The 3-D Dilemma

Jeffrey Katzenberg, the newest champion of 3-D movies, is on a conference call with analysts. Katzenberg, who runs DreamWorks Animation SKG—the Glendale, California, studio that made the Shrek films—is not happy. It’s April, and he’s been proclaiming for a year that 3-D is the biggest thing to hit Hollywood since color. He has vowed that all his new animated movies will be in 3-D, which will add $15 million to the cost of each. DreamWorks’ Monsters vs. Aliens is coming out next year, and Katzenberg was hoping that 5,000 theaters would be 3-D-ready by then. Not happening. Not even close. Maybe 1,500 will be ready to show Katzenberg’s new film, and this spells trouble for DreamWorks. “Things have dragged along, and it’s been pretty disappointing,” he says. He knows that if 3-D doesn’t hit big, he’s going to look like the guy with 10,000 unsold Segways in a warehouse.

Not far away, in Los Angeles, Cary Granat, the co-C.E.O. of Walden Media, is in his own 3-D nail-biter. Walden’s Journey to the Center of the Earth 3D—which is basically Indiana Jones Goes Spelunking—will be the first major live-action digital-3-D release when it comes out on July 11. He hoped to open Journey in 1,700 theaters, but only about 1,000 are 3-D-ready.

Far, far away—northwest Arkansas—Mike Thomson, vice president of operations and technology for Malco Theatres, pulls his truck up to a McDonald’s drive-through. For 43 years, he’s worked for Malco, which manages more than 320 screens, and he speaks with the weariness of someone who has seen innumerable fads come and go. Thomson believes in 3-D too, but clearly not with the zeal of Katzenberg and Granat. Malco is upgrading a handful of its theaters for digital 3-D, yet he sounds cautious. “We need to give people something they can’t get at home,” he says, reflecting an industrywide worry that borders on panic. “3-D is a piece of the puzzle, but it’s not the magic bullet.” Thomson drives off with his McGriddles sandwich, and the movie industry perches on the edge of its collective seat. This story might not turn out the way Hollywood imagined.

Studios are latching onto 3-D for much the same reason that Bob Dole took Viagra. Most of Hollywood’s businesses are making money—for all Katzenberg’s complaining, DreamWorks’ first-quarter profit was up 69 percent—but the sector that makes Hollywood feel best about itself, theatrical showings, is deflating, in large part because the difference between seeing a movie in your local multiplex and on a 52-inch high-definition TV in your family room is not that vast.

The Motion Picture Association of America claims that 2007 was a good year for the cinema business, with U.S. box office revenue up 5 percent to $9.6 billion. But that’s unsupportable spin. The jump can be almost entirely attributed to a bump in ticket prices. The number of tickets sold in the U.S. stayed flat from 2006 to 2007, at 1.5 billion. (In 1950, while TV was taking off, U.S. theaters sold 3 billion tickets a year—and the population was half what it is today.) Meanwhile, 379 screens were added between 2006 and 2007. Do the math and movies are doing worse than ever in theaters.

This stuff gives Hollywood agita. Publicity campaigns and the buzz from theatrical releases are what drive DVD sales and premium-cable-channel showings, not to mention ancillary moneymakers like toys, videogames, and Happy Meal tie-ins. “We make films for the theater and want to exhibit there first,” says Chuck Viane, president of movie distribution for Walt Disney Studios Motion Pictures. “It’s the engine that pulls the train.”

Hollywood hopes that 3-D can stoke that wheezing engine. Katzenberg is making the next Shrek in 3-D, and Pixar Animation Studios is rendering the first two Toy Story movies, as well as making the next one, in 3-D. Director James Cameron (Titanic) just finished shooting Avatar, a 3-D movie planned for 2009. Peter Jackson, who directed the Lord of the Rings films, is bringing the comic-book character Tintin to the screen in a 3-D movie. Director Robert Zemeckis (Beowulf, Forrest Gump) is already filming his adaptation of Charles Dickens’ A Christmas Carol in 3-D. Every major studio has leaped aboard.

When anyone questions whether such faith in 3-D is justified, Hollywood puts forth Exhibit A: Hannah Montana/Miley Cyrus: Best of Both Worlds Concert Tour. The Disney 3-D concert film shattered records for a limited release by grossing almost $45,000 a screen when it was released early this year; it made more than $30 million during its opening weekend. But Disney can’t be sure whether Hannah killed because it was in 3-D. According to Viane, relatively few theaters could show digital 3-D when the movie came out, which meant that it played on only 683 screens. “If we had done it in 2-D and opened on thousands of screens, would we have made more money? Hard to say,” he says. “More screens typically mean more gross.” Malco’s Thomson is more direct: “Hannah would’ve been huge, in 3-D or not.”

Creating a 3-D movie today is unlike making one in any other era. New software allows studios to render computer-animated films like Shrek in 3-D. And while shooting live action in 3-D was virtually impossible just a few years ago, technology developed by Vince Pace, who previously specialized in underwater cameras and worked with Cameron on Titanic, has made it feasible. (Cameron even helped develop some of Pace’s technology.) Dual-lens cameras mimic the way eyes capture an image from slightly different angles. Computers then digitize the images, allowing directors to manipulate them. This technology has become workable only in the past few years, and it's quickly getting better and cheaper. When images captured by Pace cameras are projected onto a screen, the overlapping images look slightly blurry to the naked eye. But when a viewer puts on special high-tech glasses that direct one image into each eye, the brain unites the two pictures, creating a single 3-D image.

In a screening room at Walden headquarters, I watch Journey to the Center of the Earth 3D wearing giant glasses that look like something you’d see on a 90-year-old man in Sarasota, Florida. The 3-D is compelling and easy to watch. Later, I talk to Brendan Fraser, Journey’s star and executive producer. “I’m very enthusiastic,” he says. “This picture is the tippity-­top of the spear of what’s coming. I want to be an old guy and say I was on the tip of that pointy spear and helped drive 3-D forward.” When I suggest that he might someday be known as the Al Jolson of 3-D, Fraser guffaws and asks if he can use that line in interviews. But whether Fraser gets to be the Jolson of digital 3-D depends on whether 3-D spreads the way talkies did in the late 1920s. This is where reclusive billionaire Philip Anschutz enters the scene, trying to save the day.

There’s a chicken-and-egg problem with 3-D movies: For them to achieve mass-market success, studios must deliver a stream of blockbusters. But if too few screens are equipped for 3-D, there’s little point in spending the extra 20 percent it costs to shoot in the format. Furthermore, to show digital 3-D movies, theaters must install a system, typically from one of the two main suppliers, Real D and Dolby Laboratories. A 3-D system can cost $20,000 or more. What’s more, only 4,600 of the 38,000 theaters in the U.S. have digital projectors, so many owners first have to fork out $75,000 for those—making the total price close to $100,000. Theater owners don’t want to spend that much money unless they know they’ll be able to fill the house.

Another hitch is the glasses. (“They’re a little Buddy Holly, but hey, we’re all in this together!” Fraser quips.) So far, there is no standard that works with every 3-D system. Real D relies on cheap disposable or recyclable glasses, which could cost theaters or studios millions to stock. Dolby uses expensive glasses—around $40—that are supposed to be returned at the end of every screening, but people inevitably steal them. “That is the fly in the ointment,” says Thomson, whose theater chain is buying Dolby systems. “You have to get the glasses back or you lose your ass.” You can see where this is going: Theaters don’t want to invest until Holly­wood does, and Hollywood doesn’t want to invest until theaters do. Once both invest, the industry hopes to create a positive-reinforcement cycle.

Anschutz invested in both the chicken and the egg. He funded Journey to the Center of the Earth 3D through Walden, which he controls. He also owns Regal Entertainment Group, the world’s largest movie-theater chain, with more than 6,000 screens. Regal has installed more Real D systems than any other operator. Anschutz was also connected to Real D. Joshua Greer, its president and co-founder, started developing the 3-D-projection system while he was an executive at Walden. “We didn’t want Walden to be in the business of selling a 3-D system to theaters,” Granat says. “So Josh took the project out of Walden and built Real D with knowledge from Walden.”

To recap: Anschutz stands to make money both by showing Journey in theaters and on the film itself. Plus, he had a role in the birth of technology that other theater chains are likely to buy and install. Anschutz has the chicken, the egg, and the chicken feed.

"I wish I could say the movie theater experience will never go away, but I’m not sure,” says Jonathan Kuntz, a film-history professor at the University of California at Los Angeles. It’s not just home theaters that are competing for consumers’ time. Audiences are being pulled away by other forms of entertainment too. They’re increasingly logging on to YouTube and Facebook, playing Guitar Hero and World of Warcraft, instant messaging, and blogging.

Consumers will do something that’s inconvenient to have a high-quality experience—like go to a U2 concert. And we’re willing to put up with lower quality for the sake of convenience—like listen to a U2 song on an iPod. But we’re not that interested in something that is both inconvenient and of not-so-great quality. Movie theaters are inconvenient (you have to leave the house), and the experience isn’t much better than that of a nice home theater.

Bringing in 3-D will boost the quality of the experience, but it still might not be enough to lure butts out of living rooms and into cinemas. Home theaters will soon be able to show 3-D. I visited a Kodak lab where a team is working on a 3-D display, and the images rivaled what I saw in Walden’s screening room. “It will be three years before the price and package are appropriate for consumer applications,” says Kodak researcher Patrick Cosgrove.

There’s another potential glitch in Hollywood’s 3-D scheme: Theaters are losing their appeal. “3-D doesn’t address the core problem,” says George Mason University professor Tyler Cowen, who has written extensively about the economics of entertainment. He says that people don’t go to theaters because the screen is bigger or the image is in 3-D; they go because they want to go out. Theaters have suffered to a large degree because they fail to provide their customers with great going-out experiences: They have crummy seats, sell expensive and bad food, and don’t serve alcohol. If all this is true, efforts by Malco and other chains like Landmark to introduce such amenities as couches and waiters might have more impact on the theater business than 3-D will. Maybe the money that theaters are spending on 3-D could be better used on other things.

Despite the efforts of Anschutz, Cameron, Katzenberg, and others, the greater forces at work here suggest something other than a happy ending. For Hollywood, 3-D may indeed be like Viagra—a temporary cure for a situation that will only get worse over time.

By Kevin Maney, Portfolio