Credit Crunch Impairs Theaters' Digital Vision

At the Carmike Encore Park Cinemas megaplex in Elkhart, Ind., box office receipts are way up this year. But the returns at the candy counter aren't so sweet. In fact, sales last year of sugary snacks, popcorn and soft drinks barely reached 2007 levels in Elkhart, and this year could be worse.

"That city is at a high level of the unemployment rate and we've seen a little bit of stagnation in our per-capita growth in that particular market," says Fred Van Noy, COO of Georgia-based Carmike.

The slowdown isn't limited to Elkhart. The 289-theater Carmike chain recently launched "Stimulus Tuesdays," offering 16-ounce drinks and 46-ounce popcorns for $1 each in an attempt to boost concessions.

Even as the recession has caused a spike in theater attendance, a fear that more moviegoers are passing on $5 tubs of popcorn and sodas is just one of several concerns on exhibitors' minds as they flock to their annual ShoWest confab in Las Vegas this week.

"Frankly, this is something we are really worried about," says Thomas Stephenson Jr., president and CEO of Dallas-based Rave Motion Pictures, which has 475 screens in 14 states.

"Our concession sales are not up on a yearly basis as much as we anticipated they would be," says Dean Kerasotes, COO of Kerasotes Theaters, whose 100-year-old circuit has 933 screens at 94 locations. "It's hard to tell whether it's people's spending habits or the product, which has been heavily weighted toward more adult fare like Gran Torino and Slumdog Millionaire, which aren't big concession movies."

Overall, the exhibition business, despite years of predictions of doom, is doing just fine. Ticket sales rose 13.1% in January and February compared with last year, and North American box office receipts hit a record $9.8 billion last year, up 1.5% from 2007, according to the National Association of Theater Owners (NATO).

But these bullish numbers obscure some ominous signs. Admissions -- the number of tickets sold -- declined 2.5% in 2008, and ticket prices last year shot up from $6.88 in 2007 to $7.18. At the same time, conversions of theaters to digital and 3-D projection -- which many believe represents the future of the exhibition business -- have slowed due to the recession.

Several major studios agreed last fall to pay "virtual print fees" of about $1,000 per screen for up to 20 years for digital conversion, a key first step for 3-D projection. Third-party implementors Digital Cinema Implementation Partners (DCIP), a joint venture of AMC Entertainment, Cinemark and Regal Cinemas, and Cinedigm (formerly AccessIT) had raised millions and were ready to begin conversion of half the U.S. screens just as the money froze.

"This is where the credit crisis is a true bummer for us," NATO president John Fithian says. "The big deals that will really accelerate the transition are somewhat on hold. The models are all developed. The agreements with the studios are there. To get back on track we've got to see thawing in the credit markets."

Cinedigm installed about 3,800 screens before the freeze, including the entire Carmike circuit. It became the first major circuit to fully digitize its 2,500 screens across 37 states in a deal valued at $150 million. But others have had to wait.

"We're constrained like everyone else but we're not by any means not doing it," says Bud Mayo, CEO of Cinedigm, which hopes to convert 8,500 screens during the next three years. "We're finding creative ways to work with exhibition and in some cases even the exhibitors' own banks to provide installations."

With about a dozen 3-D films headed to theaters this year, some theater chains are scrambling to complete partial 3-D installations on their own while they wait for DCIP and Cinedigm.

"There's a fair amount of that going on with self-financing and partial deals," Fithian says.

Kerasotes, for instance, was on the verge of converting his chain to digital when the crunch hit.

"Last fall I opened a 16-plex in Manteca, Calif., and went all digital anyway," he says. "I'm on the hook for it. The hope is that later we can put it into a third-party deal, which should happen."

In many existing theaters, Kerasotes paid to convert just one or two screens while he waits for the rest.

The result is money left on the table when high-profile 3-D releases hit theaters. Last Friday, DreamWorks Animation's new box office champ Monsters vs. Aliens opened in 3-D on about 2,000 screens (and 700 overseas) out of a total of 38,000 screens. That's a far cry from DWA's announcement last year that it expected 5,000 3-D screens to be ready for the film's launch.

Disney also has made a big commitment to 3-D and is anxiously awaiting more conversions.

"We keep hearing there will be funding by midsummer," says Disney distribution head Chuck Viane.

Until more screens are converted, 3-D movies are being forced out of theaters prematurely.

"So a picture like Coraline, which was doing a lot of business, was knocked out by Jonas Brothers," Viane says. "And, come summer, we will see four or five films knock each other out."

Even if the funding for conversions materializes, some exhibitors worry that the benefits will fall disproportionally to distributors, who will no longer have to make $1,600 film prints.

"It's very costly for exhibitors and exhibition is not going to be the one that benefits from an investment," says Bruce Olson, president of Milwaukee-based Marcus Theaters. Plus, he says, "The cost for maintenance is 2-1/2-to four times that of 35mm equipment. So the burden is still weighed unfairly against exhibitors."

Digital does create new opportunities for exhibitors. They can broadcast live sporting events and employ teleconferencing for business meetings and special gatherings. National CineMedia, another joint venture of Regal and AMC, offers telecasts of the Metropolitan Opera, among other programs.

"We'll have 50,000-70,000 people show up across the country for a one-night event and in many markets we will sell out," CineMedia CEO Kurt Hall says. "We could put a couple million seats in play at one time and generate a very large gross, if the content is right."

Large-format exhibitor Imax is going through a major technical transition from analog to digital, including digital 3-D, as well as a rapid expansion. It has a deal with AMC, among others, and expects to have more than 100 screens with 3-D capability by the end of the year -- and all are already financed.

"We used to have (theater chains) buy a theater for $1 million-$1.5 million," CEO Greg Foster says. "Now for joint ventures like AMC and Regal, we pay for the theater. We install the system. They pay a fairly small amount, about $150,000-$175,000 to retrofit the theater for our sound system, screen and branding. We now split the revenue."

The Imax boom has coincided with a shift in theater building. The average number of screens at each U.S. theater rose to 6.71 in 2008 but almost no chain is building 25-plexes as they did a decade ago. New theaters are often in the 14-screen range and position themselves as destinations with food and shopping.

The trend is to open where developers pay costs, known as build-to-suit deals.

"The landlord funds the entire construction of the facility," Carmike's Van Noy says. "So we are not having to access our resources to do any of these projects."

However, even that has stalled, as many developers have been caught in the credit crunch.

"This will be the first year since 2000 that we didn't open a new theater," Rave's Stephenson says.

That doesn't mean there won't be activity.

"This credit crisis may be more an opportunity for acquisitions," Marcus' Olsen says. "This may be a good time for a company like us, with cash, to go out and acquire rather than build."

Still, Fithian believes exhibition is in good shape because so many screens were constructed in recent years.

"We wouldn't want to go years without the ability to upgrade," he says, "but for a while we're OK."

By Alex Ben Block, Reuters