The Rollout Rolls On

After months of inching along, the U.S. digital-cinema rollout is finally showing signs of momentum again as we move into the second phase of deployments with what will eventually amount to over a billion dollars of equipment purchased. In July 2008, Digital Cinema Implementation Partners (DCIP), the consortium made up of Regal Entertainment, AMC Theatres and Cinemark and representing about 35% of the U.S. market, struck its first major conversion incentive deal with 20th Century Fox, with the other studios expected to follow.

Based on successfully concluding similar incentive deals with the other studios, DCIP expects to begin deploying digital systems in its partners’ theatres in the fourth quarter of 2008, starting at a rate of around 200 to 300 systems per month for the next three to five years. Representatives of DCIP would not comment on further details except to say that more announcements are expected in the near future.

Last March, the Cinema Buying Group, sanctioned by the National Association of Theatre Owners (known as NATO/CBG), announced they had selected AccessIT as their digital-cinema provider. With over 600 NATO/CBG members and representing over 8,000 screens, the CBG deployment represents approximately 20% of the North American market. Although there has been little outward progress, AccessIT’s representatives have been working behind the scenes to prepare for the NATO/CBG rollout. With their “phase-two” studio deals in place—providing incentives for up to 10,000 North American screens, recent efforts have been ongoing to define the theatre qualifications and profile the individual requirements of the NATO/CBG members. With the preparation nearing completion, the first installations are expected to begin later this fall.

For the past year, the digital-cinema rollout in the USA has essentially been stuck between what has often been described as phase one (the early adopters) and phase two (the mainstream exhibitors). Early adopters, exhibitors who saw value of being the first and desired experience in operating digital theatres, account for approximately 5,000 systems completed in the U.S. during 2005 and 2006. Many of the larger exhibitors, particularly the DCIP partners, chose to wait until the industry had matured and the initial start-up issues had been resolved.

The most fundamental issue is conversion cost. From the early discussions of the digital conversion in 2001, it became apparent that digital would fundamentally change the business. With distributors reaping the potential savings, but exhibitors having to bear the purchase and maintenance costs of more complex projection systems, the questions of “Who will pay?” resonated throughout the industry. In response, the distributors offered a general answer of “We will,” but were short on specifics on just how this would be done.

By the fall of 2005, the third-party digital-cinema providers, primarily AccessIT and Technicolor Digital Cinema (TDC), announced the first deployment plans, which provided studio incentives when a digital copy replaced a 35mm print. These deals are now referred to as virtual print fee (VPF) arrangements. The phase-one

VPF-based programs were appropriate for the early adopters, but could not necessarily be extended across the mainstream market. The studios were reluctant to commit to the same level of incentives for the broader market as they did for the initial adopters. While the potential savings from not making 35mm prints is real, during the changeover period studios had to support both film and digital, which resulted in increased costs. The distributors viewed their initial VPF deals as short-term incentives needed to jump-start the conversion process, but not necessarily as an ongoing funding mechanism.

VPF incentives typically require a third-party digital-cinema provider to negotiate the studio deals, finance the equipment, collect the fees and oversee the process. While this solution works well for many exhibitors, it wasn’t the ideal solution for everyone. Some exhibitors are able to secure their own financing and have in-house technical teams fully capable of supporting their own deployments. Exhibitors are looking for an ongoing solution that would retain their independence and help them offset the potentially higher costs of digital projection. In the past, with high-cost equipment and with little track record to base their decisions on, most exhibitors could not begin to estimate the overall costs (or savings) of moving to digital projection. As the industry matures, however, we are now able to fill in many of the blanks and more accurately evaluate the factors leading to rational and justified conversion decisions.

Today, with the third-generation digital projectors and servers, the costs of a basic digital system are approaching 50% of the equivalent from five years ago, a significant reduction that is putting digital within reach of the mainstream exhibitors. In addition, with years of operating experience, digital is showing savings in overall theatre operations, especially when the entire multiplex—or entire circuit—is converted over. While maintaining digital projection and 35mm side-by-side offers flexibility, the true savings of digital projection begin when the 35mm equipment is no longer needed.

A second and somewhat unexpected factor is the re-emergence of 3D. With the proven popularity of today’s 3D presentations, and the increase in available titles, 3D now has to be considered an essential part of any exhibitor’s digital-cinema deployment plans. While 3D certainly puts more life in the box office, the decision to add 3D equipment causes exhibitors to consider which of the various systems to add, and how many of their digital screens should be equipped with 3D. From a cost standpoint, 3D is a mixed blessing. In the past five years, the cost of a basic digital-cinema playback system has declined, but the cost of adding 3D equipment now reverses some of the savings gained by lower-cost digital projectors.

So far, 3D has proven to be a moneymaker, with box-office results reportedly in the 2X to 4X range over 2D screens. Exhibitors can justify the addition of digital and 3D for those screens where the 3D titles are expected to play well. 3D has allowed exhibitors to localize the purchase decision to a screen-by-screen basis, where the expense of 3D digital equipment can often be justified in the short term by the box-office returns. But these spectacular box-office gains may be short-lived. As the industry matures, more 3D screens are equipped, and more tentpole titles become available, it is likely that the audience will come to expect digital 3D as an essential amenity, much like 5.1 digital surround sound is expected today. After the “mainstream” exhibitors are equipped, it may be just too late for many of the smaller exhibitors to see these returns.

As we approach the mainstream rollout, we are also nearing what might be viewed as the “critical-mass” point of digital exhibition, where what was previously considered new and possibly a novelty will become standard and expected. All signs are now pointing to the mainstream conversion beginning late this year or early 2009, so exhibitors who have not developed their individual plans need to carefully consider how they will fit in with the rest of the industry’s conversion time frame.

By Bill Mead, Film Journal International