$8 billion Digital Cinema Market Beckons

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$8 billion Digital Cinema Market Beckons: Half of All Screens Will Be Digital by 2013

The conversion of the world’s cinema screens to digital technology is at last under way, opening up a potential $8 billion equipment market at today’s prices. As soon as 2013 half of all cinema screens worldwide could employ digital technology in place of traditional 35 mm projectors, according to the latest Digital Cinema Report by analysts Dodona Research.

After more than a decade in development, digital cinema took off in 2007 with 4,627 screens converted by September, approaching 5% of the global total. The beginnings of widespread adoption of the new technology has been facilitated by the emergence of third parties willing to finance the huge conversion costs. These so-called integrators typically finance purchase of the equipment, seeking to repay loans by levying an array of usage charges. While the cost of installation, maintenance contracts and sometimes content delivery charges are paid by exhibitors, the main source of revenues to support conversion comes from so-called virtual print fees. These are paid by film distributors out of their notional savings from not having to strike 35 mm film prints.

The report observes that, while most of the debate about digital cinema has revolved around film distributors and exhibitors, in practice these businesses will be relatively little affected compared to film processing laboratories and the film transport business. In particular, the $1.5 billion market for release printing will, the report predicts, all but disappear, while in the long run the film transport business will be superseded by delivery by satellite or over other digital networks.

With one provider, Access Integrated Technologies, responsible for 80% of digital cinema installations to date, it would be premature to judge how robust current business models will prove. In essence most participants in this market are seeking to develop networks of digital cinemas and then build revenues from providing a range of services such as mastering and delivering digital films, supplying alternative content, screen advertising services, and upgrades and maintenance of software and equipment.

After Access, the three leading companies in this area are XDC, Arts Alliance Media and Technicolor, each with a market share in the region of 6-7%. Equipment markets are also dominated by a small number of companies. Christie has a 77% share of the 2K and 4K digital projector market, followed by Barco with 14% and NEC with a little under 8%; in servers Doremi has a near 80% share of 2k and 4k installations, followed by Dolby with 9% and XDC, with 5%.

Digital cinema primarily makes sense in terms of networks, so installations tend to be concentrated in clusters. 78% of all digital cinema screens are in the United States, and 40% in the cinemas of a single circuit, Carmike Cinemas. The second largest number of screens is in the United Kingdom, thanks to the UK Film Council’s initiative in establishing the Digital Screen Network, while South Korea, where three exhibitors, Megabox, Lotte and CJ CGV, are committing to digital cinema to serve one of the world’s most tech-savvy audiences, is third.

The countries where the progress of the technology is most advanced, however, are Luxembourg, Singapore and Belgium. Half of Luxembourg’s screens are already digital due to the rapid embrace of the new technology by its leading exhibitor, Utopia. In Singapore the Eng Wah circuit was supported in converting to digital as long ago as 2004 by the city state’s development agencies, as part of a strategy to establish Singapore as a digital hub in the region. In Belgium, another initiative by a leading exhibitor, the Kinepolis Group, saw 10% of the country’s screens converted by September 2007 with plans to convert most of its circuit by the end of the year.

With more than 50% of the market soon to be digital in Belgium and Luxembourg, it is likely that there will soon be pressures to complete the conversion process, due to the high costs of so called dual-running of digital and 35 mm distribution systems. This could become a highly politicized process if, as is widely feared in Europe, smaller exhibitors are not able to access equipment at an affordable cost.

The main factor slowing further adoption, according to the report, has been the absence of any obvious source of extra revenues from installing the new technology. While cinema exhibitors have been quick to note the benefits to distributors of much lower print costs, they have been sceptical about the potential impact of alternative or non-traditional content, for example sports events or concerts, on their bottom lines. Although Dodona believes this scepticism is misplaced, seeing classic movies as a particularly promising source of higher revenues, instead there is a consensus building up that 3D will be the driver that takes the market to the next level.

Two rival systems from Real-D and Dolby have different advantages and disadvantages but Real-D, which was earlier to market, dominates in installations, with 423 in place by September 2007 and more than 1,000 expected for the North American release of Beowulf, compared to perhaps 75 to 80 Dolby systems by the same date. Barring mishaps, these numbers are expected to grow exponentially to 2009, when a number of high profile films, made explicitly to exploit the 3D medium, are due to be released, including Avatar from James Cameron, Monsters vs Aliens and the first film in a series featuring TinTin.

With at least 5,000 3D systems expected to be in place by 2009, this will clearly provide a considerable impetus to the digital conversion process, as these 3D systems need a digital projector to bolt onto. The Odeon UCI circuit, for example, has announced its intention to install 500 3D systems despite today having fewer than 100 screens converted to digital.

The consultants counsel against over-confidence in this market. Financing the equipment is complex and difficult conditions in financial markets could derail progress by making money more expensive and leading financiers to question future revenue assumptions more stringently. The report’s author, Karsten-Peter Grummitt notes the importance of game theory in understanding this market. The equipment manufacturers want to defray their R&D costs; the distributors want to make the minimum financial contribution possible to conversion; exhibitors wonder whether potential new revenue sources will justify the investment. “Nevertheless,” says Grummitt, “the next step in the market’s evolution is probably going to need a fall in the price of equipment, or higher virtual print fees, or bigger exhibitor contributions, or all of these. Strategies in this market need to move on from the ‘who pays?’ face-off of the last few years to focus on how to get this done.”

*Digital Cinema Report from Dodona Research at www.dodona.co.uk

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