Sony and GDC are also prominent deployment entities, but discussed elsewhere in this report.
Arts Alliance Media (AAM)
UK-based Arts Alliance Media has several operations, including the funding, management, and promotion of alternative content; digital cinema mastering, distribution, system supply and financing; and operation of a web portal that enable 3rd parties to sell-through movies to the home. It is the system provider and service manager for the 240 sites of the UK Film Council’s Digital Screen Network, and has a 7000 screen digital cinema deployment deal signed with 5 of the 6 major film studios. AAM was set to complete its 400 screen installation for Circuit George Raymond Cinemas (CGR) in France by end of 2009. AAM added 84 screens, in UK and Italy, to its deployment of digital cinema by year end.
AAM offers both alternative content and licensable software. It also offers content mastering services. Its alternative content line includes an impressive array of opera, ballet, and family plays. Its licensable software includes its Theatre Management System (TMS) with asset management and VPF collection capability, which can be licensed by non-affiliated entities. In an environment of self-financed digital cinema, TMS licensing could become a growing business. AAM also has the potential to expand into the SPS (Screen Player Software) market, complementing its TMS offering.
Arts Alliance Media is a division of Arts Alliance, with sister company Arts Alliance Productions. Arts Alliance’s founder, Thomas Høegh, is a venture capitalist with holdings in various online and storefront ventures.
US-based Cinedigm, formerly Access Integrated Technologies (AccessIT), was the first company to sign digital cinema deployment agreements with studios. It has also become the poster child for why a public company shouldn’t hold the debt for digital cinema deployments. Included in the Cinedigm family is Access Digital Media, Inc., Hollywood Software, Inc., Core Technology Services, Inc., FiberSat Global Services, Inc., ADM Cinema Corporation, Christie/AIX, Inc. (Cinedigm’s Phase 1 digital deployment), PLX Acquisition Corp., UniqueScreen Media, Inc., Vistachiara Productions, Inc., Access Digital Cinema Phase 2 Corp. and Access Digital Cinema Phase 2 B/AIX Corp. (together comprising Cinedigm’s Phase 2 deployment). Cinedigm’s Phase 1 deployment was successful in installing some 3900 digital screens, and now has around 1000 screens signed up for its Phase 2 deployment.
Cinedigm has hurdles to cross on the finance side. Its corporate reporting is consolidated and has been difficult for investors to dissect. Exhibitors complain that its deployment operations are less than transparent. In addition, the revenues from its many operations are dampened in the eyes of investors by the enormous debt the company carries for digital cinema equipment.
A problem for any deployment entity is that VPF revenue does not cover the payments on 5-year equipment loans. One way of addressing the problem is to pull in capital from multiple sources. Cinedigm requires its equipment vendors to carry part of the debt, reducing its senior debt to a manageable level. A problem in this is that the secondary debt carries high interest, upwards of 15% by some accounts. As the secondary debt is not paid off by VPF revenues until the senior debt is retired, a sizeable amount of interest can accrue.
Cinedigm took steps to improve its situation, this year hiring Adam Mizel of Aquifer Capital as its Chief Financial Officer and Chief Strategy Officer. Early results can be seen in the company’s November 10K filing with the SEC, where for the first time the company breaks out VPF revenue, making it easier for analysts (and exhibitors) to understand company operations.
The company has been successful in securing credit lines for deployment operations, most recently from GE Capital and Société Générale for $100M. On the content and services side, the company has also experimented with live 3-D events, and now openly licenses its TMS and backoffice software.
Cinema Buying Group (CBG)
US-based CBG is a buying cooperative organized under the National Association of Theatre Owners (NATO). It claims to have 6000 screens through its many independent theatre owners, although members are not committed to buy systems through the cooperative, and most large members are entertaining other options. A cinema owner does not have to be a NATO member to belong to the cooperative.
CBG members comprise a large number of independent cinema owners, some operating either 2nd run houses or simply low revenue generators. To date, only R/C Theatres has committed to buy systems through Cinedigm as a CBG member. Wayne Anderson, R/C’s former (now retired) CEO and Chairman, was the first managing director of CBG, and largely considered the group’s architect.
The original mission of the cooperative was to obtain financed digital cinema systems for all of its members through their combined buying power. However, the group failed to develop a business model that would address its unique membership of independent theatre owners. Rather than pursue deployment agreements of its own, it chose instead to align itself with Cinedigm. In an effort to fulfill its mission, it attempted to negotiate different terms with studios to differentiate the CBG/Cinedigm deal from the standard Cinedigm offering. The weekly virtual print fee, or WPF, first publicly introduced by Paramount in its direct-to-exhibitor VPF offer, stemmed from such discussions. But deployment agreements are designed to be cost neutral to studios, making it the deployment entity’s responsibility to offer packages that work for exhibitors. CBG’s attempt to renegotiate Cinedigm’s deal has caused many studio execs to shake their heads with disapproval when discussing CBG.
NATO and CBG’s greatest failure has been in not recognizing that it is the responsibility of the deployment entity to purchase digital cinema equipment and to distribute that equipment fairly among exhibitors. If NATO’s goal was to ensure that independent exhibitors get a fair opportunity to obtain subsidized digital equipment, then a national rollout plan would have been necessary with support from NATO’s largest members, including Regal, AMC, and Cinemark. Having failed early on to accomplish this, there is nothing further than NATO and CBG can accomplish.
Digital Finance Limited (DFL)
Ireland-based DFL is a pure-play digital cinema deployment entity in Europe, with deployment deals in place with four major film studios to deploy systems in Ireland and the UK. The entity offers both exhibitor-financed and bank-financed systems. Like Film & Kino, DFL has taken the approach of converting all of Ireland to digital. Unlike Film & Kino, DFL will do so without the benefit of government monies. DFL’s approach allows it to solve the problem of conversion for smaller exhibitors in Ireland that CBG is unable to solve for the US.
DLF is somewhat unique in that its only purpose is to finance digital cinema equipment. Its roots are in Avica, which originally set in motion the effort to convert Ireland as a country. Digital Cinema Limited, the original Irish entity set up to deploy systems, still exists, but will now function as a service provider to DFL for installations and network operations. Both DFL and DCL are led by Kevin Cummins.
Film & Kino
Norway’s government is unique, and in many ways envied, in having the ability to subsidize a digital cinema rollout plan that will include all of the country’s cinemas. Film & Kino, the Norwegian cinema association, has signed five deployment agreements with the US majors. (All but Sony.)
Norway has been accumulating proceeds from its cinema ticket tax for many years, and is putting these funds to work to finance digital cinema. As a result, studios will only contribute around 40% to equipment costs (quite a steal for the studios).
Equipment RFP submissions are due early January 2010, with installations to start in the March/April 2010 timeframe.
It’s often been said in these reports that Kodak Digital Cinema defies gravity, and so it is that gravity finally won in late 2009. Over the past thirteen years, Kodak’s stock has fallen by 95%, its market cap now just over $1.1B. Its digital cinema operation was a bubble waiting to pop. Management was unable to stick to a strategy. Over the past decade, Kodak passed on opportunities to own a projector company and to own and grow an alternative content division, in which equipment sales would have only been a supporting element.
The bubble could have gone on longer, but this year Kodak reached the point where it was time to sign its long-negotiated deployment agreements with studios. One can surmise that the decision was to “do or die,” and rather than sign the agreements, the company chose to kill the effort. It shut down its digital cinema operations, discontinuing its server and TMS products. It gave notice to exhibitors with Kodak equipment that it will continue to provide support and upgrades, but only up to the point of DCI compliance as last defined. (Deciphering the code, this means that no work is likely to take place to support TI Series 2 projectors and closed captions. Full SMPTE DCP compliance may also be in question.)
Kodak’s on-screen advertising, with around 2100 screens, is also on the block. Its largest customer is Cineplex in Canada. The most likely acquirer would be ScreenVision, which still has 1