Government has made an initial investment of $25 million

China’s film industry has been flourishing, with box office up 33% and record levels of production in 2005. But the People’s Republic faces some serious technical and political challenges, especially in the area of digital cinema.

The Chinese government has been committed to converting the country to digital cinema and made an initial investment of $25 million in the project in 2002. In 2004, the official State Administration for Radio, Film & Television (SARFT) predicted that China would have 2,500 digital screens within five years.

Yet despite investment from several quarters, including Hollywood majors, companies in Singapore and Hong Kong and the PRC government itself, there are fewer than 200 digital screens in the country today, and full compliance with the emerging d-cinema standards is nowhere in sight. Less than half of existing screens meet the DCI spec. As a result, no Hollywood films, which require DCI-compliant systems, were released in digital format in China so far this year.

The high cost of digital cinema remains a major obstacle. According to analyst Rowan Simons, since China still has no clear business model for digital cinemas, the route to commercially sustainable operations is uncertain.

To date, most digital cinema systems have been leased from China Film Digital by top cinemas in big cities. CFD takes some 5% of the gross and another 7% from the distributor. At current rates, say analysts, it would take more than 30 years for them to get their investment back.

To raise capital, SARFT has created a China Film Fund that includes a levy on cinema tickets. Local governments are also providing direct financial incentives.

In Beijing, the government is even offering developers cash bonuses of $60,000 per screen if they open multiplexes of four or more screens.

Meanwhile Stellar has purchased 20 2K systems. Analysts see that as an ambitious attempt to break China Film Digital’s monopoly and a similar strategy being employed by the Dadi Cinema Circuit in Guangdong.

Dadi is positioning itself to benefit from regulations exempting Hong Kong productions from foreign import quotas. The company is installing 16 DCI-compliant digital-only screens with investment from HK-listed Sino-I Technology. Company aims for a total of 300 screens, with 100 scheduled for completion by the end of 2007.

In the meantime, SARFT is also promoting cheaper e-cinema with MPEG-4-based systems.

Most of the digital screens in operation in China use e-cinema systems with an average price of $7,500. China’s own industrial might, however, may help bring down the price of d-cinema. Players within the country, including real estate developer Zhang Baoquan’s e-cinema Time Huaxia Cinema Line, are getting excited about the possibility of cheaper d-cinema systems.

Time Huaxia has permission to develop closed digital systems for densely populated urban communities, and is already extending this into cinemas in Beijing, upsetting other operators.

In March, Zhang announced that his Time Antaeus equipment company will unveil a new digital cinema server in June. According to Zhang, the new DCI-compliant server has been developed with China’s Institute of Computer Technology and will cost less than $20,000.

China’s embrace of multiple technologies is not just a result of financial or “speed to market” issues but also a function of China’s complex political environment. In China, the “do it first, worry later” approach is still thriving wherever political and commercial interests collide.

Away from the cities, Chinese authorities plan to have 35,000 mobile film movie theaters tour rural areas. They have limited commercial potential, but remain on the Communist Party propaganda front line and therefore of central importance to central planners.

Chinese government officials always stress the importance of promoting a digital countryside. In a November 2005 speech reviewing China’s performance since 2002, Cheng Yang, general manager of China Film Digital, warned against confusing the rural market with digital cinema development in big cities.

“There is another movie market in China and there is nothing like it elsewhere,” he said. “So the Film Bureau has issued temporary technical specifications for mobile digital projection systems.” A number of local firms are developing these systems that Cheng says now exceed traditional 16mm quality and will be rolled out in 2007.

Although SARFT has now agreed to limit Hollywood digital exhibitions to DCI-compliant screens, authentic digital cinema box office has been devastated by the lack of international fare.

China’s compromise over DCI may be welcomed by the stakeholders as a rare occurrence, but for thousands of operators in smaller cities and communities, the digital future will not include Hollywood for some years to come.

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