Digital Cinema Business
Frequently Asked Questions (FAQs)

What is a VPF?

The Virtual Print Fee (VPF) is a financing mechanism for funding the first purchase of digital cinema equipment. It is based on payment by a content-supplier of a fee per booking. The goal of the VPF is to achieve a neutral P&L for studios, such that the expense for delivering a digital print (including financing fee) plus VPF is no greater than the cost of delivering a film print.

Payment of the VPF will terminate once the equipment expense is fully recouped. Conditions for receiving a VPF may include additional factors, including an exhibitor contribution, collection of similar fees from all content providers, the use of DCI compliant equipment (see Digital Cinema Technology FAQs, and access to security logs. Such factors may vary from studio to studio.

What is meant when a 3rd party deployment entity announces the signing of VPF agreements?

Several entities (such as Cinedigm, DCIP, Sony Electronics, Arts Alliance Media, XDC, and others) have announced the signing of VPF agreements with a number of major film studios. The VPF agreement is normally made between a 3rd party integrator and a studio. The agreement simply says that the studio agrees to pay a certain fee per booking if certain conditions are met. It does not mean that the 3rd party integrator has the financial backing needed to roll out digital cinema, nor does it mean that exhibitors have signed up to the plan. With the exception of DCIP, who has approximately 16,000 participating screens guaranteed by its owners, a large number of theatre owners have yet to sign up with the few VPF financing deals now available.

Is DCI the authority behind the VPF model?

DCI is often thought of as the authority behind the VPF equipment financing model. In truth, there is no connection between DCI, the organization, and the studio willingness to pay VPFs. DCI only creates technical specifications. The studios have independently agreed to reimburse deployment entities with VPFs for their equipment purchases. It is true that VPF agreements require that "DCI Compliant" equipment be purchased. But the reality is that no equipment actually meets DCI specifications today, yet VPFs are still paid. To enforce a transition to DCI compliant equipment, VPF agreements generally stipulate that all equipment must meet DCI specifications once such equipment is available on the market.

Do I need to sign up with a 3rd party integrator to gain access to VPF financing?

While a few studios have offered to pay direct VPFs to exhibitors, such agreements provide no benefit to exhibitors until all studios agree to offer similar deals. In some cases, a manufacturer may offer an "interim" agreement where equipment purchased now can be rolled into a future agreement that guarantees conversion of all screens in a complex. However, if the future agreement doesn't materialize, the exhibitor will be liable for the full cost of equipment.

What are the challenges associated with financing digital cinema?

The relationship between parties is complex, making these deals difficult for banks to understand and increasing the apparent risk. This is shown in the diagram below:

The strength of the VPF is that it rests on the delivery of movies by multiple studios. The risk factors are audience demand, and continued movie production. The strength of box office combined with the large number of movie distributors results in a relatively safe cash flow. However, the equipment required for the delivery of movies must meet the DCI specification, a requirement that no equipment actually complies with at this time. The DCI specification itself has been a moving target, and the efficacy of DCI compliance testing and equipment approval process has yet to be proven. The cost of equipment upgrades for DCI compliance plus other features that will eventually be introduced, such as 3-D subtitle capability, can be a risk for banks if not guaranteed by the manufacturer. Every year the goal for meeting DCI compliance moves out. In 2009, it was 2010. In 2010, it"s 2011.

Why do studios favor payment of VPFs versus crediting our film rental?

Most operators in the business feel that crediting film rentals would have been the simplest and most elegant way to ensure wide deployment of digital projection. However, this is not the path that US studios decided to follow.

There are a few reasons that stand out. Digital cinema equipment requires substantial investment, not just for one or two screens in a multi-screen complex, but for all screens in such complexes. Studios want a guarantee that they pay their fair share, and no more. This requires auditing, which goes beyond a simple rental credit. In addition, studios want certain guarantees that the equipment purchased meets the desired distribution standards, and that the equipment is secure. The combination of auditing requirements and technical requirements call for an agreement between the equipment purchasing entity and each studio. Such agreements are more complex than rental agreements. Given the attorney bandwidth that this requires within each studio, and the heavy auditing requirements, it’s much more efficient to use a small number of deployment entities for this role.

The VPF, however, is not an ideal financing tool. It has proven to be complex, requiring sophisticated account and contract management on the part of all parties. It can also be argued that VPF financing hasn't achieved the goal of speedy conversion of cinemas. While the number of digital screens has grown, the majority of growth in recent years is due to the direct purchase of digital 3-D systems, completely bypassing VPF deployment entities. This has not led to the desired goal of converting all screens in a complex, and has created unexpected complications for studios.

Why is 3-D a driver for digital cinema, and what are the economics?

3-D technology is pentrating all areas of image display, including medical, industrial, and commercial industries. Digital cinema projectors are capable of projecting stereoscopic 3-D images with a level of quality and consistency not possible with film equipment. Audiences have demonstrated a willingness to pay a ticket premium of 20-30% to view 3-D movies, and movie directors have demonstrated a strong appetitite for the creation of 3-D product. There will be nearly two 3-D releases a month in 2010. Up until the introduction of digital 3-D, digital cinema introduced no new opportunity to increase box office revenue on weekend nights. This makes digital 3-D the primary value-add feature of digital cinema.

Even with a digital projector, however, 3-D add-on technology is additionally required from companies such as RealD, Dolby, Master Image, or XpanD. The cost of the add-on technology cannot be included in costs recouped by VPFs. The technical differences in the various add-on technologies is discussed in our Digital Cinema Technology FAQs page.

Should I wait and buy used digital cinema equipment?

There are a few facts that allow one to safely predict that there will not be a significant used equipment market in digital cinema:

• Unlike film projection equipment, digital projection equipment has an estimated 10 year lifetime. If you buy a projector that is 5 years old, then you have 5 years of life left. Lifetime is limited by parts availability and the obsolescence factors associated with high technology. While a part for an old film projector can be custom machined in the worst case, no such fall-back is possible with sophisticated digital equipment. Semiconductor technology changes quickly, and the investment required to re-engineer the circuit boards of old products with new parts is better put to work in developing entirely new products. If you've ever tried to repair a 10-year-old personal computer, then you understand the problem.
• In addition, the capex required to replace older equipment with new equipment is simply too high for undertaking an early replacement cycle. If exhibitors are struggling today to raise capex for 1st time digital equipment expenditures, it's hard to imagine that they'll willingly go through the process again in 5 years. Consider that for DCIP screens, this would amount to $1B of capex every 5 years, versus every 10 years.

A pragmatic strategy for purchasing equipment must take into account the limited lifetime it has and the re-investment in capex required every 10 years. Waiting to convert is not a bad strategy. Equipment prices, particularly those for smaller screens, are bound to improve, as is the digital supply chain itself. But if you are waiting for used equipment, you should consider the points above.

Is compliance with the DCI specification sufficient to receive a digital movie?

Generally, the answer is "yes." However, some studios may informally impose additional constraints on the equipment, such as motorized control of lenses and installation of a 5.1 sound system. Some studios require the exhibitor to sign a separate digital rental addendum to the existing film rental agreement, which may stipulate further requirements that must be met.