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Regal Entertainment Group
Cinemark Holdings Inc
Wal-Mart Stores Inc
When Sanford Hess started running a century-old movie theater two years ago, he knew Hollywood was replacing celluloid with digital files. But since the 250-seat venue in downtown Champaign, Ill., had already endured Betamax, VHS, Netflix (NFLX), and a 15-year stretch showing porn, he figured it would survive this latest transition. Now he’s not so sure.
The 12-employee business, which had just over $300,000 in revenue in 2011, can’t afford the pricey new projector and other equipment major studios want him to buy. Unless he raises the money to pay for it by October, Hess says he’ll close the theater. Studios are saying, “Small business, you have to spend $70,000 in order to continue to make exactly the same money you do now,” Hess says. “There’s not really going to be any significant efficiency improvements or extra revenue that I can get; it just allows me to stay in business.”
For the past decade, Hollywood’s biggest studios have been working on a new standard for digital movies that could save them $1 billion annually in printmaking fees and shipping costs. The movies in the new format are shipped on hard drives that hold hundreds of gigabytes of data and are connected to a super-high-definition projector. To unlock a movie, the distributor sends the theater a code that controls where, when, and how long it can be played.
To induce exhibitors to purchase the equipment, celluloid prints of new movies from the majors will no longer be available in the U.S. by the end of 2013, according to John Fithian, president of the National Association of Theater Owners. The studios haven’t announced any deadline, but Howard Gantman, a spokesman for the Motion Picture Association of America, says the shift to digital will streamline film distribution. “This could only mean more and higher-quality motion picture entertainment,” he says. About 26,000 of the 40,000 screens in the U.S. have already converted.
The biggest chains—Regal Entertainment (RGC), AMC Entertainment, and Cinemark Theatres (CNK), which account for just over half the $10.2 billion annual U.S. box office—expect to complete the conversion early next year. But “for lower-grossing theaters, it’s just not affordable,” says Fithian. “I predict we’ll lose several thousand screens in the U.S.”
Bill Campbell, the second-generation owner of the six-screen Centennial Theater in Sheridan, Wyo., spent about $65,000 per screen to install digital projectors in November 2010. He’s worried the new technology will become obsolete more quickly than celluloid projectors, which cost $25,000-$35,000 and have a lifespan of 25 years or more. “Now that we’ve stepped up to computers, we don’t know long they’ll last. Think how long a laptop lasts.”
To help offset the cost, Hollywood is working with a handful of middlemen known as integrators. These companies typically buy the necessary gear and lease it to theaters. They also collect a fee from studios and distributors for each showing, and they can limit which movies can be played. To spur exhibitors to commit to the financing programs, major studios have indicated that they won’t pay fees to integrators for any theaters that don’t sign up by this fall. The deals put smaller cinemas “in a position of very high financial stress,” says Chapin Cutler, co-founder of Boston Light & Sound, which has installed projection equipment in movie houses for 35 years.
This toll-road model could spell trouble for theaters that show few Hollywood blockbusters, acknowledges Gary Johns, senior vice president at Sony Electronics’ Digital Cinema Solutions, a large integrator that has installed 9,000 new systems across the country. “It’s probably more of a challenge for those guys,” says Johns. Chris McGurk, chief executive officer of Cinedigm, another big integrator, agrees the financing programs work best “when there’s more turnover.”
The fee structure is changing the economics of the distribution business, too. Neal Block, head of distribution at Magnolia Pictures, which handles about 30 films annually, says the deals “basically disenfranchise” companies such as his. He says they will need to pay the same amount large studios do for every movie they show on an integrator’s equipment, even smaller films unlikely to become hits. “We have to evaluate profitability in a way that we never had to before,” says Block. “We have to look at every engagement to determine if it’s going to make money [to cover the fee] before we play it.”
To pay for the gear without a financing deal, Hess aims to convert his for-profit theater into a co-op, selling shares for $65 apiece to local film buffs. In two months he’s raised nearly $40,000 from 380 individuals. Hess, who spends around 20 hours a week designing software for a consulting firm on top of his 40 hours at the theater, is fielding phone calls from curious cinema owners interested in the idea. “This industry is stacked against the little guy in so many ways,” says Hess. “It’s kind of like going up against Wal-Mart (WMT). Yeah, you can exist if you build up a local audience who purposely drive past Wal-Mart to go to your store. But it’s very difficult.”
The bottom line: As Hollywood shifts to digital, smaller theaters fear they won’t be able to afford the conversion cost of $65,000-plus per screen.