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 / Third Quarter 2002 / Issue 28(originally published by Booz & Company)


When Will Cinema Go Digital?

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.

Moreover, the promise of additional revenue from advertising or other uses of the facilities, while attractive, is too speculative at a time when theater owners, facing the consequences of building too many cinemas in the 1990s, are scraping for cash to make interest payments on their real estate, or filing for bankruptcy.

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.

Michael S. Katz, [email protected]
Michael S. Katz is a senior vice president with Booz Allen Hamilton in New York. He specializes in media and entertainment, information technology, and e-business, working with clients in traditional publishing, recorded music, interactive media, television, and motion pictures.

John B. Frelinghuysen, [email protected]
John B. Frelinghuysen is a vice president with Booz Allen Hamilton in New York. He specializes in strategy development and implementation for clients in the media and entertainment industries, including TV networks and program suppliers, online destinations, business/professional information providers, major film studios, music companies, and site-based entertainment businesses.

G. Krishan Bhatia, [email protected]
G. Krishan Bhatia is a senior associate with Booz Allen Hamilton in New York. He focuses on helping media and entertainment companies develop growth strategies and create value by leveraging digital technologies. Mr. Bhatia’s clients include many of the leading recorded music, filmed entertainment, cable television, and online companies, as well as related retail businesses.
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