George Lucas does not dwell in the past -- he's more of a forward-looking type. But he also has created a bit of history during his 35-year career, and as a result, Lucas frequently is asked to revisit the events that got him where he is today: running, under his Lucasfilm umbrella, a network of companies that includes not only Industrial Light + Magic and Skywalker Sound but also the gaming firm LucasArts, the George Lucas Educational Foundation and Lucasfilm Animation, which opened its doors last month in Singapore. Lucas sat down recently with The Hollywood Reporter's Paula Parisi over breakfast at Hotel Bel-Air to reflect on his empire and, more to his current taste, talk about the challenges facing the theatrical-release model and why the industry is missing the boat on digital cinema.

The Hollywood Reporter: Things have changed a lot during the 30 years since you formed ILM: Back when you were making 1977's original "Star Wars," you had to wait days to see your effects shots. In general, how does the process compare with today?
George Lucas: Steven (Spielberg) was just up visiting on Monday; we're doing (Universal's upcoming drama release) "Munich," and I was showing him the new facility. He arrived in the morning, at about 9 o'clock, and we looked as some of his dailies. He indicated some things he wanted differently in the effects. Then we went off and I showed him around, and we worked on some other projects and stuff. By the time we got back to ILM, before lunch, we were able to look at his shot again, with the change. In the old days, that would have taken weeks to do; now, you can do it in a matter of hours.

THR: Now there is a whole movement toward real-time previsualization. Can you composite right there on the set?
Lucas: Yeah -- not in quality that would be in the (finished film), but we can do it roughly. We can even build digital sets and things and have them move in real time. So if we're shooting bluescreen, we can pan around and see what you're going to see, a rough version of what the final shot would look like.

THR: What was the industry like when you started preproduction on "Star Wars" in 1975, and why did you open your own effects firm?
Lucas: None of the studios had special-effects departments. The Walt Disney Co. had Harrison Ellenshaw, a matte painter, and a little bit of a special-effects department, and Universal had Albert Whitlock, also a matte painter. But once you got beyond matte painting, the departments weren't really there -- (and) I needed something much more complicated. The only person who had actually done some special effects in the last 10 years was Stanley Kubrick, so I started looking around for people who had worked on (1968's "2001: A Space Odyssey"), and then it just grew from there.

THR: Can you describe your vision for what you were going for in "Star Wars," in terms of sound and effects?
Lucas: I wanted a really kinetic film, visually -- lots of quick cuts and camera movement. Soundwise, I've always felt sound was an extremely important part of the process of making a film; I had worked as a sound editor, and for a couple of years I had worked as an editor, so I was very attuned to that sort of thing. Ultimately, I wanted to be able to do sound work right in our offices -- I didn't want to go into (San Francisco) -- so we started setting up our little mixing room. I had hired Ben Burtt, and he was creating all of the sound effects and voices. I had to start from scratch -- What does R2-D2 sound like? What does C-3PO sound like? What does a Wookiee sound like? A spaceship? A laser sword? -- because I was creating a space opera, a fantasy film. I wasn't making a science fiction film -- it was a movie. And believe it or not, one of the most important elements to making something move is sound.

THR: You invested a half-million dollars of your own money to develop technology for "Star Wars." That was a pretty big gamble at the time.
Lucas: At that point, I didn't have any choice. The original film, "Star Wars -- Episode IV: A New Hope," was very carefully written around the technology. I felt that the one thing I could accomplish technologically, the one hurdle I was willing to try to jump over besides the normal stuff of getting a film made, was being able to pan in space, so I could make a very kinetic experience out of it -- I thought that was important to the vision. Everything else was carefully written so I could shoot in deserts, and I didn't have to build a lot of sets. We didn't have a lot of costumes; we didn't have a lot of extras. Everything was stripped down so I could do it as inexpensively as possible.

THR: What was the budget?
Lucas: Originally, when I was writing the script, we were hoping we would be able to do it for $3 million or $4 million. But it came out closer to $10 million.

THR: That's a far cry from the budgets of today.
Lucas: The average is something like $60 million, (but) the average cost of making a movie in Europe is $3.5 million. That's the way things are really competing. I think the American film industry is going to become like the rest of the world -- and people won't get paid as much.

THR: There are definitely some dynamics that are changing the economics of the business. What do you think of Mark Cuban's idea of releasing films simultaneously at home and in theaters?
Lucas: I think it'll happen -- it'll have to happen.

THR: Really? Because of the economics?
Lucas: Because of piracy. It's the only way you can stop piracy; there is no other way. You have to get a very, very aggressive enforcement program so that people do have consequences to stealing, but you also have to be able to offer it to them (in the home) for the same price they can get it on the street. It won't be DVDs -- DVDs aren't going to be around too much longer. If you can get it at home for $2, then why would you go on the street and get a bad version?

THR: What do you think will replace DVD?
Lucas: Pay-per-view.

THR: Something that streams in, not prerecorded media?
Lucas: It's the way kids do it today. It's how you do it on your iPod: They just download it. You pay 99 cents for music, and movies will be like two bucks. That will definitely change the economics of the business because (studios) are losing money now.

THR: Somebody was telling me that the studios' profit margins are only about 10%.
Lucas: I don't even think it's that: If you look at the (theatrical) divisions, I don't think they make any money. I don't think they've made money for five or six years.

THR: So it's basically a loss leader for DVD, television, etc.?
Lucas: Yup, all of the ancillary markets. For studios, the fact is that the theatrical film market is less than 10% of their business -- it's very, very small. I mean, you could chop that off in a second, and it wouldn't even bother them -- they're just doing it as a promotional thing.

THR: Do you think the industry will survive that way?
Lucas: I don't think the theatrical exhibition business will go away because I think people will always want to go to the movies, just as they go to the opera, they go to the ballet, and they go to football games. Football is a perfect example, where you can stay at home and watch it in the comfort of your own home and see a much better presentation, but people still sit out in the cold and cheer on (their teams) ... and you can't see anything because it's all distant. And now they have giant screens so you can watch it on television right there -- but they still fill up 100,000-seat (stadiums). We'll end up with fewer theaters with bigger screens and better presentations, and the theater owners will work very hard to make the whole thing an event.

THR: How will the industry deal with that?
Lucas: I don't know, but they'd better go faster. They're very slow in their reaction time: If they had started releasing movies digitally in 1999, when we released "(Star Wars: Episode I --) The Phantom Menace," which was the first digital film, released digitally, then they would have saved $5 billion or $6 billion by now. Of course, that kind of money doesn't mean much to the studios. But the filmmakers won't have a problem: They can always make films. They just have to figure out how to get them shown. As more and more people switch to digital and realize they can make films for nothing, really, then you can either show them on the Internet or in movie theaters if you get digital distribution. Right now, on an A-class movie, just making prints at the lab is $20 million, then there are costs for shipping those prints and eventually destroying them.

THR: Now that you have scaled the mountain in terms of visual presentation, are these the things you'd like to see accomplished?
Lucas: Well, we've become very efficient in terms of how you design shots and the creative side of things. But then, at the same time, we've become very efficient on the production side of things: We move things through the process very fast and still have the highest possible quality.

THR: So you're not really compositing "elements" anymore but building up these shots in the computer ...
Lucas: You do build things in digital: You build your characters, your sets, your vehicles, props and everything that goes into it.

THR: So you're building a library of digital assets?
Lucas: That may happen at some point. Generally, now, we build the dinosaurs for (1993's) "Jurassic Park," but by the time (1997's "The Lost World") rolls around, we've moved the sophistication of the technology so far forward that those dinosaurs are dinosaurs. There's a better, faster way of doing it, so you have to build new ones, using new software. But eventually it'll get to a point where that will settle down, the technology will stabilize, and once you build elements, you can reuse them. But once you get those things built, they get brought in, and then the live-action elements get brought in, and you combine it all. Your animation elements are done. It's just like making a movie.

THR: It's just like making a movie? (Laughs) It is making a movie!
Lucas: It's just that you're doing it in the computer instead of on a back lot somewhere.