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Cost Stalls Digital Cinema Adoption

14 May, 2002 By: Holly J. Wagner

Full acceptance of digital cinema by the film industry is still a long way off and in fact the technology may never catch on unless the industry redefines how it shares revenues and finds inventive ways to finance the cost of the changeover, says a new report by Booz Allen Hamilton.

Although the release of Star Wars: Episode II – Attack of the Clones, has focused attention on digital cinema, digital projection of films faces several major obstacles, not the least of which is who will pay to install the systems in theaters.

"Given declining profitability in the theaters and the uncertainty surrounding hard benefits for theater owners versus the studios, it could be difficult to attract the necessary capital," said Booz Allen SVP Mike Katz, who estimates the payoff on that investment could be three to five years.

The most obvious advantage for digital cinema is copying cost savings, as electronic transmission replaces mass copying and distribution of 35mm celluloid prints. That process costs studios more than $1 billion each year. Digital projection also offers better picture and sound quality, easier editing and new opportunities for theaters.

But the industry has been reluctant to embrace digital cinema technology. Episode II was shot on digital videotape from beginning to end, but at its U.S. opening only 60 screens out of 5,000 will display it in its pure, digital form, while the rest will use traditional film projectors. Fewer than 100 theaters worldwide are equipped with digital cinema projectors and only 30 feature films have ever been distributed digitally, the report says, noting the main reason for this slow adoption rate is the cost of converting the nation's 36,000 movie screens to digital projection, which is estimated at $3 to 5 billion.

“No one's hurrying to change the current system, because it works just fine,” said Booz Allen VP John Frelinghuysen. Traditional projection equipment is extremely reliable, and there is a plentiful supply of used equipment on the market."

Concerns about digital piracy and competing technology standards at studios and theaters, as well as a fear of losing control also prevent adoption, he said.

Film distributors, including traditional players like Technicolor and new entrants like Qualcomm and Boeing could fund and fuel the switch and may emerge as the logical sources of capital and brokers of the deals necessary, said Krishan Bhatia, Booz Allen senior associate.

“The distributors may be best positioned to break the logjam caused by the economic climate, the financial structure in place and the conflicting interests among the stakeholders,” he said. “They have the broad relationships and the cash flow to act as catalysts during the transition.”

The report, out today, outlines other scenarios that might lead to a breakthrough for digital cinema:

1) Studios and theaters redefine the way they share revenues to adapt to the economics and dynamics of digital cinema. The increased revenues and cost savings need to be split in a way that helps theaters out of a slump while providing incremental upside to studios.

2) Theaters move beyond their focus on movies to embrace alternate forms of content and advertising. Just $200 per screen per year is generated in ad revenue in the U.S., compared, to $22,000 per screen in Europe, the report says. Third parties interested in presenting sports, concerts or other in-theater entertainment could also represent attractive new revenue sources.

“Ultimately, the next level of investment in the technology may only be spurred by a dramatically different type of digital cinema event that captures the public's imagination,” Katz said. “Otherwise, expect it to continue to go the way of solar power, high definition TV and electric cars – great inventions that promise a brighter future but are not quite ready for the mass market."

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