Cinedigm’s 10,000 screen Phase 2 roll-out began in early 2008, with a three year roll-out period. If the roll-out period has not been extended, then its roll-out will end early 2011. Likewise, DCIP’s roll-out period for its current phase is expected to end in the 2012 time frame. (Recall that DCIP only has funding for 2/3 of its screens.) While it may seem that it has only just begun in earnest, the horizon for digital cinema roll-out in the US is within sight. By the time these two roll-out periods expire, the US will be about 50% converted. That leaves 50% to go in the US.
Studios have always said that future phases of VPF financing deals would subsidize less and less of the system cost. This is already appearing to be the case, as fixed term deals that no longer hinge on recoupment of equipment costs are beginning to emerge in other regions of the world. These deals are said to offer a moderate VPF and terminate after a number of years, with no concern for the recoupment of equipment costs. For studios, this is a smart way to expand the transition of digital cinema, as they are simpler to define, and simpler to manage.
Such deployment agreements are also smart in that they push equipment costs down. Recoupment-based deals do not encourage lower equipment pricing. A recoupment-based deal will impose a ceiling on the cost of equipment, which most likely does not change from year-to-year. Manufacturers have only to fit their pricing within the cost caps. If the exhibitor only pays 20% of costs, then they’re not very sensitive to differences in prices between components. If one component costs $1000 more than another, but the exhibitor’s share of that differential is only $200, there’s not a significant incentive to go with the lower priced component.
But a switch to non-recoupment-based VPF financing changes this. Such deals only return a fixed amount to the exhibitor, which is guaranteed to be less than the equipment cost. Thus, a component cost differential of $1000 now costs the exhibitor the full $1000. This raises the incentive to select cost competitive components, which in turn pressures manufacturers to reduce costs.
To be clear, your author has not discussed this possibility with studios, but it’s his belief that any new VPF financing of the 2nd 50% of screens in the US will be non-recoupment-based. If so, it will have a profound effect on the near-term decision-making by US exhibitors, many of whom have yet to sign up with a deployment entity. The impact on equipment manufacturers would be equally profound, pressuring them to rethink how they build equipment.
For example, a significant and not-very-forward-looking trend has begun with in-projector media blocks. Server companies, not wanting to reduce the dollar value of a sale, supply in-projector media blocks driven by their own server. This forces the exhibitor to use the server manufacturer’s media block. The server component of the sale is essentially just smart storage, running the manufacturer’s software and streaming encrypted content to the media block. An off-the-shelf Dell server could do the job nicely and for less cost, but then the digital cinema server company would be losing a potential hardware sale to Dell.
Such less-than-forward-looking thinking has led one prominent company to sell an in-projector media block with custom server at a combined price significantly higher than a more traditional digital cinema server with built-in media block. This is obviously a wrong turn.
For costs to come down, components have to become commodities. The media block in the projector should be a commodity, included in the cost of the projector. The server hardware external to the media block should also be a commodity. The operations software should be the only part that is unique, as it is this software that supplies the look, feel, and feature set that exhibitors seek. If the digital cinema equipment market is efficient, then the current trend for how in-projector media blocks are sold is a bubble.