When the raising the newly minted subject of virtual print fees (VPFs) in a breakfast meeting with a former studio executive in 2005, the spontaneous comment evoked was “history has shown that subsidies do not work.” But subsidies combined with 3-D have proven otherwise.
The current digital cinema adoption rate is substantial, perhaps as good as it will get. In the US, Regal, AMC, and Cinemark are installing at a rate of about 1000 a month through deployment entity DCIP. When adding in other installations, the US digital screen count is expected to be around 16,000 by year-end. Another 9000 screens are expected to be installed over the next 2-3 years. Elsewhere in the world, deployments are also moving forward, in Australia, Japan, China, Middle East, the UK, and parts of Europe. By year end, the number of digital screens around the world should well exceed 30,000.
With such success, the last thing to worry about should be a falloff in the rate of digital deployments. But the combined motivation provided by 3-D and VPF financing to convert cinemas around the world may not be sustainable. 3-D could cease to be a driver if the count of 3-D screens reaches a saturation point. The question is whether the VPF mechanism alone is suited to finish the job.
The VPF has both roots and a spotted history. In 2004 and 2005, facing the need to encourage cinema owners to adopt digital cinema equipment, studios generally agreed to share the potential savings introduced by digital prints. Thus, the VPF was born, a fee tied to the booking, but not directly to the playout, of a movie.
The original concept had a lot of merit. The model deployment entity was a company with a stake in bringing digital cinema to the industry. It was envisioned that companies with substantial breadth in products and services would pursue this role, having arranged for the financing of equipment, lowering the threshold for bank approval of loans. If recoupment of equipment costs were to be managed over a large number of screens owned by a variety of cinema owners, then it could be argued that fair access was available to all.
In reality, few of these goals were met. Companies of scale such as Boeing, Kodak, and Technicolor all pulled out after first taking steps towards digital cinema deployments. In practice, deployment entities are startups, attempting to provide off-balance-sheet equipment financing to exhibitors. But in just about all cases, it has been a difficult goal to achieve, as banks and suppliers want a guarantee from the exhibitor should the VPF scheme not prove fruitful. This has complicated the access problem, which continues today in most parts of the world.
The role of a deployment entity is also not a particularly easy one to play. For the VPF to work properly and fairly, all content providers must participate in paying (not just Hollywood majors), requiring a substantial investment in contract negotiations. If unfair behavior is detected, the VPF agreement will impose penalties, underlining the importance of effectively managing these agreements. If a content provider refuses to pay, the deployment entity has little choice but to force exhibitors to not play the movie, potentially raising legal issues. To manage the contracts efficiently requires information technology tools to automate the collection of performance data. This is not an area where standards exist, requiring investment in the development of such tools. Products to help facilitate this function are only beginning to emerge in a commercial manner.
With all of the structural limitations imposed by the VPF, it’s a wonder that digital cinema has been successful at all. In fact, VPF’s alone are not driving world adoption of digital cinema technology, as originally envisioned. That credit goes to 3-D, which has given cinema owners a reason to invest in the technology, independent of studio subsidies. Once a few digital 3-D screens are purchased, many exhibitors seek ways to fully convert. Outside the US, over 60% of screens are 3-D enabled. In the US, where the VPF plays a stronger role, approximately 50% of screens are 3-D.
In seeking ways to encourage more conversion of screens, one will hear talk about the eventual cutoff of film. But this is not as immediate a threat as some make it out to be. It wouldn’t make sense for studios to make distribution decisions solely based on technology. One should figure that costs are fairly neutral across technologies, as a studio pays about as much for VPFs and digital prints as it does for film prints.
Whatever the incentive to convert may be, those incentives will change with time. It is unlikely that the conversion to digital will continue at a satisfactory rate if no financial stimulus exists, whether that be by means of digital 3-D content, the availability of VPF financing, lower cost equipment, or a combination of these.
Further stimulus is not on the radar for studios, however. They are currently looking at ways to wind down their engagement in new VPF deals, as indicated in a recent letter to US exhibitors from Fox. Fox points to the availability of no less than 4 VPF deals signed by Fox in the US, with a 5th deal on the way. But it follows with a warning that “VPFs acceptable to Fox will decline as time passes…” Hardly a new statement by the studio, but a fair one. In this, Fox is unlikely to be alone. At least one other studio is sharing its intent to manage commitments so as not to pay VPFs after 2020. That would set a deadline of no greater than 2015 for remaining rollout periods. This thinking could be widely shared. It is a humbling thought.
The four deals signed by Fox are with Cinedigm, DCIP, Sony, and GDC, with a deal in the works with Christie Digital. Of these, GDC requires exhibitor-financing, Cinedigm offers limited financing, and DCIP and Sony offer equipment financing programs, albeit DCIP’s is limited to Regal, AMC, and Cinemark. In Europe, the well-known deployment entities are AAM, XDC, Sony, and Ymagis. Of these, only Ymagis does not offer some level of equipment funding. Elsewhere, Scrabble in India is reaching out to deploy digital cinema in the Middle East. GDC is deploying systems in China. Sony in Japan. DCIPA in Australia. Major exhibitors in the UK have either signed direct deals or are operating through XDC and AAM. There is substantial VPF action going on. However, the question remains as to whether this is enough to leave no cinema behind.
2011 is set to be another good year for digital cinema sales. If you’re an exhibitor, it’s time to consider your options. If you’re a manufacturer, it’s time to start thinking about where the money will come for future sales.