But, as in other areas of entertainment, the digital transition in cinema has not been smooth. A new Booz Allen Hamilton study suggests that full acceptance of digital technology by the film industry is only a distant possibility, unless key players can redefine how they share revenues and find creative ways to finance the multibillion-dollar cost of the changeover.
At least a half-dozen films shown at this year's Cannes Film Festival were shot at least partially using this new technology, which stores video and audio as digital data so it can be manipulated and transmitted electronically. However, few moviegoers actually saw Lucas' film in its pure digital form. Although "Clones" was shot
As in other areas of entertainment, the digital transition in cinema has not been smooth.
The problem is that the directors may be hooked on digital, but the studios and theater owners--the companies that would have to finance a new digital infrastructure--aren't. Their argument? As there are 36,000 screens in the United States, it could cost $5 billion to $7 billion to upgrade the entire infrastructure. Why undertake such a large and costly project when the current system works well in getting films produced, distributed and exhibited to audiences around the world? Plus, in contrast to digital music, digital cinema cannot claim a customer base clamoring for it.
Proponents counter that this attitude ignores the flaws in an aging business model and underestimates the promise of digital cinema not only as an entertainment medium, but also as a way to significantly drive down costs and tap into new revenue streams.
When a studio produces a movie, for example, it makes thousands of celluloid prints and ships them in metal canisters to theaters. In the United States, it costs the studios more than $1 billion a year to duplicate, distribute, rejuvenate, redistribute and dispose of the year's film reels. With digital cinema, much of this cost to the studio would be eliminated because movies could be created, stored, distributed and projected electronically.
Theaters, instead of being constrained by how many prints they have, could instantly access a digital movie through any projector linked to their server and simultaneously increase the number of screens showing a film. Consequently, theaters would be filled closer to capacity more often, and revenue opportunities would increase.
Digital cinema also opens avenues for theaters to show new types of content, including preshow advertising and special presentations of live events such as sporting events or concerts, which appear to
In this industry, spending money without a quick payback is not part of the culture.
Still, all of the potential economic advantages of digital cinema--close to $1 billion in additional revenue for theaters and $1 billion in cost savings for studios--are overshadowed by the estimated $5 billion to $7 billion it would take to upgrade the infrastructure, and the advantages don't add up to enough to justify a complete switchover in a short period of time. In this industry, spending money without a quick payback is not part of the culture.
Studios face other obstacles. It is not yet clear which of the competing technological specifications will become the standard for digital cinema, and studios don't want to risk backing the wrong approach. In addition, operating two different distribution systems for any period of time is not palatable to them. And, most seriously, studios fear that distributing their films over computer networks will lead to piracy.
Meanwhile, the revenue-sharing arrangement between the theater owners and the studios--an old business model that the studios don't want to change--makes digital cinema much less desirable for the theaters. Currently, the largest percentage of revenues goes to the studios at the start of a run, declining about 10 percent each week after the opening. This means that if demand for a new film beats expectations, and theaters can use digital files to immediately show the film on more screens, studios will actually get a larger share of the increased revenues from new releases.
The only hope for digital cinema may lie with the film distributors.
The only hope for digital cinema may lie with the film distributors. These companies collect upward of $1 billion in fees per year to reproduce and disseminate celluloid prints to theaters. Traditional distributors, like Technicolor, as well as companies better known for electronic communications, such as Qualcomm and Boeing, view digital cinema as a potentially lucrative innovation that could cut the cost of distribution and open a new communications market. To test the waters, some are slowly infusing capital into the system. Technicolor recently announced a plan to fund 1,000 digital screens. And Boeing says it will soon have 40 systems in place worldwide that will use satellite technology to distribute films.
Distributors could invest in installation of digital cinema equipment in return for a share of incremental revenues for advertising and alternative content. They could also offer the studios reduced fees as an incentive for providing digital prints. In addition, distributors could syndicate advertising and alternative content, given their relationships with the full universe of theaters.To read more articles like this one, visit www.strategy-business.com.
Reprinted with permission from strategy+business, a quarterly management magazine published by Booz Allen Hamilton.