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D-cinema
conflict
Exhibitors
and distributors continue to battle with the hows and whens of
the digital cinema transition -- with no resolution in
sight.
March 04,
2002
By
Nicole Sperling
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"Lilo & Stitch" is
among the films planned to unspool at digital venues this
spring. Though still small in number, such venues are an
important testing ground for studios and
exhibitors.
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When
it comes to digital cinema, there are two things that the
exhibition and distribution sectors agree upon: It will
happen, and when it does, it will transform the industry. But
beyond these two statements, the industry is filled with
myriad tough questions that have dogged the d-cinema
initiative for the last few years: Who is going to pay for the
transition to filmless distribution and exhibition? What
technical standards will be used? Is the technology available
today good enough to begin the implementation? How will
third-party technology companies fit into the current
distributor-exhibitor equation?
These now long-familiar questions are just a few of
the many the industry is grappling with over the d-cinema
issue.
Last year, at ShoWest
2001, Technicolor Digital Cinema announced its partnership
with Qualcomm, declared itself the solution to the d-cinema
conundrum and promised to seed the market with 1,000 digital
systems in the following 12 months at no initial cost to
exhibition.
Those 12 moons have
come and gone, and to date, Technicolor has installed a mere
10 systems across the country.
The plan, said former CEO Lanny Raimondo last year,
required the exhibitors to pay Technicolor 12.5 cents per
customer at digital screenings, and it charged the studios to
distribute movies electronically.
As initially outlined, this model didn't work.
Newly hired Technicolor president Ken Williams admits that the
studios and theater chains were resistant to components of the
business plan -- mainly the 12.5 cents-per-ticket fee.
"Any plan that costs the exhibitors
or the patrons more money is something we won't support," says
one exhibition executive.
The
d-cinema systems available today are prohibitively expensive,
ranging from $200,000 to $250,000 for projector, server and
installation. An ongoing debate has raged between distribution
and exhibition over who will pay for the systems. Exhibition
has long demanded distribution pay because they believe the
eventual benefits of digital transmission will be reaped
mainly by the distribution community. Also, the exhibition
industry's history of financial problems, including bankruptcy
by a dozen chains, make independently financing such an
undertaking at the current prices impossible.
Phil Barlow, former head of the Walt
Disney Co.'s d-cinema project, said in June at CineExpo in
Amsterdam that distribution would pay for the systems. "It's
commonplace that studio execs understand that most of the
costs or at least the starting costs have to be taken by the
studios," Barlow said at the time.
However, when recently contacted by The Hollywood
Reporter, Barlow said that distribution immediately saving
from the rollout is the very idea "that poisons the debate.
Hundreds of millions will be saved only if the conversion to
digital happens overnight. Initially, it will increase costs
substantially for the studios."
Technicolor is not the only technology company
trying to tackle the problem. Boeing Digital Cinema has also
been meeting with both distributors and exhibitors at a
furious pace to sign deals before the release of George Lucas'
hotly anticipated "Star Wars: Episode II -- Attack of the
Clones" is released in the United States on May 16.
Boeing Digital Cinema exec director
Frank Stirling will not confirm that the company has partnered
with Lucas, but he will say that two upcoming films -- largely
created with digital production techniques and due shortly for
release -- represent a "watershed opportunity" for the
community. So far, no deals have been signed, but, he says,
"we are in very intense talks with quite a few players in the
industry."
Stirling won't comment
on the specific details of Boeing's business plan, but he
insists the company is trying to be "as open as possible" with
its business model and system requirements.
Stirling, Williams and other technology heads,
including Bob Mayson from Eastman Kodak, are dealing with a
chicken and egg problem. Exhibition won't install projectors
into its theaters until they can guarantee distribution will
supply them digital content. And distribution won't convert to
digital until there is enough market penetration to warrant
the migration.
Both exhibition
and distribution are also concerned that Technicolor and now
Boeing are trying to insert themselves into the center of the
exhibition-distribution relationship from a monetary and
information perspective. What industry insiders call a
"gatekeeper mentality," Technicolor and Boeing are proposing a
"one-stop shop" of providing all the components of the
d-cinema process, from equipment supply to transmission, while
maintaining control of the data generated by the technology.
This mentality, according to industry sources, has the
potential to change the way exhibition and distribution deal
with each other, which is a complex process on its own. It's
also a mentality that requires both parties to pay a third
party, on a continual basis, for an already margin-thin
business.
"I don't think this
business needs gatekeepers," says Kurt C. Hall, president of
United Artists Theater Circuit and new CEO of Anschutz Corp.'s
yet-unnamed company, which will focus on digital cinema, among
other issues. "Digital cinema should not change the current
licensing deals or the dynamic between theater owners and
distribution executives. We don't need to introduce more cost
structure or middle men. We will need these companies to
provide certain services but not change our business
relationship with the studios."
Technicolor says the spirit of its initial plan
remains, and its 1,000-screen initial rollout was a ballpark
figure designed to get the industry's attention. Williams
asserts that the L.A.-based company remains committed to a
seed rollout of digital cinema, so it can present the benefits
to its customers.
"The
gatekeeper issue is an extremely important and legitimate
business issue," Williams says. "The way we address it is to
pledge open systems and interoperability. We know the costs
are large, and exhibitors can't make an independent decision
to install them into theaters. We want to show the experience
and illustrate the new revenue streams that can be achieved
with digital."
But exhibition
even finds fault with the concept of seeding the marketplace.
According to a confidential memo sent Feb. 7 to the exhibition
community by John Fithian, president of the National
Association of Theater Owners, and obtained by The Hollywood
Reporter, "Gatekeepers offer unique terms for the first
installments to incentivize exhibitors to install equipment.
However, exhibitors must know what the terms for a true
rollout are before even the seeding can begin. We can't 'seed'
intelligently if we don't know what type of crop we are trying
to grow."
Boeing's Stirling
opposes the gatekeeper assumption that his potential customers
hold. "We are trying to move our company into areas where we
can help," he says. "We will never get between exhibition and
distribution. We will never be a player. We just want to
facilitate the move to digital."
But critics of Boeing say the company has stepped
into this complex issue in a naive manner. "It is astounding
to see how little research they've done in terms of the types
of deals they are proposing," says one industry insider. "They
are an aerospace company. They look at this as a business that
'if you make it, they will come.' They are not friendly to all
the baggage that exhibition-distribution brings to the
table."
Both technology
companies' plans include managing the data generated from the
d-cinema process, including what theater holds what movies,
how much ad time is being used, which trailers run where --
valuable data that those in the exhibition sector believe is
crucial to their business.
"Both
Boeing and Technicolor want to hold all the data that
exhibition generates," says Michael Karagosian, a d-cinema
consultant for NATO. "That data is part of the exhibition
business. It's another suggestion that exhibition would be
losing control of its business in a deal involving third
parties."
According to many on
both sides of the d-cinema equation, the only way to create a
d-cinema plan is for both distribution and exhibition to come
together without the interference of third parties.
"If movies want to continue to play
an important part in our society, we must adopt this
technology," says Barlow. "We will have to reach an agreement
eventually. Distribution and exhibition have a symbiotic
relationship with each other. We live off each other;
therefore we must live with each other."
Fithian, in his Feb. 7 memo to the exhibition
community, took it further: "I am confident that distributors
and exhibitors can and will develop plans that allow all to
participate. Ideas are in the works so that relative cost
sharing will reflect relative benefits. Open and fair
competition must and will be assured. Neither exhibitors nor
distributors will permit third-party gatekeepers to decide the
business plan for us."
While
plans for collaboration sound noble and relatively logical,
antitrust concerns that force exhibition and distribution to
negotiate terms on a film-by-film, theater-by-theater basis
plague the issue of digital cinema. In fact, many distributors
are not willing to meet with exhibition representatives
because of these concerns.
But
Fithian remains strong on the idea of a coalition of
exhibition and distribution solving this problem
collaboratively.
"We do not
believe that antitrust laws prohibit distribution-exhibition
conversations on an industrywide basis," Fithian says. "Some
issues can be discussed collectively. Some issues must be
reserved for individual company negotiations."
A solution some industry insiders
are mulling over regards involving a third party in financing
the transition to digital cinema but not participating in the
business from a technology or control issue.
Third-party involvement seems to be
welcomed by many in the industry, it's just the extent to
which they engage in the business that remains up for
debate.
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