British biz says digital conversion fee is unfair to smaller films

While the advent of digital rollout has promised to provide cheaper deals for studio distribution in the long run, Blighty’s independent distributors are facing an uphill battle that could shake the entire sector.

As it stands, two of the U.K.’s three major exhibs have inked deals with the majors for financing the conversion of the industry to digital cinema: Odeon & UCI Cinemas Group inked long-term digital deployment deals with all six majors and some undisclosed indies across Blighty while exhib chain Cineworld inked an agreement with European digital provider Arts Alliance Media in August to digitize its remaining 540 screens (out of 790; 250 were already digital) for a cost of $44 million. Meanwhile, exhib Vue Entertainment has signed an “agreement in principle” with Sony Europe to install its 4K digital cinema projection systems across its circuit.

Through these deals, Virtual Print Fees (or VPFs) have been structured to cover the costs of conversion, whereby distributors pay a fee for each booking over a set period of time to contribute toward the cost of the equipment. The idea behind it is that the distributors should save money by shipping digital, rather than 35mm, prints and these “savings” are used to contribute toward the cost of equipment.

And while it makes economic sense for the studios to sign onto digital deals first — the independent sector represents about 20% of the U.K. total box office — indie distribs are realizing that they have come late to the table.

Alleged ‘most favorite nation clauses’ set up with studios mean potential negotiations for indies are stifled.

“The majors have a bigger market share so of course they’re going to negotiate with them first,” says Rupert Preston, managing director at Vertigo Films, which released “StreetDance 3D” earlier this year. “The clear frustration is that digital technology has been fantastic in terms of projection and production, but when it comes to distribution, the terms that are being offered to the independent sector are more expensive.”

While VPF models from the different aggregators may vary slightly, a rough model means that to showcase a film on one screen costs roughly £430 ($679) for the first week rate; week two comes in at 70% of the standard rate; week three at 50%; and week four at 30%. All of this is locked into a 10-year deal from the date of installation.

If a digital print is moved to another cinema, then the chain starts over again. This model, many argue, is a funding system that works for mainstream, mass releases and is inherently discriminatory to platform releases.

This, coupled with the fact that the cost of 35mm prints have actually decreased, has the Brit indie sector up in arms.

“Digital costs are now more than the cost of a print,” says Preston. “To allow U.K. cinemas to have the lowest rental costs in the world and now, as a distributor, we’re essentially paying for the renovation of cinemas, just doesn’t add up.”

Under the current terms, distribs overall are looking to contribute anywhere between 75% and 80% of the overall digital rollout across Blighty, while exhibs foot the rest of the bill.

Meanwhile, exhibs benefit from new equipment, which they can use for alternative content such as showcasing concerts and sports events.

“Nobody has ever suggested that it wasn’t going to cost everyone a little bit more to run digital and 35mm simultaneously,” says Drew Kaza, exec vice prexy of digital development at Odeon and UCI Cinemas. “The trick is to make the transition happen as quickly as possible.”

But are there agreements to be negotiated? Kaza says yes. “Absolutely, we’re having those conversations. But does it mean we’re prepared to reinvent the wheel for someone who has a 2% market share? Probably not.”

“The VPF amount has been negotiated with the Hollywood studios that make significantly more prints than any local distributor and therefore must have lower print costs,” says Howard Kiedaisch, CEO of Arts Alliance Media. “The studios have never been known as generous when it comes to making payments to exhibitors so the idea that they have set the bar high is completely illogical.”

Kiedaisch adds that his company offers a variety of different models for distribs to choose from — “Some do result in distributors incurring additional VPFs when a film is moved from one cinema to another while some models do not.

“For the record, we went out and talked to most of the local U.K. distributors offering all of them the chance to input into the process while we were negotiating with the studios,” he says. “Unfortunately, the indies all felt they did not have the resource or the time to proactively engage with us and help craft these agreements.”

Xavier Marchand, managing director of Momentum Pictures, fears that being given an ultimatum on negotiations for a VPF model could ultimately stifle the independent sector and change the indie landscape.

“The economic model for indie distribution is different from studio models,” he says. “So it’s very damaging that we are being offered the same deal as the studios with very little or no wiggle room.”

He stresses the market in Blighty for the indies has changed: Exhibitors in the U.K. pay one of the lowest shares of box office to distributors in theworld, just 28% of B.O. In France, it’s 40%-45% while the U.S. is closer to 50%.

“Applying the same split in the U.S. VPF model does not make sense in the U.K., which has the lowest film rentals in the world,” Marchand says. “A contribution from the distributors, if any, should be proportionally much lower here.”

Indies are also grappling with increasing advertising costs, a diminishing DVD market and fewer TV sales to Sky, making a challenging climate for independent cinema in Blighty.

“If we don’t find a clever way of structuring VPF, it might change the way we buy and distribute movies,” says Marchand.

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