With the closing of Kodak Digital Cinema, Hollywood studios are faced with the fact that 50% of the US deployment entities towards which they spent considerable legal resources have failed to produce the desired results. This includes deployment agreements signed with Dolby, Kodak, and Technicolor. Fortunately, Cinedigm, DCIP, and Sony remain active in their pursuit to install systems. DCIP, however, is off the table for the owners of 60% of US screens, leaving the majority of exhibitors to choose between Cinedigm and Sony. But while Cinedigm and Sony are each capable entities, exhibitors have not flocked to sign up with them. The reasons are complex.
There are several motives that would cause an exhibitor to delay conversion. Digital cinema economics are not as advantageous as those for film. The cost of ownership is higher. Even if the first purchase of equipment is subsidized through virtual print fees, the eventual replacement of digital equipment, which ages much more quickly than mechanical equipment, adds substantially to the cost of ownership. Not only is the purchase price higher, but maintenance costs are higher. Maintenance contracts cost around $2000 per year per screen, which is substantially higher than the $500-$1000 per year per screen that exhibitors account for today.
Early adopters assumed that digital projection would lead to new revenue opportunities. But digital 3-D is the only proven value add component that digital projection has brought. To show digital 3-D in one’s theatres does not require conversion of all screens. It can be argued that digital distribution provides the ability to show a greater variety of content, but exhibitors aren’t touting greater revenue as a result. It can also be argued that similar advances in digital technology are available for the home, and that nothing prevents new content available for exhibition to also be marketed directly to the consumer through services such as VOD (video on demand). The value proposition offered strictly by technology is limited.
Ultimately, what makes the theatre special is unique content, and that advantage exists by means of the favored release window. It is ironic that the MPAA continued this month to pursue the option to engage selectable output controls on set-top boxes with the FCC. Studios seek this ability for the purpose of day-and-date release to the home of feature movies. No doubt such action is dictated by falling DVD sales. However, it doesn’t stimulate an exhibitor to increase operational expense by converting to digital cinema.
Set aside the economic issues, there is the issue of choice. When entering a deal with either Cinedigm or Sony, exhibitors take on a new business partner. A deployment deal with either engages the exhibitor in an advertising deal, an alternative content deal, and a maintenance deal. With Sony, a deployment deal commits the exhibitor to Sony equipment. When asked, most exhibitors say they want to unbundle financing from equipment and services. They want to continue to do business with the equipment suppliers they’re accustomed to, and they want to select services of their own liking. But with the deals on the table, it’s not possible in the US to install VPF-financed digital cinema equipment without the choiceless baggage.
It would seem to be a reasonable prediction, then, that even as financing for digital cinema systems becomes more available in the coming year, exhibitors will continue to delay their decisions in the hope that other options will appear. Those options include the direct distributor-to-exhibitor credit as with the public offer from Paramount, or the emergence of a friendlier deployment entity.