Digital cinema: Devil is in the details

With rollout nearing, third-party financier proposed to fund reluctant exhibs

Now comes the hard part.

Coming off a two-year project to formulate uniform engineering standards for digital cinema, distribs and exhibs are turning their attention to how to fund the rollout of digital projectors and distribution technology.

A studio consortium on digital cinema, which soon will publish final technical specs, is expected to announce a broad outline of its funding plans today at at ShoWest.

“We are engaged in active, ongoing discussions as we investigate how to participate in and promote the actual deployment of digital cinema,” says Chuck Goldwater, CEO of Digital Cinema Initiatives.

Of course, the devil could lurk in the details.

For instance, though it’s widely expected that Hollywood majors will pay for most of the cost of installing the digital systems, some studios are inclined to be more generous than others. But most expect a consensus, and the approach being discussed wouldn’t require any actual cash outlay by the studios.

That’s because a third-party financier is likely to be used to funnel funds to equipment vendors and to oversee shipments to exhibs to circumvent antitrust regs prohibiting studio collusion.

Investment firm J.P. Morgan has been in talks with DCI about acting in such a capacity, though others have also pitched the consortium. The firm would use studios’ anticipated savings from digital distribution to fashion investment instruments on Wall Street.

Proceeds would be used to buy equipment for exhibs chosen either on a first-come/first-served basis or alternately by market locale and size.

Studios bear brunt?

Film distribs would repay the third-party financier by paying more than the costs of digital distribution for several years. In total, it’s expected the studios will bear about 85% of the rollout costs and exhibs the balance.

But eventually, studios will cut distribution costs on movies from roughly $1,500-$2,000 per film print at present to as little as $500 per digitally distribbed pic.

Much remains to be finalized on the d-cinema financing scheme, and the technology to be purchased is still very much under development. Sony is working to develop a so-called 4K digital projector that would double the image resolution of previous 2K technology, and Texas Instruments is feverishly working on next-generation systems as well.

In general, costs on d-cinema systems are dropping, with bulk purchases now penciling out at under $100,000 per system. Combined with the happy conclusion to DCI’s engineering work, d-cinema proponents are optimistic about the prospects of a major rollout taking shape over the next couple years.

“There’s finally one big, happy party with the technical specs,” says one source. “Everybody finally gets it.”

The Society of Motion Picture and Television Engineers has helped formulate standards that could be embraced by distribs, exhibs and systems vendors, and Entertainment Technology Consultants at the University of Southern California is serving as a testing facility. “It’s one thing to say here are the specs, but it’s another thing to actually build equipment that will all be interoperable,” ETC executive director/CEO chief exec Charles Swartz says. “That’s needed, because you want multiple manufacturers to play in this space.”

Competish helps

Healthy vendor competition will further drive down technology costs, Swartz adds.

“2004 is a milestone year for digital cinema,” observes Julian Levin, DCI chairman and d-cinema czar at 20th Century Fox.

Levin has been impressed with recent progress toward consensus on technical and business issues. But like other d-cinema proponents, he stresses that more challenges lie ahead.

Industryites say only a few hundred systems may be rolled out in the next 12 months, supplementing an installed base of under 100 truly viable d-cinema theater systems in the U.S. and just over 100 abroad. But within two years, there’s a good chance that number could be upped to 4,000, many believe.

“We’re clearly making progress (and) the next phase we need to get into are the business issues,” says Kurt Hall, co-CEO at No. 1 U.S. exhib Regal Entertainment. “We’re all searching for a way to get that to happen.”

Regal is already using digital projection in its advertising “pre-show,” something rival exhibs have noticed as the biz looks to supplement box office and concession-stand income.

As for how to physically get movies into the nation’s multiplexes, DCI claims to be distribution agnostic. Satellite, fiber-optic networks and digital discs are all feasible means of distribbing pics to theaters, they say.

Vendors seeking to service the industry’s distribution needs include Technicolor Digital and Deluxe Laboratories — both diversifying L.A. film labs — and Microspace, a satellite services company based in Raleigh, N.C. Another service company, Boeing Digital, has taken itself out of the biz and put its assets up for sale.

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