Digital cinema speeds up

Digital cinema received a boost in the US recently, but question marks remain over the financing of the format in other territories.
Delivery & Transmission
Delivery & Transmission

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Digital cinema received a boost in the US recently, but question marks remain over the financing of the format in other territories.

The rollout of digital cinema got a major shot in the arm last month when five Hollywood studios agreed to a deal which appeared to resolve the financing issue previously stalling deployment.

While the US agreement rubber stamps a commercial model in which studios pay for the bulk of equipment costs, its ramifications are less acute in Europe and elsewhere, where the market is more fragmented and there are concerns for the survival of independent distributors and exhibitors.

The breakthrough saw five studios secure a finance package worth over US $1billion with a group of the biggest cinema chains, to digitally convert between 14-20,000 US and Canadian screens within three years.

Studio signatories include Walt Disney, Paramount Pictures, Twentieth Century Fox, Universal Pictures and Lions Gate Entertainment.

Warner Bros. and Sony Pictures Entertainment (SPE) are currently not part of the agreement although SPE (along with Fox and Paramount) have adopted a separate strategy that would offer finance plans to cinemas that were outfitted with Sony's own 4K digital cinema projection systems.

The deal sees studios pay a majority of the approximately $70,000 in hardware plus installation costs to install digital-cinema equipment per screen. The money is paid out of their notional savings from no longer having to strike 35mm film prints - a so-called Virtual Print Fee (VPF).

The model calls for a third party (in this case bank JPMorgan) to front the cost of the equipment with exhibitors paying a usage or maintenance fee. When the cost is recouped, the cinema will own the equipment, a process likely to take up to ten years.

"The deal is a great vote of confidence in digital cinema in general and in the VPF model in particular," says Kate Pidgeon, marketing executive at European D-Cinema service provider Arts Alliance Media which recruited the 400 screens of France's Circuit Georges Raymond as AA's first VPF-funded European roll-out.

"That amount of financial backing and number of distributors will hopefully kick-start a round of new investment in Europe."

Studios stand to gain an enormous saving in film distribution (estimated by analysts Screen Digest at around $1.5bn a year from a $25bn box office) by no longer having to distribute analogue 35mm-reels but reusable hard disks today and probably using satellite or fibre optic transmission in future. The $1.5bn market for release printing will as a result all but disappear.

"This potential will only become effective once studios have reached a critical mass that will allow them to completely stop analogue distribution territory by territory," notes Oliver Pasch, Sony's head of Digital Cinema Europe. "That's why it is important for them to roll out rather quickly and also avoid a long phase of hybrid distribution with both analogue and digital, which would even increase cost for a limited period."

The timing of the deal is also significant. With over 20 studio-produced 3D releases scheduled during 2009, it is hoped that theatres will upgrade at the same time to projection systems capable of showing 3D.

There's enough evidence to suggest that 3D delivers a tri-fold increase in box office returns versus 2D versions of the same film to convince Hollywood and exhibitors that 3D is a business worth investing in. Currently, there are only 1300 3D screens in the country.

Even though Hollywood studios strike global deals with film labs to get the best economic and quality terms for film prints, costs for independent distributors are much higher, so they could benefit even more from digital distribution.

Conversion will allow them to increase the number of digital 'prints' in much shorter time, enabling them to respond to market demand much faster. Many indie movies are already shot digitally, so they'll also save the cost of 35mm transfer.

A single 35mm print regularly costs $1700 compared to digital where the cost is of a standard portable hard drive on which the content needs to be copied, then shipped to the cinema and also a digital key to be created and forwarded to the cinema.

"It's really hard to tell what the cost for that will be in the future once the roll out has happened, but it will definitely be less than 10% of analogue cost," forecasts Pasch.

However, it would be naïve to suggest that the conversion to digital is proving easy. The key issue that continues to tax people in Europe is how to pay for it for all levels of the market.

"For the US, it seems quite easy as the share of Hollywood movies is almost 99%," says Pasch. "If the six major studios agree upon a business model, the deal is almost done. Now imagine what it's like for example in France, with a Hollywood share of only 50% and 40 local distributors in the industry."

Besides market complexity, the situation in Europe has the added elements of differing cinema cultures and governments, which are keen to ensure that no players are left behind in the switch.

"The VPF model needs adapting to Europe," says Screen Digest senior analyst, Charlotte Jones. "Essentially, there's more emphasis on exhibitors contributing to costs, perhaps $25-30,000, because the studios are not as significant here."

The leading market outside the US is the UK where, uniquely, $24m national lottery funding has been used to digitise 240 screens in a bid to encourage greater film diversity (classic, arthouse or foreign language).

Extant for 18 months there are still no official figures of its impact. Nonetheless, it remains a one-off fund with new models, as elsewhere in Europe, needing to be devised if smaller exhibitors (and indies who distribute features to them) aren't to be cut out.

"Since the VPF model takes into account cost savings from studios, this model is most likely to appeal to major multiplexes," says Jones. "Smaller cinemas and distributors who don't want to or can't afford to give away the cost saving are concerned. There's talk of government funding for indie cinema but that would affect the commercial model and would really complicate matters."

According to David Sin, director of the UK's indie exhibitors trade body Independent Cinema Office, "Independent exhibitors are concerned. One way forward is when the first wave of digital equipment needs replacing. This could be in two to three years when newer and more efficient technology is available. Then, they could be in the market for second-hand models.

Besides 3D, D-Cinema is said to offer independent exhibitors the incentive of more control over theatre management and the chance to adapt their business to offer a wider range of content. This could ultimately be exploited by exhibitors to fund digital conversion themselves.

Alternative content shown to some success in the UK includes live and recorded performances of opera, concerts and sports like Formula One alongside specialist features scheduled to maximise revenue in under-utilised screens. Clearly still a niche, according to Screen Digest the market for alternative content (UK only) has already risen from US $1.6m in 2007 to $2.4m in the first six months of 2008.

"Financing the equipment is complex and difficult conditions in financial markets could derail progress by making money more expensive and leading financiers to question future revenue assumptions more stringently," notes Dodona analyst Karsten-Peter Grummitt.

"Equipment manufacturers want to defray their R&D costs; distributors want to make the minimum financial contribution possible to conversion; exhibitors wonder whether potential new revenue sources will justify the investment.

"Nevertheless the next step in the market's evolution is probably going to need a fall in the price of equipment, higher virtual print fees, bigger exhibitor contributions, or all of these. Strategies in this market need to move on from the ‘who pays?' face-off of the last few years to focus on how to get this done."

As of June 2008 there were 7300 digital cinemas (6% of the 110,000 global total), up from 2996 in 2007, with 5000 of those in the US. Screen Digest forecast that 30% cent of the world's modern screens will be digitised by 2010.

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