Digital Switch Halfway Home

Paramount Pictures

Digital distribution made it possible for Paramount to add new footage to the film, boosting its gross to $72.2 million.

Theater owners rush to lock in virtual print deals as the number of screens using film prints declines.

Nearly half of the movie screens in North America have forsaken film and made the transition to digital cinema. And that’s one of the reasons why Paramount’s Justin Bieber: Never Say Never, at $72.2 million, has become the highest-grossing concert-themed movie at the domestic box office. Thanks to digital, the studio was able to update the low-budget movie with extended footage two weeks into its run, resulting in repeat business.

But converting all of the 39,000 screens in North America presents challenges. NATO chief John Fithian expects that 30,000-32,000 digital screens could be installed by the end of 2013 and that studios, which now distribute movies in a mix of film print and digital formats, might start looking at the possibility of releasing only digital prints “very soon” after that.

Others are convinced that studios will not give up film prints so quickly as long as there are theaters that still need them, because that would amount to leaving money on the table. “This is not about technology; this is about economics,” says Michael Karagosian, founder and president of MKPE Consulting. “You have to be confident that you are not losing revenue as a studio.”

In the meantime, though, the rush is on to grab virtual print fee deals before they expire.

VPFs are the financing models that the industry adopted to help pay for the conversion from film projectors to digital systems. Converting a single screen typically costs about $100,000. To help theater owners handle the costs, studios pay exhibitors VPF fees on each movie they release.

But those deals won’t last forever, and Fithian is urging theater owners who want studio support not to wait to get started. “VPF deals are set to end, and if you haven’t done a deal, then you’ll no longer be eligible,” he warns, adding that plans have different cutoff dates, but they begin to expire during fall 2012 and into 2013.

At last count, 16,231 of the screens in North America have gone digital, and about 100 digital screens are being installed every week.

For the Hollywood studios, the initial promise of digital cinema meant that they would be able to eliminate costly film prints, reducing the price of distribution. But in this interim period, studios are being asked to deliver a range of formats — film, digital 2D, Imax film, Imax 2D and a number of 3D formats. And that doesn’t make distribution simpler or less expensive.

During the past few years, a key reason theater owners bought digital projection systems was that they were required for 3D — and the lure of 3D’s higher ticket prices prompted many theaters owners to simply go out and buy digital cinema projectors. Nearly 9,000, or about half, of the digital screens in North America are 3D capable. The gross from 3D ticket sales doubled from 2009 and 2010, when they represented roughly 22 percent of the box-office gross.

But now, the conversion is being driven by those VPFs.

Digital Cinema Implementation Partners — whose partners AMC, Regal and Cinemark represent roughly 14,000 screens — offers the largest VPF-based deployment effort in North America. Following a slowdown during the height of the recession, a year ago the organization raised $660 million to fund the deals, and deployment began.

Cinedigm Digital Cinema, Cinema Buying Group and Sony are among the other organizations that also offer VPF deals.

There’s some debate about how long the total conversion will take. Conservative estimates predict it won’t happen until about 2020; others, like Fithian, expect it to be much sooner.

Even as individual theaters are converted, distributors and exhibitors must also look at how digital entertainment will be distributed. “The next step is for digital exhibitors to get connected,” suggests Rick O’Hare, senior vp of Deluxe Entertainment Services Group, who points to such methods as satellite or virtual private networks. “We believe that’s where it needs to go.”

Exhibitors are also looking at the potential of alternative content such as concerts and sporting events to supplement movie offerings.

“That is becoming challenging,” Karagosian says, noting that the successes have been in niche areas. “Concerts — some worked, some didn’t. The FIFA World Cup worked, but the challenge with sport is it has to be live. With opera, more people go when it’s live. There is something about the immediacy.”              

FUTURE IS NOW: 3D has powered the conversion of digital screens

  • 16,231 Number of digital screens in the U.S.
  • 8,963 Number of 3D screens in the U.S.
  • 23,511 Number of digital screens abroad
  • 17,059 Number of 3D screens abroad