April 29, 2005

As the external indicators seem to be leaning more closely to a world of digital exhibition, it seemed an appropriate time to look at some of the factors that will determine how quickly things move forward.

The idea of converting all of America's movie screens to digital projectors is a rare happening in the history of the movie business in that none of the other major shifts have ever happened without the threat of bankruptcies forcing the issue. Digital projection has significant financial upside for the studios and, at least in my opinion, a minimal upside for exhibitors. (The theory of heavy upside for exhibitors is based on more effective pre-show advertising, which is real, and a variety of non-first-run-movie uses for the halls, which I believe will never be successful.)

Of course, the big financial upside for studios is based on roughly 40,000 digital projectors of enough quality and operating consistency that the costs can be, for the most part, fixed as the industry moves towards this end. People are quick to assume that it's all just a matter of cash. It's not... but let's assume it is for a minute.

One rarely thinks about the massive cost of prints, but the industry spends roughly $2 billion a year getting celluloid to the cinemas, between features and trailers. Digital projection would reduce that cost to less than half of that.

The cost of projectors, using the current economies of scale, would be about $4 billion.

So theoretically, the savings could pay for the cost of the equipment in just four or five years. But there are other issues...

There haven't been massive changes in the celluloid projector over the years. There have been improvements and there have been additions, but a projector has been an investment that lasts a long time. But how well will 40,000 digital projectors hold up over time? And as time passes, how noticeable will improvements be? Given the last decade of computer technology, one would expect that the improvements five years after the first mass installation will be significant. Likewise, the price of those improved projectors are likely to fall.

Both digital storage and digital delivery systems are an issue. The wet dream is fiber optic cable stretching across the nation, delivering films and anything else you can think of to your local bijou in just minutes with no piracy to worry about. But that shouldn't be the step forward that slows the progress to the projectors themselves. Few films would be more than 50 gigs of information. (corrected: 11:50a, 4/29) Overnighting that to theaters would be inexpensive enough to make sense... perhaps more sense than the fiber optic panacea will make for another bunch of years.

I would also expect the industry to be overly cautious with maintenance on these machines, given that it is a brave new world of technology. The cost of that maintenance... and when you go into a fairly new multiplex with folks who know projectors or Dolby techs, you find that the quality of maintenance on current projectors is painfully minimal. I don't know how many of you have found your computer in painful need of repair far too often for your own good, but I think you'll agree, it's easier to maintain your bicycle than your laptop.

It seems to me that what the industry is waiting for is someone who can fill very deep pockets and create the opportunity that everyone can finally buy into. In fact, I would estimate that a smart businessperson could systematize a digital roll out that would cost the industry as much as $20 billion over the first decade, with maintenance included. Why would the industry spend five times the cost of the actual machines to roll things out?

Risk avoidance is a big part of the Hollywood mindset, even if the making of movies seems like an endless gamble. I am guessing that maintenance costs for each projector could surpass the cost of the hardware in that first 10 year cycle. In order for the $4 billion investment to deliver 10% growth a year, the investment would have to return another $10.5 billion. That's a total of more than $20 billion already.

And you wonder why no one has gone ahead with this project yet... that $1 billion a year in savings seemed like so much money!

Of course, the big effort for years has been to create a reliable, quality projector with a big enough throw to work for less than the $100,000 price point. A $75,000 projector, obviously, would cut the investment by 25%, bringing the whole cost of the first decade of this projects into the $15 billion range.

Of course, this still means that the industry would have to commit the first decade of savings on prints as well as find a new revenue source using the digital projectors to cover the costs that are even beyond those savings. Of course, at the end of that decade, digital would be the standard and those savings would start to accrue to the studios. Even if new projectors were needed, that infrastructure cost would become the responsibility of exhibitors, just as it is now.

Then there is the system by which distributors large and small would have to figure out how to calculate each distributor's annual financial commitment to the project. This is tricky. But I would suggest an industry wide weekly "tax" on every screen in the country that would participate. That would be either $750 or $1000 a week. Ouch.

There are obvious variables. Perhaps maintenance could be lower. Perhaps the cost of projectors could be even lower.

But it isn't going to be cheap. And, I dare say, there will be no extra tickets sold as a result of these new projectors.

The tipping point is getting closer every year. And someone - whether its Mark Cuban or God knows on Wall Street - will be The Father of Digital Cinema. Just wait for the white frames...

READER OF THE DAY: The return of HONG KONG STEVE: "I have much more time to share what I thougt with you. Today, it's called "A Lot Like Guess Who".

This is a movie project for the story is about Ashton Kutcher met Amanda Peet, but it took seven years to fall in love and getting married. When She decided to take him home to meet her family, Boom, Here Bernie Mac Show Up!!! What A Surprise! Then Everyone jumps out and says "You're Punk'd!!1" You know, just like Ashton did on MTV.

Why I think this idea will work? Think about it, People only need to spend the money of one ticket to enjoy the fun of two movies!!! What A Great Deal! Doesn't any body know that? Yeah, Amy Pascal should give me a call. It wil sell, I promise."

E-ME.