Fox Reaches Digital Cinema Upgrade Deal

News Corp's Twentieth Century Fox has reached an agreement in principle with a group of theater chains, paving the way for a long-delayed $1.1 billion digital cinema upgrade that Hollywood hopes will boost attendance and cut costs, sources familiar with the deal said on Thursday. One of the sources said the deal was contingent upon other studios also agreeing to help co-finance the digital roll-out for the movie chain consortium.

Fox is the first of six studios engaged in year-long talks with the Digital Cinema Implementation Partners (DCIP) -- formed by Regal Entertainment Group, Cinemark Holdings Inc and AMC Entertainment Inc, who operate 14,000 screens -- to reach a deal to help finance the theater upgrades.

Walt Disney Co and Viacom Inc, which owns Paramount, are expected to soon reach a DCIP deal, other sources familiar with the deal said. Officials from the studios were either unavailable or declined comment on the negotiations. Travis Reid, chief executive of DCIP, confirmed a studio had reached a deal but declined to disclose which one. "A party has signed a deal and we think it won't be long until we have multiple studios," he said.

DCIP was formed over a year ago and first hoped to reach a deal by the fourth quarter of 2007. Discussions also involve General Electric Co's Universal Pictures, Time Warner Inc's Warner Bros, Sony Corp and third party financiers. Negotiations had been slowed by disputes over terms requiring studios, exhibitors and content providers to pay usage and other fees to help pay off loans provided by financial institutions such as JPMorgan Chase to buy and install new digital equipment. Market volatility and issues involving standards, equipment procurement and performance criteria also delayed the talks.

Hollywood has a lot riding on the industry's digital conversion, as studios like DreamWorks Animation SKG Inc, whose films are distributed via Paramount, are planning to make all future movies in 3-D and need enough 3-D enabled screens to support their slates.

Various theater chains have been upgrading individually but the DCIP deal is being watched closely because it accounts for so large a portion of the nation's box office.

"When the DCIP deal drops, then digital cinema is really on its way," said Michael Lewis, chief executive of RealD, a provider of 3-D systems for the cinema market.

About 5,000 of the 37,000 cinema screens in the United States are digitally equipped and the ultimate aim is to transform all 125,000 screens worldwide.

The upgrades will enable studios to beam film via hard drives or satellite dishes to theaters, saving them billions of dollars in print and delivery costs. Once outfitted with digital projectors, theaters can add 3-D capabilities. There are close to 1,300 3-D screens in the U.S., primarily provided by RealD, said Lewis, who has commitments for another 4,250 3-D screens, many of which are dependent on clinching the DCIP deal.

News of a DCIP studio deal was first disclosed by Regal Entertainment Group Chief Executive Mike Campbell on a conference call on Thursday. "We can't disclose which studio, but we consider it to be a major milestone. It is always difficult in getting someone to be willing to be the first," he said, adding he expected other studios to soon follow suit.

Studios look to the success of the 3-D concert movie, Hannah Montana/Miley Cyrus: Best of Both Worlds Concert Tour, which commanded substantially higher ticket prices, as a template for the future.

The latest 3-D release, Journey to the Center of the Earth, reaffirmed the trend, with 954 RealD screens generating over 55 percent of the opening weekend box office receipts, yielding a per-screen average of $12,118, compared with the $4,116 average for standard 2-D screens, Lewis said.

Studios are collectively preparing about 40 3-D films over the next three to five years.

"I believe 3-D will enhance the moviegoing experience. It's the hook that will bring people back for the experience," said Chuck Viane, president of Disney domestic distribution.

By Sue Zeidler, Yahoo News