Unspooled: theater chains make alliances with studios to gear up for the debut of digital projection.

HOLLYWOOD'S digital dawn, clouded for years by concerns about rollout costs, may finally be at hand.

Driven by emerging alliances of studios, tech firms and Wall Street investors--and exemplified by Technicolor's recent pact with Century Theaters--a fundamental change in the business model of theatrical distribution has begun to make the conversion of the nation's 36,000 movie screens a reality.

The benefits of digital cinema--using bits and bytes to record, transmit and replay images, rather than using chemicals on film-are clear to the majority of the industry: it's extremely easy to use and by Hollywood standards, costs virtually nothing.

Studios now spend more than $700 million each year getting copies of films to U.S. theaters. But digital films are essentially large computer files that can be written to a DVD-ROM, encrypted and sent through broadband cable or shipped via satellite. With virtually no shipping expenses, it doesn't cost the production company any more to open a film in 100 theaters than it does one.

The hang-up has been the cost of equipping theaters to show the films. The cost of a projector, server, satellite dish and the other gear required to show a digital film is roughly $100,000 per screen, a price theater owners have been loathe to absorb.

Disney and Dolby offered a glimpse of the new business plan with this fall's 3D distribution of "Chicken Little." Under the old model, studios paid about $1,250 per film print. In the new scenario, the studio--in this case Disney--pay a "virtual print fee" of about $1,250 to the digital equipment provider--in this case Dolby. The suppliers will use that money to recover the costs of making the digital equipment over a number of years. The theater owners no longer pay the print fees, but are responsible for some digital maintenance and some installation costs, roughly $10,000 for each screen.

"In what are now the 'old days' for the exhibitors," said Bill Mead, publisher of industry publication and Web site DCinema Today, theater owners would make "a modest investment in equipment that would last as long as the theater lasted. When digital technology came in it was different, because it's much more expensive equipment that takes a certain level of expertise to maintain and operate."

Technicolor Digital Cinema, a unit of electronics maker Thomson, last month reached a deal to install digital projection systems for 90 to 120 movie screens owned by Century Theatres Inc. The deal will allow theaters to receive films, concert footage or other content via satellite, the Internet, or in the form of a small, reusable hard drives.

Financing arrangements

Technicolor is planning to arrange financing for equipment installation for 5,000 movie screens over the next several years, with the goal of eventually supporting 15,000 screens over the next decade.

Joe Berchtold, president of Technicolor Electronic Distribution Services, said that at present, the company "can pay for (the equipment) based on the deals we already have." But he said that Technicolor was exploring other options for the future.

"We've gotten a number of phone calls from just about every bank in the world," Berchtold said.

Industry analyst Dennis McAlpine said the level of Wall Street interest is understandable, given the new momentum behind the transition to digital cinema. "With the studios getting on board, you will see a lot more private (capital) deals being made," McAlpine said.

Christie/AIX, a wholly-owned subsidiary of Access Integrated Technologies, in December announced a deal with Carmike Cinemas to install its projectors for 2,300 screens in Carmike's chain.

"The company has gone to the markets to raise funds several times and been pleased with the level of interest," said Bud Mayo, chairman and chief executive of Access.

"As long as movie companies are willing to pay the pseudo-print fees for distribution, people should be able to make decent money as a provider," McAlpine said. "The only risk exhibitors have is obsolescence, and most have negotiated deals that have an out for equipment upgrades."

Stage set

Theater chains AMC Entertainment Inc., Cinemark USA, Inc. and Regal Entertainment Group formed joint venture National CineMedia, and are trying to use their collective power to negotiate equipment purchase at bulk rates.

"The studios are not going to realize these savings for a long time, and studios are not known for making decisions based on savings in 10 years," Berchtold said "The whole idea with exhibitors is to increase their per-screen box office take."

The stage for the rollout takeoff was set last summer when the seven major studios--Disney, Fox, MGM, Paramount, Sony Pictures Entertainment, Universal and Warner Bros.--formed Digital Cinema Initiatives LLC and settled on standards for digital projection, ending concern that the industry's myriad production and post-production firms would be facing a mish-mash of formats.

"The issue of standards became huge when digital cinema was conceived," said Tim Partridge, senior vice president and general manager of Dolby's professional division. Part of the reason the transition had taken so long was the studios' fear that multiple formats could result in a "nightmare scenario" involving a variety of non-compatible formats.

Despite the recent sprint toward the rollout, hurdles for the changeover remain.

During the transition, distribution could actually be more expensive for studios, which will have to release in both formats until all theaters are digitally equipped.

ANNE RILEY-KATZ

Staff Reporter