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(originally published by Booz & Company)


Digital Cinema: Promising Future, Dicey Debut

Will digital cinema ever come to a theater near you? Filmmakers are talking up the technology, but studios, theater owners, and distributors still need to work out the financial hurdles.

With the May release of George Lucas’s Star Wars: Attack of the Clones, the spotlight is again focused on the promise of digital cinema. But, as in other areas of entertainment, the digital transition in cinema has not been smooth. A new Booz Allen Hamilton study suggests full acceptance of digital by the film industry may remain a distant possibility, unless key players can redefine how they share revenues and find creative ways to finance the multi-billion dollar cost of the changeover.

“A half-dozen films shown at this year’s Cannes Film Festival were shot at least partially using digital, which stores video and audio as digital data so that it can be manipulated and transmitted electronically.”
It seems like the people with the most visible enthusiasm for digital cinema technology are those making movies with it. A half-dozen of the films shown at this year’s 11-day Cannes Film Festival were shot at least partially using this new technology, which stores video and audio as digital data so that it can be manipulated and transmitted electronically. The most prominent was Clones, whose influential director seemed as intent on spreading the word about digital cinema — the high quality of its picture and sound, the ability to more easily create dazzling special effects, the lower cost of filmmaking — as he was on hyping his movie. Still, although Clones was shot digitally from beginning to end, few moviegoers actually saw Mr. Lucas’s film in its pure digital form. When it opened in the U.S., only 60 screens out of 5,000 displayed it using digital projectors.

Good News, Bad News
The problem is, the directors may be hooked on digital, but the studios and theater owners — the companies that would have to finance a new digital infrastructure — are not. Their argument: With 36,000 screens in the U.S., 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 effectively gets films produced, distributed, and exhibited to audiences around the world? Furthermore, conventional projection equipment is almost legendary in its reliability and longevity. Plus, in contrast to digital music, there isn’t a customer base clamoring for digital cinema.

Proponents counter that this attitude, tied to an aging business model and old economic assumptions, ignores the promise of digital cinema not only as an entertainment medium, but also as a way to drive down costs significantly 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 U.S., it costs the studios more than $1 billion a year to duplicate, distribute, rejuvenate, redistribute, and ultimately destroy the film reels produced. With digital cinema, much of this cost to the studio would be eliminated because movies can be created, stored, distributed, and projected electronically.

“A new Booz Allen study says the film industry’s support of digital cinema will remain weak unless key players can redefine revenue sharing models and find ways to finance the multi-billion dollar cost of changing the current system.”
For theaters, there are benefits, too. Instead of being constrained by the number of prints they have, theaters can instantly access a digital movie with any projector linked to their server, and simultaneously increase the number of screens showing it. Consequently, theaters would be filled closer to capacity more often, increasing revenue opportunities.

Digital cinema also paves the way for theater owners to show new types of content, including preshow advertising and special presentations of live events, such as sports or concerts, which appear to be under-exploited today due to the current distribution model. According to Booz Allen analysis, cinema advertising could generate between $400 million and $800 million in additional revenues annually for the U.S. theater industry.

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  1. “OnLine Music Gets a Hollywood Strategy,” by G. Krishan Bhatia, Richard C. Gay, and W. Ross Honey, s+b enews, 07/03/01. Click here.
  2. “How to ‘Truck’ the Brand: Lessons from the Grateful Dead,” by Glenn Rifkin, s+b, 1Q 1997. Click here.
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