Cinedigm Plan Pays Theaters to Get Films Sooner for Video

Cinedigm Digital Cinema Corp. (CIDM), a distributor of small, independent films, is making deals to grant theater chains a share of home-video revenue if they allow movies to be shown earlier on consumers’ TV sets, an approach that may bridge an industry impasse.

Cinedigm, based in Morristown, New Jersey, and run from Los Angeles, has forged revenue-sharing agreements with several exhibitors covering films and alternative programs such as concerts and sporting events, Chief Executive Officer Chris McGurk said in an interview, without identifying the chains.

By agreeing to a shorter period than the current three- to four-month industry standard, cinema chains will get a cut of the revenue that films make later, McGurk said. For Cinedigm, a faster move to home-video allows the company to get more mileage from its theatrical marketing campaigns because consumers will be more aware of the mostly smaller films when they move to the home.

“For an exhibitor, it’s a completely new revenue stream and it’s found money for them,” McGurk said. “There are always going to be issues, but you’re going to find exhibitors who are flexible.”

Cinedigm’s move represents a new attempt by movie distributors to try to recapture some of the revenue that has been eroded in home video as consumers have shifted away from DVD purchases to cheaper-priced channels such as pay TV and Internet streaming.

Independent Outlets

While McGurk sees the plan affecting mostly smaller-budget movies that are distributed through independent outlets such as Cinedigm, others see the potential, should the experiment work, for Hollywood studios to follow suit with larger films.

“If Cinedigm makes it work it definitely becomes a driver for studios to do the same thing,” said Eric Wold, a San Francisco-based analyst with B. Riley & Co. “In the past the exhibitors have made it pretty clear that if studios get that window shortened they would want to participate in the revenue” from home video sales.

Cinedigm is scheduled to report fourth-quarter earnings after the close of markets today. The company is expected to report a loss of 13 cents a share on revenue of $18.7 million. A year earlier it reported a loss of 23 cents a share on sales of $20.6 million.

Under McGurk, who became chief executive officer in January 2011, Cinedigm is transforming itself from a technology and finance company to a distributor of digital content to theaters and to home-entertainment channels. In cinemas, Cinedigm is pitching its content as entertainment that will bring customers to the theater on weeknights when most seats are empty.

On-Demand Services

“If Cinedigm can go in there and offer cinema operators that revenue, they’re going to be more amicable to doing a variety of things, like releasing the movie through on-demand services on the same day it opens in theaters,” Wold said.

Cinedigm rose 2.5 percent to $1.59 at 9:47 a.m. in New York trading. The shares had gained 13 percent so far this year.

Attempts by studios to get theaters to allow movies to go out on home video sooner have met with resistance from cinema chains, which argue that films need long runs in their venues to maximize sales and that faster home-video release cuts into revenue because consumers wait to watch the film at home.

In 2010, Walt Disney Co. (DIS) angered European cinema operators when it announced plans to release “Alice in Wonderland” on DVD 13 weeks after its theater run. In 2011, cinema chains complained when Comcast Corp. (CMCSA)’s Universal Pictures, News Corp. (NWSA)’s Fox, Sony Corp. (6758) and Time Warner Inc. (TWX)’s Warner Bros. began releasing movies through DirecTV (DTV) for four to six weeks after the theatrical release. The studios eventually dropped the plan, which didn’t feature any major hits, citing low demand.

Wide Release

Most recently, Universal Pictures backed down from a proposal to show “Tower Heist,” which generated $152.9 million in worldwide ticket sales at the box office, through video-on- demand services three weeks after wide release, after U.S. theaters, including Cinemark Holdings Inc. (CNK), refused to cooperate.

Michael Pachter, an analyst at Wedbush Securities in Los Angeles, said Cinedigm’s approach has limited scalability.

“The exhibitors will gladly let the window shrink if they’re cut in on some of the revenue, but the studios aren’t going to do that because they take all of the risk creating the intellectual property,” Pachter said. “I don’t see this becoming the model for big studios.”

Distribute Films

For Cinedigm, the model works because it has the means to digitally distribute films to theaters as well as cable channels and online services, including Netflix Inc. (NFLX) and Hulu LLC, said Wold, who has a buy rating on the stock.

Cinedigm, which isn’t a filmmaker, typically spends $500,000 or less to acquire and market a movie, which means it doesn’t have to generate huge theatrical sales to make money, according to Wold.

The company released “Battlefield America,” a dance- competition drama, on June 1 to 188 U.S. theaters, generating $169,000 in ticket sales. “The Invisible War,” a documentary about sexual assault in the U.S. military, is scheduled to reach theaters on June 22. Cinedigm films not yet on the release schedule include the horror picture “Citadel” and the French crime thriller “22 Bullets.”

It plans to release eight to 12 small, independent films over the next 12 months, along with live events, McGurk said.

Cinedigm could best capitalize on distribution of small films and alternative content by partnering with companies such as concert promoter Live Nation Entertainment Inc. (LYV) to provide a regular supply of programming, Wold said.

“If you talk to filmmakers now, having additional ways to get access to theatrical release, it’s like the Holy Grail to the indie film community,” McGurk said.

To contact the reporter on this story: Michael White in Los Angeles at mwhite8@bloomberg.net

To contact the editor responsible for this story: Anthony Palazzo at apalazzo@bloomberg.net

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