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Digital Dreams on the Silver Screen

By Beth Carney For a commercial cinema chain, the Kinepolis group of movie theaters offers some rather creative programming. The Brussels-based group recently arranged its own release of a Flemish-language children's movie that normally would have gone straight to DVD. It also showed episodes of a popular Belgian TV drama series before they hit the small screen. This month, one theater screened 11 live eye surgeries in high-definition before an audience of doctors.

The showings were possible because the company has outfitted 21 of its screens with digital projectors, enabling the chain to show pristine screenings of blockbusters such as Star Wars: Episode III -- Revenge of the Sith, along with its offbeat fare. "We think it gives us a competitive advantage," says Claeys Bob, the international projection and sound director for Kinepolis.

"STARS ARE ALIGNING." Six years after the commercial launch of digital cinema, 365 movie screens globally are equipped with high-quality digital projectors, according to Texas Instruments (TXN), which licenses the DLP, or "digital light processing," technology used in the devices. For now, Kinepolis is the cinema operator with the most digital screens in use in the world. But that's about to change dramatically in the coming year.

This month, Christie Digital Systems, a maker of digital projectors, and Access Integrated Technology (AIX), which provides software and digital-cinema services, announced plans to bring digital cinema to 2,500 screens in the U.S. within two years. In an attempt to create the first national digital network, Avica Technology, a digital-services company based in Santa Monica, Calif., is installing digital projectors in Ireland's 515-plus theaters. And Britain's Film Council has committed to bring digital projecting to 209 screens starting this fall.

"The stars are aligning in a way that they have never aligned before," says John Fithian, president of the National Association of Theater Owners, a group based in Washington, D.C., representing the owners of 26,000 movie screens.

WIDER VARIETY. The benefits of digital movie screening are undisputed. Currently, the vast majority of films are projected from several bulky reels of 35-millimeter film, which are expensive to make and ship around the world. A wide-release Hollywood movie can cost studios $1,000 per copy, while smaller-run films, particularly those with subtitles, are even pricier, says David Hancock, analyst with media researcher Screen Digest.

By comparison, making a digital file of a movie and transmitting it either by satellite or by physically shipping a hard disk costs $200 to $300, according to digital-cinema service companies. Screen Digest estimates that distributors could ultimately save $2.28 billion a year in print and distribution costs if all of the 100,000 or so movie screens in the world were to go digital. Even better, digital files don't get scratched or degrade, so they present a perfect image in every viewing.

The cheaper cost of distributing movies would add variety to cinema programming. Makers of art-house films, for example, could afford to make more digital copies of their works, enabling wider distribution. The projectors can also be used to show alternative programming, as the Kinepolis chain does, for live sporting events or business presentations.

AWAITING DIGITAL STANDARDS. "It's possible for a distributor -- for either no or relatively little cost -- to supply a larger number of cinemas with what we call specialized films," says Steve Perrin, deputy head of distribution and exhibition at the U.K. Film Council. The government-funded group is spending the equivalent of $22 million in lottery money on digital projectors for the sole purpose of expanding movie offerings available to British theatergoers.

Despite the benefits of digital projection, however, cinemas' conversion has been slow because the transition will be expensive. Outfitting a cinema with digital projectors and related equipment such as satellite dishes costs more than $100,000 a theater, compared to about $35,000 for a traditional film projector, says Fithian. Deciding who should pay has been a sticking point -- the costs fall logically to exhibitors because the equipment is in their cinemas, but nearly all of the savings go to distributors.

In addition, Hollywood has yet to establish a common format. Digital Cinema Initiatives, a group representing six major studios, was formed in 2002 to look at the economics of digital projection and to come up with technical guidelines. Key concerns are to ensure that digital cinema is superior to high-definition TV and that encrypted files are protected from piracy, says Walt Ordway, DCI's chief technology officer. The group is expected to complete its specifications this summer.

TEMPLATE FOR CHANGE. In the meantime, various companies have proposed plans that allow distributors to subsidize the cost of the new equipment. Take the deal announced by Cypress (Calif.)-based Christie Digital Systems and Access Integrated Technology in Morristown, N.J. According to the agreement, the projector maker will provide equipment and maintenance to 2,500 theaters, while the software and services group will supply more than $100 million in funding through a subsidiary set up to administer the project, Christie/AIX.

In return, the distributors, whose names haven't been announced, will pay the subsidiary a "virtual print fee" for each digital movie shown in the theaters. The fee represents the savings the distributors realize by not making film prints. The theater owners pay only for installation, use of software, and maintenance, but get the equipment free.

In Ireland, Avica Technology also plans to recoup the $48 million investment in equipment by replacing the film-print cost with a digital-print cost. "What we're doing here is creating the template that will enable the entire industry to convert, by creating the financial model," says Bud Mayo, the CEO of Access Integrated Technology, which stands to gain further from the rollout because it's in the business of transmitting digital files for a fee and selling software to manage the process. "We intend this to be a profitable subsidiary."

"INVESTMENT IN THE FUTURE." Even with a business model, however, widescale digital conversion will take time. There are three major digital projector makers, Christie, Belgium's Barco, and Japan-based NEC, all of which use Texas Instrument technology. Sony (SNE) is planning to launch its first projector this summer, a model that will offer higher resolution than the current projectors.

Sarah Brown, research analyst at Dodona Research in London, which focuses on the film-exhibition industry, expects to see 2,700 high-quality digital projectors in use by the end of next year and 5,700 by the end of 2007. Production constraints are likely to prevent faster adoption, she says, even though she expects the exhibition industry to embrace the new technology in the same way it adopted multiplexes. "It's one way of making the quality of the experience better," she says.

The 298-screen chain Kinepolis didn't want to wait for distributors to shoulder the costs, although its projectors become increasingly useful as digital cinema spreads. When the company bought its first projectors in 1999, only three movies were available to show digitally. But by 2004, 53 were.

In addition to staging special programs, Kinepolis helps recoup some of the projector costs by charging an extra euro per ticket for digital screenings of major Hollywood movies, which typically sell out before the film version. "It's an investment in the future," Bob says. That future may be coming soon to a theater near you. Carney is a correspondent for BusinessWeek Online in the London bureau

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