Exec Has Positive Outlook for Digital Movie Delivery

Most moviegoers just want to know what films are playing. Michael Joe wants to know what’s playing the films.

As the Universal Pictures executive in charge of its digital cinema initiatives, Joe is more interested in the projection booth most theater patrons never see.

Digital cinema backers say the transition from expensive 35-millimeter film reels would change the movie business in subtle but profound ways. It would be cheaper in the long run and offer sharper pictures.

But digital distribution also would allow more flexibility in tailoring movies to different audiences and offer greater protections against piracy.

In July, Hollywood’s major studios hammered out technical standards for digital movies.

Technicolor Inc. and a competing coalition led by Access Integrated Technologies Inc., or AccessIT, and Christie Digital Systems Inc., have been inking deals with studios to help cover the $85,000 cost of installing the systems at theaters nationwide.

Universal has signed agreements with both vendors and anticipates distributing some movies digitally by the middle of this year. Joe, Universal’s executive vice president of Business Development and Strategic Planning, discussed the transition.

Question: How do you see digital cinema fitting into Universal’s plans?

Answer: We believe digital cinema is -- over the medium to long-term -- the future of the exhibition business in the way our films will be seen in movie theaters. It’s very important to us in terms of making sure the presentation is of the best quality possible and that the system that’s designed and ultimately installed in theaters makes sense for our business from an operational standpoint.

Q: Universal has signed agreements with each of the competing vendors. What are the key differences, if any, between the systems being offered by Technicolor and by Christie and AccessIT?

A: From a technology standpoint in terms of what consumers will ultimately see on the screen, they won’t be all that different. Both companies will be building systems that meet the Digital Cinema Initiatives’ technical specifications that were created for digital cinema.

Q: Do you think the roll-out of digital cinema can work with multiple vendors or will it make the process too complicated?

A: I think it will work with multiple vendors. That was really one of the main reasons we as the studios collectively spent so much time working on the specifications for digital cinema. We know all the equipment being built for digital cinema will work in a certain way so that we’re creating only one format for digital cinema exhibition and not creating lots of different formats that will end up being very inefficient and costly for us.

Q: How long do you predict it will take for a nationwide roll-out of digital cinema?

A: I think you’ll start seeing meaningful installations in 2006. By the end of 2006, there will be somewhere between 500 and 1,000 digital cinema systems in the marketplace. There are 35,000 theater screens in America. We’re probably looking at somewhere in the five- to 10-year timeframe before you’ll see the vast majority of those screens converting to digital.

Q: What do you view as the biggest obstacle to conversion?

A: It’s a complicated process in that to lay out a digital system and make the economic model work, you have to have arrangements with the studios, you have to have arrangements with exhibitors, you have to buy equipment from lots of different manufacturers. And then [there’s] the process of actually going into the theater and installing the systems. It’s complicated and I think that complication has been part of what has caused it to take as long as it has to get going, but I think we’re at a point ... where a lot of those problems have been solved.

Q: Do you think digital cinema is compelling enough to reverse the box-office slump?

A: I think digital cinema will make the moviegoing experience more compelling for consumers. The image they will see on screen will be of a higher quality and a more consistent quality. One of the great things about digital cinema is that the image looks as good the 500th time as it does the first time. I think we all know with film print there is a general sort of erosion or degradation of the quality of the prints over time.

Q: So you think it will be compelling enough that folks will say, “Hey, I really want to go see movies again.”

A: I think it will make it more interesting and I think we’ve seen with the limited number of digital installations that are out there right now that the consumers really like it. They like the idea of going and seeing a movie in the digital format. The other real advantage of digital cinema from the consumer perspective is that it allows the studios and filmmakers and exhibitors to potentially offer more, varied content and do things we haven’t been able to do historically in a film-print world -- things like making different versions of a movie available during the theatrical window. As an example, you could have a film that plays at 7 p.m. in a PG-rated version and then again at 10 p.m. in an R-rated version so you can make that film more accessible to a broader audience. It will be much easier to do things like allow directors to put their directors’ cuts of their films in theaters [or] to potentially offer a movie with different endings.

Q: By one estimate, digital distribution promises to save studios as much as $1 billion a year in the cost of making and distributing traditional film print. How much does Universal expect to save?

A: It’s hard to peg a specific number. I think we do believe the cost savings will be meaningful. We think it will be a lot less expensive to deliver movies to theaters digitally than it has been historically with film print. We think long-term, our post-production process and the process of getting a movie finalized and off to theaters will be a much more efficient process. But it’s hard to say for sure what the real savings will be. It’s really in a lot of respects going to be tied to how the cost of digital cinema systems evolves over time, how much does the pricing come down as more and more systems get ordered and installed and what is the life of the system.

Q: You’ll have to pay out some of the savings to folks like Technicolor or Christie as part of the vendor agreements, correct?

A: Yes, exactly. The way the systems are being financed is through a combination of studio contribution and through exhibitor contributions. I think the way we’ve always thought about the financing of the roll-out of digital cinema is that those receiving the economic benefit of this need to fund their fair share. The way the model seems to be evolving for studios is that we will pay a fee to people like Christie and Technicolor based on usage of their systems. It does feel like the model is starting to crystallize in a way that works for studios, works for exhibitors ... and that should be sustainable in the long-term.

Q: Will those savings help preserve profits by offsetting declining box-office sales or will they actually help grow revenues?

A: I think the roll-out of digital cinema will be good from a top-line perspective in terms of creating a more compelling offering in the theater for consumers that will benefit both studios and exhibitors. But in terms of the cost savings, I think that will be an additional benefit that will accrue to studios on top of whatever revenue benefits we might get by simply being able to get our movies out to theaters in a more cost-effective way.

Q: What’s Universal’s sense in terms of theater owners’ thoughts on digital cinema?

A: I don’t think it scares them. Exhibitors were very involved [in] designing the digital cinema specifications. I think theater owners look at digital cinema as also being very good for their economics because it does allow for a more compelling consumer proposition. It allows them to pursue alternative programming models. You’ve seen Regal do a bit of this where they’ll show live music concerts in their theaters on a Tuesday night or I think people have talked about broadcasting sporting events inside theaters. It opens up new business models for exhibitors that are good for them and it also allows them to use their theaters during times of the day that have been typically slow like weekday mornings to bring in school groups and corporate groups. The other great thing it does for exhibitors is it allows them to do a better job managing and monetizing their pre-show. We can all remember being in theaters where you see nothing but slides ... running up to the start time of the movie. You’re starting to see exhibitors getting much more innovative and creative programming around that time in a way that consumers find interesting but also in a way that allows them to monetize that time and improve the economics of their business.