, analysts said, has been a steady stream of respected, top-level executives.

The biggest blow came in late June, when Carl Bellini resigned as president of the company after a year on the job. Bellini, who had joined Erol's from drugstore giant Revco Inc., where he was executive vice president, resigned for "personal reasons," Erol's said.

Bellini did not return phone calls seeking comment. But many in the video industry speculated that Bellini left because of friction with Onaran, a problem that has led to the resignation of other executives.

"It is a one-man show, when you get down to it," Apple said. "He makes all the decisions, I believe."

One former Erol's executive suggested that Bellini "just essentially ran into a roadblock a lot of others ran into in terms of difference of management style between the way Erol wants to do things and the way {the other} people wanted to do things."

Onaran insisted that the parting with Bellini was amicable, noting that Bellini is staying with the company for several months despite his resignation.

And he denied that he is difficult to work for. "If I hire somebody to do a job, I let him do it the way he wants to do it," Onaran said.

Still, there are no plans to replace Bellini, and Onaran said he's ready to come back and manage the company himself after being somewhat less involved over the past year. "I'm back in running the company," he said. "I just sort of got bored, and I want to come back and do it."

Onaran's renewed stewardship has begun with a bold strategic move, the decision to sell Erol's franchises.

Previous attempts to expand outside the Washington and Baltimore markets with company-owned stores have been largely unsuccessful because of the huge expense and because it is difficult to effectively advertise in big new markets without a large number of stores.

But franchising could allow Erol's to grow more cheaply.

The company plans to sell franchises for $400,000 to $550,000 apiece, and collect royalties of 5 percent to 10 percent of sales, said Troy Cooper, Erol's vice president for operations and a franchising expert, who is overseeing the program.

The company won't sell franchises in its core markets of Washington and Baltimore, but will offer them in Richmond, Tidewater Virginia, Philadelphia, Cleveland and Chicago, all markets where it already has locations, as well as Atlanta, Buffalo, Rochester, N.Y., and Pittsburgh, which are virgin territory.

Onaran -- who said Erol's had resisted franchising because he didn't think it had enough management expertise -- said the company hopes to sell 50 to 75 franchises next year, and double that in 1992.

"It's a good way to use other people's money to expand, basically," said Tom Adams, a video analyst at Paul Kagan Associates. "They know how to run good video stores, they might as well go on and offer that service to others."

But Jacobson of Kidder Peabody said: "I think that franchising is going to be a bust for them. ... They're getting into franchising late and they're under-prepared for it."

He added: "It's much too late. Why would anybody want an Erol's franchise when Blockbuster is clearly blowing them away?"

Onaran is confident that franchising is the key to Erol's future growth, and he also is mapping other plans for the company: Unprofitable stores will be closed; some stores will be moved to better locations; more emphasis will be placed on the growing business of selling, rather than renting, videos; a handful of "super stores," with expanded selections, will be opened; and the company is looking into the renting of both printed and taped books.

Also, Onaran said, there is a "good possibility that we may go public in a few years. That would give us more room to grow."

But analysts were skeptical about Erol's chances of actually selling stock to the public, citing both Onaran's previously reluctance to give up control of his creation and the stock market's general aversion to video-oriented stocks.

More likely, some observers said, is that Onaran will eventually decide to sell the company outright. Asked about that possibility, he smiled and said, "Anything can happen any time, but I have no plans."

In the meantime, Erol's and its ruling namesake will cope with Blockbuster and other challenges. "He's had his ups and downs in business before, and I've got to believe he's going to survive," said a former executive of the company. "It may not be as big and as grand as it once was, but he certainly continues to dominate this market."