May 18 (Bloomberg) -- The Prince Charles, a London movie theater that’s more likely to screen “The Rocky Horror Picture Show” than a James Cameron blockbuster, is struggling to pay for Hollywood demands to go digital.
The two-screen, independent cinema doesn’t have the funds of the neighboring Odeon theater at Leicester Square, where Hollywood films premiere and stars walk the red carpet. It must still pay the same 60,000 pounds ($86,500) to convert each of its screens to digital, as studios replace celluloid.
“We are financially stretched,” said its manager, Gregory Lynn. “So many indie cinemas like us cannot afford to go digital, but we don’t really have a choice.”
The movie house is among thousands of small cinemas -- mostly in Europe -- in danger of going bust unless they make the switch. The conversion costs may leave some small towns with no theaters, and fewer venues to screen movies may result in the shrinking of the European film industry, already concerned about the cultural dominance of Hollywood.
“European films are mostly watched in Europe and generally only seen in their own country,” said Jean Cazes, a producer of movies including the Oscar-winning “Leaving Las Vegas” and vice president of the European Producers’ Club.
With Hollywood studios counting on savings of $1 billion a year by ditching 35-millimeter prints for digital, the days of “Cinema Paradiso” may be history in as little as three years, replaced by 3-D blockbusters “Avatar,” “Alice in Wonderland” and “Clash of the Titans.”
The issue took spotlight at the Cannes Film Festival, currently under way, in a Council of Europe-sponsored seminar. In Europe, where the largest chains represent only 10 percent of the continent’s 30,000 screens, more cinemas could fold. North America’s largest cinema chains account for 60 percent of about 39,000 screens.
“A cinema will absolutely go out of business if they don’t upgrade,” said John Fithian, head of the North American Theater Owners. “Smaller exhibitors that cannot afford digital technology will go out of business.”
Theater owners are switching to higher-quality digital following the success of 3-D movies, which command higher ticket prices. “Avatar” is the world’s top-grossing film, having taken in $2.72 billion in worldwide box-office receipts since its Dec. 18 release.
A digital projector and server also allow a cinema to show a variety of content including live sporting events and concerts, said David Hancock, head of the cinema market at researcher Screen Digest, based in London.
‘If, Not When’
For Hollywood studios like Sony Pictures Entertainment Inc., Paramount Pictures and Universal Pictures, digital significantly cuts the price of manufacturing and distributing 35-mm film. They can deliver video files electronically.
Studios plan to release 19 3-D films this year, according to Hollywood.com. Box office receipts reached records worldwide last year with total sales in Europe of $9.6 billion and $9.7 billion in the U.S., according to Hancock.
“Digital is not an ‘if’ thing, it’s a ‘when’,” he said. “Within four years major markets like the U.S., U.K. and France will be fully digital.”
France leads the way in Europe for digital screens, with 959 converted so far out of 5,440, according to Screen Digest. Europe has 4,580 digital screens out of 37,600, while the U.S. has 7,418 out of 39,233.
Governments in Europe are stepping in to help small, beleaguered movie theaters. The European Union plans to pay as much as 50 percent of the cost of digital equipment for cinemas that show a majority of European films.
The U.K. Cinema Exhibitors’ Association formed the U.K. Digital Funding Partnership this year to help smaller cinemas secure financing for the switchover and negotiate fees studios pay to theaters for movies shown on digital screens.
The partnership aims to have 500 U.K. screens signed up by the end of the summer and is in loan talks with financial institutions, said Phil Clapp, the association’s head.
The U.S.’s National Association of Theater Owners did the same several years ago when it worked with Goldman Sachs Group Inc. and General Electric Co. to raise funds to convert screens, Fithian said.
“The real danger here is in the small towns, where we could see cinemas disappear,” Fithian said. “I think where we are now the model is relatively fair. Where it started was unfair and the studios wanted it right away. George Lucas and his team described us as dinosaurs holding back the industry.”
JPMorgan Chase & Co. raised almost $700 million to equip the three largest U.S. cinema chains, Regal Entertainment Group, AMC Entertainment Holdings Inc. and Cinemark Holdings Inc. this year. Europe’s largest cinema chain, Berlin-based Odeon Film AG, raised 37 million pounds in private equity in direct negotiations with studios to help foot conversion costs, and is funding the switchover itself.
Cineworld Group Plc in London has converted about a third of its screens, about 232, to digital, with its own funds, said Chief Executive Officer Steve Wiener.
“In the cinema industry, whenever there’s been a major technological change, the good small exhibitors will find resources and survive,” he said. “The smaller ones won’t.”
At the Coronet Cinema in London’s Notting Hill, projectionist Chris Bird isn’t convinced his two-screen picture house needs to go digital.
“3-D comes and goes and who know how long it will hang around now,” the 40-year-old said. “Just like Quentin Tarantino said he likes working with film, I think you’ll have some filmmakers that will resist working with digital.”
Arts Alliance Media Ltd., a London-based company that supplies software and services for digital-film projection, has done deals with exhibitors in countries including the U.K., France and Denmark. In March, it secured 50 million euros ($63.3 million) from Bain Capital LLC’s credit affiliate Sankaty Advisors to help fund the rollout of equipment.
“It’s obviously harder for small cinemas who need to figure out what to do with digital,” said Howard Kiedaisch, chief of Arts Alliance Media. “It’s like going from using a typewriter to a computer.”
Kiedaisch said the turning point for digital gaining momentum was the release of “Avatar.”
“Now, if you order digital equipment it won’t arrive until November or December,” he said. “Six months ago it would come the next week.”
At London’s Prince Charles, manager Lynn is hoping his cinema’s recent membership in the U.K. Digital Fund will help it pay for the conversion of its second screen to digital.
“We’ve had no encouragement from any film company to make the changes so we’re lucky to have done it by ourselves. We don’t have luxury like the big chains.”
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