What Digital Times?
By Tobias Jacobsen, participant at the ”DigiTraining Plus 2009”

Knowledge. A fundamental condition for making the right decisions must be based on an updated and solid knowledge of the subject. To achieve an overview of the consequences of the digitalisation of cinemas is a huge challenge. The business is a complex and ramified organism with many areas of interest and corresponding partners each with their own agenda. As digitalisation is an international change in a standard dating back more than 100 years the change of medium is a manoeuvre that calls for a certain respect and cautiousness. Much money is to be earned and also to be lost if you do not make the right decisions based on knowledge.

Without any solid knowledge of digital cinema and as a first-time participant on a course on this very subject, the following is my experience of the situation in general within the EU as it was reflected at the “DigiTraining Plus 2009” course in London.

To distinguish between 3D-technology and digitalisation as such is a necessity in order to introduce light and shade into the challenges facing the move to another medium. At present it is the 3D-locomotive that drives digitalisation and the chains which have a commercial interest seem to succeed in achieving this. But 3D alone is not enough to stimulate a change of medium for those cinemas that do not have a specific priority in positioning themselves in the marketplace or have an audience segment that fits into exactly this context. For them conventional 2D and its content is central. And even if many promises are made by those who hail 3D as the format of the future for any film, it is doubtful that this will happen in the near future – if ever. There are obvious possibilities but also limits in telling stories in 3D and only the future will show if 3D is as revolutionary as some predict.

Probably 3D will merely be an add-on and not the nucleus in a business model that will have to finance the heavy cost of digital equipment in the cinema. Certainly insecurity still remains as to realistic depreciation models which are central in order to relate to the eventual assets or disadvantages of the investment. Digital technologies become obsolete very fast in all other areas worldwide and there is no reason to believe that it should be any different in our business. Of course it is of prime importance whether today’s standards (DCI, SMPTE, NATO etc.) that have almost fallen into place after long and troubled negotiations will be changed. It is probably doubtful that anybody feels like shaking the foundation of today’s definition of digital cinema.

In countries where you don’t have a national initiative or a state-based scheme of support for digitalisation it is the big chains with solid economy that plunge wholly or partially into the digital adventure. But as one of the leading authorities in the area, Michael Karagosian has calculated, the digitalisation of a cinema would probably end up costing up to 300% more than continuing with traditional 35mm machinery over a period of 25 years. Of course there is a certain insecurity inherent in this but beyond doubt the bill will come out at the really expensive end of the scale. As prices are now there is nothing to gain by paying for digitalisation out of your own pocket. For first-run cinemas, the incitement of going digital is also limited in relation to an eventual improvement of the audience experience, as their 35mm prints usually always come directly from the lab in mint condition. Here 3D and alternative content can be attractive in order to position your cinema and bring PR-value in relation to competitors and market shares.

The case is different for small cinemas. They share part of the problems with the big ones, but for the small the price is not a rock but a mountain. There is only one thing to do: hope for financial support. The advantages for the small are easy to see. Primarily, the small theatres are potential first-run cinemas as limitations of prints would be past history. Add to this an increase in quality clearly to be seen on the screen. No more old scratched prints. Absolutely central and connected to the question of business agreements and eventual financial support is of course bad will from the big players to change the rules of the game. Rules that clearly favour the big ones. In order to support digitalisation politicians might want a guarantee of democratisation of the opening window and in this way create cultural value all the way down to the smallest cinema out in the countryside. Therefore it is doubtful that a national solution can be reached in many places besides Norway where the majority of cinemas are owned by the local municipality.

In the middle you have the Virtual Print Fee (VPF) deals with third parties like Arts Alliance and XDC. Such firms function as a kind of a leasing firm and provider of services, but also act as the receiver of VPF from the companies, which is used to bring down the debt acquired in purchasing the cinema’s equipment through the third-party company. The idea is that every time a new digital print is screened in the cinema a VPF is paid to the third party and used to finance the depreciation of the equipment bought through them. For the single cinema this is estimated to have a duration of 6-8 years depending on how many first runs the cinema has. This turnover (change of first runs) has a lower limit, though, as the VPF must flow continually in order to reach its target over the time span. The business model has basically two cornerstones: one is for the turnover rate to create a flow of VPFs and the other is the condition that the supplier should carry out servicing over a period of 10 years. When the equipment is paid for and is now owned by the cinema, the supplier has secured himself a lucrative and stable business. The advantage of the VPF model is that the cinema will have to finance very little if anything at all to get started – the disadvantage is that you are completely in the pocket of the third party. It is a totally different arrangement of the power structure between suppliers, leasing company and the third leg of the companies – production. Something to be afraid of. Giving away sovereignty in areas where today you have freedom of choice. As an alternative to self financing or a state-support solution this is what is available in the market place right now and probably in the future to come.

In the end we have an open time frame at present derailed by the global financial crisis that has probably put a damper on digital investments here and now. But the future is obvious: digitalisation in cinemas will happen – it’s just a question of time. Some have already jumped into it and harvest experiences for everybody’s benefit. While waiting for prices, politics and prosperity to unite, the cheapest and most sensible thing you can do is to gain knowledge. And here the “DigiTraining Plus” course offers a sovereign and substantial opportunity to achieve exactly that: see you in Helsinki in February.

Tobias Jacobsen
Empire Cinema, Copenhagen (DK)