Universal, Disney Back Rollout Of Digital Cinema Equipment

Universal Pictures and Walt Disney Co. have agreed to throw their backing behind the rollout of digital cinema equipment in U.S. theaters, according to people familiar with the matter, moves that should finally allow exhibitors to proceed with an aggressive plan to replace old-fashioned film reels with digital technology.

The transformation to digital projection in theaters has been discussed for a decade. Digital projection would cut millions of dollars in annual costs for the studios by eliminating the need for film prints. It would give theater owners more flexibility to move films on and off the screens they operate. Digital projectors are also crucial to the rollout of equipment needed for 3-D movies, which Hollywood is increasingly planning to produce.

But progress toward achieving it has been slow amid bickering over how to pay for it. To overcome the problem, three major theater chains -- Regal Entertainment Group, Cinemark Holdings Inc. and AMC Entertainment Holdings Inc. -- formed a consortium called Digital Cinema Implementation Partners. The group is arranging a $1 billion financing package that it will begin to tap once a critical mass of four major studios has agreed to participate and help shoulder the financial burdens.

Until recently, just two studios -- News Corp.'s Twentieth Century Fox and Viacom Inc.'s Paramount Pictures -- had agreed to participate. Now, General Electric Co.'s Universal is set to throw its support behind the consortium as soon as this week, people close to the situation say. And Disney has separately made its own deal to support the consortium.

Two other studios, Time Warner Inc.'s Warner Bros. and Sony Corp.'s Sony Pictures, say they are also interested in participating, but aren't ready to immediately sign on.

Currently, just 5,000 of the 40,000 or so screens in the U.S. and Canada sport digital gear in the projection booth. Some 1,200 screens support 3-D.

Under the DCIP plan, the three big chains will be able to outfit several thousand of their combined 15,000 screens next year with the technology, with a goal of converting almost all in three to four years. The financing package, totaling $1 billion, will be led by J.P. Morgan Chase & Co., and paid for over eight to 10 years.

The studios will pay their share by contributing the money they would have spent on movie prints -- about $800 to $1,000 per film -- in the form of a so-called virtual print fee. The participating studios are promising to provide a digital print of their movies for each screen that converts to digital. The studios' total annual contribution would vary depending on how many movies each company releases per year.

The Hollywood studios' payoff is later; once the equipment is rolled out and their financing obligations are done, digital distribution of movies will cost just pennies per digital "print."

The equipment itself costs around $70,000 per screen, with the three big chains likely getting a discount for volume. Financing and maintenance will add to the final price tag per screen. The theaters are also paying a small portion of the cost, in addition to what the studios will pay.

While the long-term cost savings have been an incentive to participate, the move toward digital cinema has finally picked up steam recently, thanks to interest in a new generation of high-tech 3-D movies that has been billed by some as a key to keeping the theatrical film business healthy. With movie attendance declining in many recent years, studios and exhibitors alike have been concerned that theaters have to give consumers something extra that they can't get from their glitzy big-screen TVs and DVD players.

Several movies, such as Journey to the Center of the Earth, have taken in considerably more revenue on 3-D than expected, getting both studios and theater owners more interested in converting screens to digital, the first step in most 3-D set-ups. One of 3-D's biggest advocates has been DreamWorks Animation SKG, which has said that all of its movies will be released in the format beginning with Monsters vs. Aliens, opening next March.

"Alternative content, and 3-D in particular, have definitely ignited the momentum," says Julian Levin, executive vice president for digital exhibition at Fox, which is releasing director James Cameron's next movie, Avatar, in 3-D next year. "Those weren't thought of as the driving factors early on, but they became extremely significant."

By approving long-term agreements, the studios lock in a price per film that will likely be higher for distributors that don't commit to continuing financing. The studios that aren't yet participating, like Sony and Warner, are in talks with DCIP.

"We're working on trying to make a deal that is economically responsible for our company, whether it happens next week or whether it happens next month," says Dan Fellman, president of distribution at Warner Bros. At Sony, "digital is very important and critical to our strategy," says Scott Sherr, senior vice president of digital cinema operations. "We're moving carefully and thoughtfully and deliberately."

A separate arm of Sony, Sony Electronics, is deploying advanced high-resolution digital projectors known as 4K, meaning they have more than 4000 pixels per horizontal line. Most digital projectors on the market are 2K, meaning they have more than 2000 pixels per horizontal line.

By Sarah McBride and Peter Sanders, The Wall Street Journal