Tensions mount over slow digital rollout

After a year of wooing the industry and the press with positive words and big predictions, Jeffrey Katzenberg let out his frustration with the slow pace of the digital cinema rollout for the first time during DreamWorks Animation’s earnings call Tuesday.

“In the last 30 days, things have not progressed as well as I had hoped, expected and, quite frankly, been committed to, by all the parties involved,” Katzenberg said in response to an analyst’s question. “It’s ongoing as we speak literally now, but in terms of getting the big three (exhibitors: Regal, Cinemark and AMC) on board and actively moving forward, I feel as though things have dragged along, and it’s been pretty disappointing.”

Tensions are simmering on both sides of the issue, as the major studios and the top three circuits try to hammer out the size of the “virtual print fee” that studios will pay to distribute their pics digitally, which would be used to defray the costs of digital projector installations.

A consortium formed by Regal, Cinemark and AMC to help with the digital transition is in the midst of trying to secure a $1.1 billion line of credit that theater owners can use to convert screens to digital. The virtual print fee agreement needs to be in place before the financing can be secured. Another round of talks is expected in the next two weeks.

The DreamWorks Animation CEO said his goal has always been to have 5,000 screens deployed by March, so that his studio’s “Monsters vs. Aliens” can be released nationwide in digital 3-D, but that the chances of that happening are dimming.

“If these guys don’t get their act together very quickly in the next 30 days, they’re not going to be able to achieve that goal,” he said. “Every week that goes by, it’ll be several hundred less screens that manage to be rolled out in the time frame.”

He added that he’s still confident DWA will be able to recoup the $10 million-$15 million in incremental costs it is spending to produce all its films, starting with “Monsters vs. Aliens,” in 3-D.

Katzenberg’s accusations come just a couple of weeks after National Assn. of Theater Owners prexy John Fithian made similar remarks from the other side of the bargaining table during the Digital Cinema Summit at NAB. “If the studios want this to happen in time for 2009, the deals have to be struck, and they have to be struck right now,” Fithian said at the time.

Several big films are counting on a broad digital 3-D rollout next year, including “Monsters,” James Cameron’s “Avatar” and toon “Ice Age: Dawn of the Dinosaurs” from Fox; Disney/Pixar’s “Up”; and the Mouse House’s “A Christmas Carol.” Currently, there are fewer than 1,000 digital screens in the U.S.

No studio has staked as much of its future on digital 3-D as DreamWorks Animation, however, with Katzenberg serving as the technology’s most active cheerleader and traveling around the country to sell theater owners on it.

Tuesday’s declaration, his first negative public comments on the topic, came during a largely positive earnings report for the studio, with revenue up 67% to $156.6 million and net income rising 69% to $26.1 million.

However, the increase covered up a relatively modest perf for November release “Bee Movie,” which grossed $287 million worldwide and has sold 4.8 million units on DVD since its early March release. That was still a significant improvement over November 2006′s “Flushed Away,” which grossed only $176 million and sold just 3.2 million homevid units.

“Bee Movie” contributed $48.9 million in revenue, mostly through homevideo. A portion came from the $100 million or so that Toshiba paid DWA to support the now-defunct HD DVD format.

Prexy Lew Coleman said that “Bee Movie” will end up being slightly profitable for DreamWorks but won’t make any meaningful financial contributions given its higher-than-average expenses, driven largely by the participation of star/co-writer Jerry Seinfeld.

Studio made almost as much money — $48.3 million — from last spring’s “Shrek the Third,” primarily due to foreign homevideo. And 2005′s “Madagascar” contributed $15.9 million, mostly from international free TV and homevideo sales, while “Flushed Away” brought in $12.6 million, largely on foreign pay TV sales.

For the rest of the year, DreamWorks Animation’s perf will be driven by June’s “Kung Fu Panda.” If the pic is a big box office hit, it could bring in revenue as early as the summer. Otherwise, most of its earnings will come from the holiday DVD release.

In November, the studio releases “Madagascar: Escape 2 Africa.”

DreamWorks Animation stock was up 5% in after-hours earnings after closing down 2% at $25.74 on Tuesday.

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