"The shift from film to digital will be a crucial test for Technicolor, a storied Hollywood name that invented the cameras, lenses, and film-processing techniques that made possible classics like The Wizard of Oz. In time, all theaters will likely get their movies in electronic bits, beamed via satellite, stored in a theater's computer servers, and shown with high-resolution digital projectors. That will cut out the current process of making 60 pounds of film and shipping it to multiplexes in battered metal cans. Technicolor is the world's biggest supplier and distributor of those film prints, with a revenue stream estimated to be worth about $900 million by Screen Digest, a London research firm. That business is expected to vanish slowly over the next decade, which is why the company is so focused on making the transition to digital.
But Technicolor, which was bought in 2000 by Thomson of France for $2.1 billion, is up against an aggressive new entrant, Access Integrated Technologies (AccessIT), as well as Digital Cinema Implementation Partners (DCIP), a joint venture of the three biggest theater chains, Regal Entertainment, AMC Theatres, and Cinemark. This summer could be the tipping point in the digital transition, as the number of U.S. theaters capable of showing movies in digital form finally exceeds 10% of the 35,000 U.S. screens. "This is a disruptive technology environment," says AccessIT CEO A. Dale "Bud" Mayo.
Technicolor is no stranger to evolving technology, and the arrival of digital cinema hasn't taken it by surprise. If anything, the company, now based in Camarillo, Calif., expected the change-over to happen more quickly. For almost eight years it has worked and reworked its digital strategy to appeal to the six major studios, as well as to theater operators. In 2000, just a year after Star Wars: Episode I made its debut—an event generally regarded as the first major digital release—Technicolor formed a joint venture with Qualcomm. A year later, they announced plans to convert 1,000 theaters to digital projection.
But theater owners balked at paying for new equipment, and studios decided to form a committee to make sense of the incompatible systems being installed. The number of movies released in digital form slowed to a rivulet. After setting up equipment in about 60 theaters, Technicolor laid off most digital cinema employees in 2002.
By the time digital installations resumed in 2005, AccessIT had dived in. The Morristown (N.J.) company, with annual revenues of $16.8 million, has built the nation's biggest network of digital cinemas, with systems in 2,700 individual theaters and plans to have 4,000 installed by October (a basic system costs about $100,000). Last year, Technicolor resuscitated its digital cinema group, installing industry veteran Curt Behlmer as chief operating officer. It plans to digitize 15,000 screens in the next decade.
For now, there is still a tremendous amount of manual labor and physical transportation in digital distribution. For the latest Pirates of the Caribbean sequel, Technicolor packed about 1,000 500-gigabyte hard drives containing the movie in foam padding, placed the 8-lb. drives in orange plastic briefcases, and shipped them on DHL delivery trucks to theaters. There the hard drive was plugged into a server and the movie loaded, a process that takes about as long as the movie itself. A few films are transmitted by satellite today, a method most expect to dominate once dishes are installed atop enough theaters. AccessIT now uses satellite for 60% of its distribution. Technicolor is just starting. "It's certainly not efficient today," says Behlmer. "But over time we should be able to take advantage of the efficiencies digital distribution creates."
The player who assembles the biggest network of digital screens may not find a treasure chest waiting. Theater owners don't pay the equipment's full cost up front (some seem reluctant to pay anything). Instead, studios help finance gear over a 10-year term by paying a fee each time they send a new movie to play on it. Those fees start at about $1,200 and drop over time to zero. That's when studios start saving money.
Technicolor hopes to profit from digital services such as producing and encrypting the movie file and then sending it to theaters. In any case, Technicolor CEO Lanny Raimondo says he won't mourn the death of film if it is replaced by satellite-delivered streams of bits. "What we would bemoan," he says, "is if we didn't make the transition."
By Scott Kirsner, Business Week
